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 March
31, 2008
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 (May 6, 2008).
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 March 31, 2008 (Unaudited) and December 31,
2007
|
|
|
|
|
|
Consolidated
Condensed Statements of Operations for the three months ended March 31,
2008 and 2007 (Unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statements of Equity and Comprehensive Loss for the three months
ended March 31, 2008 (Unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows for the three months ended March 31,
2008 and 2007 (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
6.
|
Exhibits
|
|
|
|
|
PART 1 -
FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
CONSOLIDATED CONDENSED BALANCE
SHEETS
(In
thousands, except share data)
|
|
ASSETS
|
|
March
31, 2008
(unaudited)
|
|
|
December
31, 2007
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
5,222 |
|
|
$ |
4,500 |
|
Accounts receivable, net of
allowance of $1,298 in 2008 and $1,537 in 2007
|
|
|
82,452 |
|
|
|
79,207 |
|
Drivers' advances and other
receivables, net of allowance of $2,722 in
2008 and $2,706 in
2007
|
|
|
5,607 |
|
|
|
5,479 |
|
Inventory and
supplies
|
|
|
4,314 |
|
|
|
4,102 |
|
Prepaid
expenses
|
|
|
12,199 |
|
|
|
7,030 |
|
Assets held for
sale
|
|
|
11,937 |
|
|
|
10,448 |
|
Deferred income
taxes
|
|
|
20,408 |
|
|
|
18,484 |
|
Income taxes
receivable
|
|
|
7,389 |
|
|
|
7,500 |
|
Total
current assets
|
|
|
149,528 |
|
|
|
136,750 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
343,370 |
|
|
|
350,158 |
|
Less
accumulated depreciation and amortization
|
|
|
(111,570 |
) |
|
|
(102,628 |
) |
Net
property and equipment
|
|
|
231,800 |
|
|
|
247,530 |
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
36,210 |
|
|
|
36,210 |
|
Other
assets, net
|
|
|
18,809 |
|
|
|
19,304 |
|
Total
assets
|
|
$ |
436,347 |
|
|
$ |
439,794 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Securitization
facility
|
|
$ |
58,464 |
|
|
$ |
47,964 |
|
Checks outstanding in excess of
bank balances
|
|
|
418 |
|
|
|
4,572 |
|
Current maturities of
acquisition obligation
|
|
|
333 |
|
|
|
333 |
|
Current maturities of long-term
debt
|
|
|
2,364 |
|
|
|
2,335 |
|
Accounts payable and accrued
expenses
|
|
|
45,482 |
|
|
|
35,029 |
|
Current portion of insurance
and claims accrual
|
|
|
17,947 |
|
|
|
19,827 |
|
Total
current liabilities
|
|
|
125,008 |
|
|
|
110,060 |
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
75,925 |
|
|
|
86,467 |
|
Insurance and claims accrual,
net of current portion
|
|
|
13,207 |
|
|
|
10,810 |
|
Deferred income
taxes
|
|
|
55,812 |
|
|
|
57,902 |
|
Other long-term
liabilities
|
|
|
2,175 |
|
|
|
2,289 |
|
Total
liabilities
|
|
|
272,127 |
|
|
|
267,528 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Class A common stock, $.01 par
value; 20,000,000 shares authorized;
13,469,090 shares issued; and
11,676,298 shares outstanding as of
March 31, 2008 and December 31,
2007
|
|
|
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
|
|
|
92,014 |
|
|
|
92,238 |
|
Treasury stock at cost;
1,792,792 shares as of March 31, 2008 and
December 31,
2007
|
|
|
(21,278 |
) |
|
|
(21,278 |
) |
Retained
earnings
|
|
|
93,325 |
|
|
|
101,147 |
|
Total
stockholders' equity
|
|
|
164,220 |
|
|
|
172,266 |
|
Total
liabilities and stockholders' equity
|
|
$ |
436,347 |
|
|
$ |
439,794 |
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(In
thousands, except per share data)
|
|
Three
months ended March 31,
(unaudited)
|
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
Freight revenue
|
|
$ |
148,596 |
|
|
$ |
143,542 |
|
Fuel surcharge
revenue
|
|
|
33,078 |
|
|
|
22,850 |
|
Total
revenue
|
|
|
181,674 |
|
|
|
166,392 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages, and related
expenses
|
|
|
66,677 |
|
|
|
67,422 |
|
Fuel expense
|
|
|
63,458 |
|
|
|
45,990 |
|
Operations and
maintenance
|
|
|
10,816 |
|
|
|
9,598 |
|
Revenue equipment rentals and
purchased transportation
|
|
|
20,346 |
|
|
|
15,461 |
|
Operating taxes and
licenses
|
|
|
3,359 |
|
|
|
3,879 |
|
Insurance and
claims
|
|
|
7,970 |
|
|
|
6,255 |
|
Communications and
utilities
|
|
|
1,757 |
|
|
|
2,115 |
|
General supplies and
expenses
|
|
|
5,968 |
|
|
|
5,682 |
|
Depreciation and amortization,
including gains and losses on
disposition of
equipment
|
|
|
10,917 |
|
|
|
12,734 |
|
Total
operating expenses
|
|
|
191,268 |
|
|
|
169,136 |
|
Operating
loss
|
|
|
(9,594 |
) |
|
|
(2,744 |
) |
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
2,282 |
|
|
|
3,032 |
|
Interest income
|
|
|
(87 |
) |
|
|
(115 |
) |
Other
|
|
|
(33 |
) |
|
|
(82 |
) |
Other
expenses, net
|
|
|
2,162 |
|
|
|
2,835 |
|
Loss
before income taxes
|
|
|
(11,756 |
) |
|
|
(5,579 |
) |
Income
tax benefit
|
|
|
(3,935 |
) |
|
|
(3,509 |
) |
Net
loss
|
|
$ |
(7,821 |
) |
|
$ |
(2,070 |
) |
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
$ |
(0.56 |
) |
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
14,026 |
|
|
|
14,005 |
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE LOSS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Unaudited
and in thousands)
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Treasury
Stock
|
|
|
Retained
Earnings
|
|
|
Total
Stockholders'
Equity
|
|
|
Comprehensive
Loss
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2007
|
|
$ |
135 |
|
|
$ |
24 |
|
|
$ |
92,238 |
|
|
$ |
(21,278 |
) |
|
$ |
101,147 |
|
|
$ |
172,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal
of previously
recognized
SFAS No. 123R
stock-based
employee
compensation
cost
|
|
|
- |
|
|
|
- |
|
|
|
(224 |
) |
|
|
- |
|
|
|
- |
|
|
|
(224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,821 |
) |
|
|
(7,821 |
) |
|
|
(7,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss for three
months
ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(7,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at March 31, 2008
|
|
$ |
135 |
|
|
$ |
24 |
|
|
$ |
92,014 |
|
|
$ |
(21,278 |
) |
|
$ |
93,325 |
|
|
$ |
164,220 |
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(In
thousands)
|
|
Three
months ended March 31,
(unaudited)
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(7,821 |
) |
|
$ |
(2,070 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision for losses on
accounts receivable
|
|
|
317 |
|
|
|
165 |
|
Depreciation and
amortization
|
|
|
11,534 |
|
|
|
12,393 |
|
Amortization of deferred
financing fees
|
|
|
81 |
|
|
|
65 |
|
Deferred income
taxes
|
|
|
407 |
|
|
|
1,079 |
|
Stock based compensation
expense reversal
|
|
|
(224 |
) |
|
|
151 |
|
Loss (gain) on disposition of
property and equipment
|
|
|
(617 |
) |
|
|
341 |
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Receivables and
advances
|
|
|
(7,575 |
) |
|
|
30 |
|
Prepaid expenses and other
assets
|
|
|
(5,126 |
) |
|
|
(2,555 |
) |
Inventory and
supplies
|
|
|
(208 |
) |
|
|
239 |
|
Insurance and claims
accrual
|
|
|
516 |
|
|
|
(5,915 |
) |
Accounts payable and accrued
expenses
|
|
|
10,114 |
|
|
|
(880 |
) |
Net
cash flows provided by operating activities
|
|
|
1,398 |
|
|
|
3,044 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and
equipment
|
|
|
(3,127 |
) |
|
|
(23,988 |
) |
Proceeds from disposition of
property and equipment
|
|
|
6,702 |
|
|
|
11,269 |
|
Payment of acquisition
obligation
|
|
|
(83 |
) |
|
|
(83 |
) |
Net
cash flows provided by (used in) investing activities
|
|
|
3,492 |
|
|
|
(12,802 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Change in checks outstanding in
excess of bank balances
|
|
|
(4,154 |
) |
|
|
4,317 |
|
Proceeds from issuance of
debt
|
|
|
19,500 |
|
|
|
22,000 |
|
Repayments of
debt
|
|
|
(19,514 |
) |
|
|
(17,400 |
) |
Debt refinancing
costs
|
|
|
- |
|
|
|
(261 |
) |
Net
cash provided by (used in) financing activities
|
|
|
(4,168 |
) |
|
|
8,656 |
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
722 |
|
|
|
(1,102 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
4,500 |
|
|
|
5,407 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
5,222 |
|
|
$ |
4,305 |
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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. Covenant.com, and CIP, Inc., both which were
Nevada corporations, were dissolved in January 2008. 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, 2007 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, 2007. Results of operations in interim periods are
not necessarily indicative of results to be expected for a full
year.
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. On August 28, 2007, the Company signed Amendment No. 1 to
the Credit Facility ("Amendment No. 1"), to modify the financial covenants to
levels better aligned with the Company's expected ability to maintain compliance
and to grant and expand the security interest to include, with limited
exceptions, then owned revenue equipment, as well as revenue equipment acquired
subsequently utilizing proceeds from the Credit Facility. At March
31, 2008, the Company was in compliance with the covenants of the Credit
Facility and Securitization Facility. However, if the Company
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 were
required to obtain waivers of defaults, the Company could 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 loss for the three month periods ended March
31, 2008 and 2007 equaled net 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 ("SFAS No. 131"). 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 as 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 consolidated condensed 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
separately.
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 ended March 31, 2008
and 2007, 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 loss
per share included in the consolidated condensed statements of
operations:
(in
thousands except per share data)
|
|
Three
months ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
Net loss
|
|
$ |
(7,821 |
) |
|
$ |
(2,070 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share – weighted-
average shares
|
|
|
14,026 |
|
|
|
14,005 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee stock
options
|
|
|
- |
|
|
|
- |
|
Denominator
for diluted earnings per share –
adjusted weighted-average shares
and assumed
conversions
|
|
|
14,026 |
|
|
|
14,005 |
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
$ |
(0.56 |
) |
|
$ |
(0.15 |
) |
Note
6. Share-Based
Compensation
The
Covenant Transportation Group, Inc. 2006 Omnibus Incentive Plan ("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 March 31, 2008, 311,524 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. To
the extent available, the Company has issued 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 / (benefit)
for each of the three months ended March 31, 2008 and 2007 of approximately
($224,000) and $151,000, respectively. The ($224,000) benefit recorded in the
three months ended March 31, 2008 resulted from the reversal of previously
recorded stock compensation expense related to prior years’ performance-based
restricted stock and stock option issuances for which the Company now considers
it improbable of meeting the required performance-based criteria for the
potential future vesting of such securities.
The
following tables summarize our stock option activity for the three months ended
March 31, 2008:
|
|
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
|
|
|
1,205 |
|
|
$ |
13.33 |
|
64
months
|
|
$ |
- |
|
Options
granted
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Options
exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Options
forfeited
|
|
|
(9 |
) |
|
$ |
8.43 |
|
|
|
|
|
|
Options
expired
|
|
|
(13 |
) |
|
$ |
14.91 |
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
1,183 |
|
|
$ |
13.34 |
|
61 months
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
1,017 |
|
|
$ |
14.01 |
|
53 months
|
|
$ |
- |
|
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 three months ended March 31, 2008 or 2007.
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
three months ended March 31, 2008:
|
|
Number
of
stock
awards
|
|
|
Weighted
average
grant
date
fair value
|
|
Unvested
at January 1, 2008
|
|
|
500,584 |
|
|
$ |
12.21 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Vested
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(920 |
) |
|
$ |
11.50 |
|
Unvested
at March 31, 2008
|
|
|
499,664 |
|
|
$ |
12.21 |
|
As of
March 31, 2008, the Company had no unrecognized compensation expense related to
stock options or restricted stock awards which is probable to be recognized in
the future.
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.
If
recognized, $1.8 million of unrecognized tax benefits would impact the Company's
effective tax rate as of March 31, 2008. Any prospective adjustments to the
Company's reserves for income taxes will be recorded as an increase or decrease
to its provision for income taxes and would impact our effective tax rate. In
addition, the Company accrues interest and penalties related to unrecognized tax
benefits in its provision for income taxes. The gross amount of interest and
penalties accrued was $0.9 million as of March 31, 2008, of which $0.1 million
was recognized in the three months ended March 31, 2008.
The
Company's 2005 through 2007 tax years remain subject to examination by the IRS
for U.S. federal tax purposes, the Company's only major taxing jurisdiction. In
the normal course of business, the Company is also subject to audits by state
and local tax authorities. While it is often difficult to predict the final
outcome or the timing of resolution of any particular tax matter, the Company
believes that its reserves reflect the probable outcome of known tax
contingencies. The Company adjusts these reserves, as well as the related
interest, in light of changing facts and circumstances. Settlement of any
particular issue would usually require the use of cash. Favorable resolution
would be recognized as a reduction to the Company's annual tax rate in the year
of resolution. The Company does not expect any significant increases or
decreases for uncertain income tax positions during the next twelve
months.
Note
8. Derivative
Instruments
The
Company engages in activities that expose it to market risks, including the
effects of changes in interest rates and fuel prices. Financial exposures are
evaluated as an integral part of the Company's risk management program, which
seeks, from time to time, to reduce potentially adverse effects that the
volatility of the interest rate and fuel markets may have on operating results.
The Company does not regularly engage in speculative transactions, nor does it
regularly hold or issue financial instruments for trading purposes.
The
Company accounts 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, the Company enters 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 March 31, 2008 and December 31,
2007:
(in
thousands)
|
|
March
31, 2008
|
|
|
December 31,
2007
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
Securitization
Facility
|
|
$ |
58,464 |
|
|
$ |
- |
|
|
$ |
47,964 |
|
|
$ |
- |
|
Borrowings
under Credit Facility
|
|
|
- |
|
|
|
65,000 |
|
|
|
- |
|
|
|
75,000 |
|
Revenue
equipment installment notes with finance company weighted average interest
rate of 5.65% at December 31, 2007, due in monthly installments with final
maturities at various dates ranging from September 2010 to April 2011,
secured by related revenue equipment
|
|
|
2,364 |
|
|
|
10,925 |
|
|
|
2,335 |
|
|
|
11,467 |
|
Total
debt
|
|
$ |
60,828 |
|
|
$ |
75,925 |
|
|
$ |
50,299 |
|
|
$ |
86,467 |
|
In
December 2006, the Company entered into our Credit Facility with a group of
banks. The Credit Facility matures in December 2011. The Company signed
Amendment No. 1 to the Credit Facility on August 28, 2007, which, among other
revisions, modified the financial covenants to levels better aligned with the
Company's expected ability to maintain compliance and granted and expanded the
security interest to include, with limited exceptions, then owned revenue
equipment, as well as revenue equipment acquired subsequently utilizing proceeds
from the Credit Facility. 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 0.875% and 2.250% 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 2.25% at March 31, 2008). At March 31, 2008, the
Company had borrowings outstanding under the Credit Facility totaling $65.0
million, with a weighted average interest rate of 5.0%. The Company's
obligations under the Credit Facility are guaranteed by the Company and all of
its subsidiaries, except CVTI Receivables Corp., a Nevada corporation ("CRC")
and Volunteer Insurance Limited, a Cayman Island company
("Volunteer").
In
January 2008, the Company chose to reduce the maximum borrowing limit by $10.0
million in order to reduce its unused fees on the Credit Facility. As of March
31, 2008, the Credit Facility has a maximum borrowing limit of $190.0 million
with an accordion feature which permits an increase up to a maximum borrowing
limit of $265.0 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. As amended, the Credit Facility is secured by a pledge of the
stock of most of the Company's subsidiaries and certain owned revenue equipment,
as well as revenue equipment acquired subsequently utilizing proceeds from the
Credit Facility. A commitment fee, which is adjusted quarterly between 0.175%
and 0.500% 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 March 31, 2008 and December 31, 2007,
the Company had undrawn letters of credit outstanding of approximately $41.7
million and $62.5 million, respectively. As of March 31, 2008, the Company had
approximately $52.6 million of available borrowing capacity under the Credit
Facility.
In
December 2000, the Company entered into our 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. On December 4, 2007, the Company and CRC entered into
certain amendments to the Securitization Facility. Among other
things, the amendments to the Securitization Facility extended the scheduled
commitment termination date to December 2, 2008, reduced the facility limit from
$70.0 million to $60.0 million, tightened certain performance ratios required to
be maintained with respect to accounts receivable including, the default ratio,
the delinquency ratio, the dilution ratio, and the accounts receivable turnover
ratio, and amended the master servicer event of default relating to
cross-defaults on
material
indebtedness with the effect that such master servicer event of default may now
be more readily triggered. As a result of the amendments to the
Securitization Facility, the Company can receive up to $60.0 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 March 31, 2008 and December 31,
2007, the Company had $58.5 million and $48.0 million in outstanding current
liabilities related to the Securitization Facility, respectively, with weighted
average interest rates of 3.7% and 5.3% respectively. CRC's Securitization
Facility 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. 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. We were in
compliance with the covenants as of March 31, 2008.
Note
11. Recent Accounting
Pronouncements
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities ("SFAS No. 161"), which amends and
expands the disclosure requirements of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), to provide an
enhanced understanding of an entity’s use of derivative instruments, how they
are accounted for under SFAS 133 and their effect on the entity’s financial
position, financial performance and cash flows. The provisions of SFAS 161 are
effective as of the beginning of our 2009 fiscal year. We are currently
evaluating the impact of adopting SFAS 161 on our consolidated condensed
financial statements.
In
December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 (revised 2007), Business
Combinations ("SFAS No. 141R"). This statement establishes
requirements for (i) recognizing and measuring in an acquiring company's
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree, (ii) recognizing and measuring
the goodwill acquired in the business combination or a gain from a bargain
purchase, and (iii) determining what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. The provisions of SFAS No. 141R are effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The Company does not believe the adoption of SFAS No. 141R will
have a material impact in the consolidated condensed financial
statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51 ("SFAS No.
160"). This statement amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The provisions of SFAS No. 160 are
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company does not believe the
adoption of SFAS No. 160 will have a material impact in the consolidated
condensed financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities ("SFAS No. 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 adopted SFAS No. 159 as of the beginning of the
2008 fiscal year and its adoption did not have a material impact to the
consolidated condensed financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). 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 adopted SFAS No. 157 as of the
beginning of the 2008 fiscal year and its adoption did not have a material
impact to the consolidated condensed financial statements.
Note
12. 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.
On April
16, 2008, BNSF Logistics, LLC ("BNSF"), a subsidiary of BNSF Railway, filed an
amended complaint (the "Amended Complaint") in the Circuit Court of Washington
County, Arkansas to name the Company and Covenant Transport Solutions, Inc.
("Solutions") as defendants in a lawsuit previously filed by BNSF on December
21, 2007 against nine former employees of BNSF (the "Individuals") who, after
leaving BNSF, accepted employment with Solutions. The original complaint
alleged that the Individuals misappropriated and otherwise misused BNSF's trade
secrets, proprietary information, and confidential information (the "BNSF
Information") with the purpose of unlawfully competing with BNSF in the
transportation logistics and brokerage business, and that the Individuals
interfered unlawfully with BNSF's customer relationships. In addition to
the allegations from the original complaint, the Amended Complaint alleges that
the Company and Solutions acted in conspiracy with the Individuals (the Company,
Solutions, and the Individuals collectively, the "Amended Defendants") to
misappropriate the BNSF Information and to use it unlawfully to compete with
BNSF. The Amended Complaint also alleges that the Company and Solutions
interfered with the business relationship that existed between BNSF and the
Individuals and between BNSF and its customers. BNSF seeks injunctive
relief, specific performance, as well as an unspecified amount of damages
against the Amended Defendants. On April 28, 2008, the Amended Defendants
filed an Answer to the Amended Complaint and intend to vigorously defend this
lawsuit. A jury trial in this matter has been set for November 3,
2008. An estimate of the possible loss, if any, or the range of the loss
cannot be made and, therefore, the Company has not accrued a loss contingency
related to this matter.
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
earnings, revenues, or other financial items; any statement of plans,
strategies, and objectives of management for future operations; any statements
concerning proposed new services or developments; any statements regarding
future economic conditions or performance; and any statements of belief and any
statement of assumptions underlying any of the foregoing. Such statements may be
identified by the use of terms or phrases such as
"expects," "estimates," "projects," "believes," "anticipates," "intends,"
and "likely," and similar terms and phrases. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified, which could cause future events and actual results to differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Readers should review and consider the factors that
could cause or contribute to such differences including, but 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, 2007, 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 tenth largest truckload carrier in the United States measured by fiscal 2006
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.
For the
three months ended March 31, 2008, total revenue increased $15.3 million, or
9.2%, to $181.7 million from $166.4 million in the 2007 period. Freight
revenue, which excludes revenue from fuel surcharges, increased $5.1 million, or
3.5%, to $148.6 million in the 2008 period from $143.5 million in the
2007 period. We experienced a net loss of $7.8 million, or ($0.56)
per share, for the first three months of 2008, compared with a net loss of $2.1
million, or ($0.15) per share, for the first three months of 2007. The
2007 quarter benefited by approximately $0.12 per share from a lower effective
tax rate than was subsequently used for fiscal 2007, with the additional 12
cents being recorded in the second quarter of 2007.
For the
three months ended March 31, 2008, average freight revenue per tractor per week,
our primary measure of asset productivity, increased 0.3%, to $3,001 in the
first three months of 2008 compared to $2,992 in the same period of
2007. The increase was primarily generated by a 2.4% increase in
average miles per tractor, partially offset by a 0.4% decrease in our average
freight revenue per total mile.
The
lackluster freight environment continued to impact every subsidiary and service
offering. The consolidated freight obtained from freight brokers was
approximately 15% of revenue in the first quarter of 2008, compared with
approximately 13% of revenue in the first quarter of 2007. Although
freight from brokers helps keep tractors moving, most freight from brokers is
characterized by low rates and no fuel surcharge. The percentage of
broker freight negatively impacted the Company's net cost of fuel.
We
continued to constrain the size of our tractor fleet to achieve greater fleet
utilization and attempt to improve profitability. Weighted average
tractors decreased 3.6% to 3,553 in the 2008 period from 3,686 in the 2007
period.
Our
after-tax costs on a per-mile basis increased 8.9%, or 12.3 cents per mile,
compared with the first three months of 2007. Excluding the effect of the
atypical tax rate in 2007 and operating expenses associated with brokerage
operations, which does not have associated miles, the after-tax costs of our
asset-based trucking operations on a per mile basis increased 2.0% or 2.7 cents
per mile compared with the first three months of 2007. The main
factors were: a 7.3 cents per mile increase in net fuel expense associated with
higher fuel cost per gallon, an increase in freight obtained through brokers, an
increase in non-revenue miles, and less compensatory fuel surcharge programs
contracted with our customers; a 1.7 cents per mile increase in general
insurance and claims expense, an additional 1.7 cents per mile increase in
workers compensation insurance expense, and a 1.3 cents per mile increase in
operations and maintenance expense. On a net basis, all other expenses decreased
on a per mile basis.
For the
three months ended March 31, 2008, results of each service offering included the
following, as compared to the results we had achieved for the three months ended
March 31, 2007:
●
|
Covenant
Expedited long haul service. We decreased the average fleet size by
approximately 9%, primarily by moving solo-driver trucks out of this
service offering. We increased the percentage of team drivers within this
fleet to 92% teams from 84% teams in the 2007 period. Average
freight revenue per truck per week increased by 5.5%, with average freight
revenue per total mile up approximately 1% and miles per truck up
approximately 4.2%. Despite increased freight revenue per tractor per
week, the profitability of this service offering suffered because of
higher net fuel expense.
|
|
|
●
|
SRT
Refrigerated service. In the first quarter of 2008, average freight
revenue per truck per week increased by 2%, with average freight revenue
per total mile up approximately 1% and miles per truck up approximately
1%. Net fuel costs and an increase in cargo claims were the main
factors that negatively impacted profitability.
|
|
|
●
|
Covenant
Dedicated service. We decreased the average fleet by approximately 5%.
Average freight revenue per truck per week increased by approximately 8%,
with average freight revenue per total mile decreasing approximately 5%
and miles per truck increasing 14%. Dedicated was our only profitable
service offering during the 2008 quarter, principally because of better
fuel cost coverage than other operations and moving unseated trucks to the
regional service offering.
|
|
|
●
|
Covenant
regional solo-driver service. We increased the average fleet by
approximately 74 trucks or about 13%, primarily because the regional
service offering served as an overflow vehicle for trucks that were
unproductive in other service offerings. Average freight
revenue per truck decreased approximately 11%, due primarily to an 8%
decrease in average miles per truck, and a 3.0% decrease in average
freight revenue per total mile. Fuel surcharge recovery also declined.
Substantial additional improvements are needed for this service offering
to become profitable.
|
|
|
●
|
Star
regional solo-driver service. Average freight revenue per truck per week
decreased by approximately 6%, with average freight revenue per total mile
decreasing approximately 1% and miles per truck
decreasing approximately 5%. Especially soft freight demand in
the southeastern United States, where Star's lanes are concentrated,
has resulted in rate pressure, fewer loaded miles, a larger
percentage of unloaded miles, and reduced fuel surcharge collection,
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 5,601 in the first quarter of 2008 from 1,295 loads in
the first quarter of 2007. Average revenue per load also increased 11.8%
to $1,780 in the first quarter of 2008from $1,592 per load in the first
quarter of 2007. 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.
|
At March
31, 2008, we had $164.2 million in stockholders' equity and $136.8 million in
balance sheet debt for a total debt-to-capitalization ratio of 45.4% and a book
value of $11.71 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.
In our
trucking operations, 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. In our brokerage operations, we
derive revenue from arranging loads for other carriers.
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 certain non-driver personnel expenses.
Revenue
Equipment
At March
31, 2008, we operated approximately 3,533 tractors and 8,512 trailers. Of such
tractors, approximately 2,715 were owned, 703 were financed under operating
leases, and 115 were provided by independent contractors, who own and drive
their own tractors. Of such trailers, approximately 2,307 were owned and
approximately 6,205 were financed under operating leases. We finance a portion
of our tractor fleet and most of our trailer fleet with off-balance sheet
operating leases. These leases generally run for a period of three years for
tractors and five to seven years for trailers. At March 31, 2008, our
fleet had an average tractor age of 2.0 years and an average trailer age of 3.6
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
March
31,
|
|
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2008
|
|
|
2007
|
|
Total revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Freight revenue (1)
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating
expenses:
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages, and
related
expenses
|
|
|
36.7 |
|
|
|
40.5 |
|
Salaries, wages, and
related
expenses
|
|
|
44.9 |
|
|
|
47.0 |
|
Fuel expense
|
|
|
34.9 |
|
|
|
27.6 |
|
Fuel expense (1)
|
|
|
20.4 |
|
|
|
16.1 |
|
Operations and
maintenance
|
|
|
6.0 |
|
|
|
5.8 |
|
Operations and
maintenance
|
|
|
7.3 |
|
|
|
6.7 |
|
Revenue equipment rentals
and
purchased
transportation
|
|
|
11.2 |
|
|
|
9.3 |
|
Revenue equipment rentals
and
purchased
transportation
|
|
|
13.7 |
|
|
|
10.8 |
|
Operating taxes and
licenses
|
|
|
1.8 |
|
|
|
2.3 |
|
Operating taxes and
licenses
|
|
|
2.3 |
|
|
|
2.7 |
|
Insurance and
claims
|
|
|
4.4 |
|
|
|
3.8 |
|
Insurance and
claims
|
|
|
5.4 |
|
|
|
4.4 |
|
Communications and
utilities
|
|
|
1.0 |
|
|
|
1.3 |
|
Communications and
utilities
|
|
|
1.2 |
|
|
|
1.5 |
|
General supplies and
expenses
|
|
|
3.3 |
|
|
|
3.4 |
|
General supplies and
expenses
|
|
|
4.0 |
|
|
|
4.0 |
|
Depreciation and
amortization
|
|
|
6.0 |
|
|
|
7.7 |
|
Depreciation and
amortization
|
|
|
7.3 |
|
|
|
8.9 |
|
Total operating
expenses
|
|
|
105.3 |
|
|
|
101.6 |
|
Total operating
expenses
|
|
|
106.5 |
|
|
|
101.9 |
|
Operating
loss
|
|
|
(5.3 |
) |
|
|
(1.6 |
) |
Operating
loss
|
|
|
(6.5 |
) |
|
|
(1.9 |
) |
Other expense,
net
|
|
|
1.2 |
|
|
|
1.7 |
|
Other expense,
net
|
|
|
1.5 |
|
|
|
2.0 |
|
Loss
before income taxes
|
|
|
(6.5 |
) |
|
|
(3.4 |
) |
Loss
before income taxes
|
|
|
(8.0 |
) |
|
|
(3.9 |
) |
Income tax
benefit
|
|
|
(2.2 |
) |
|
|
(2.1 |
) |
Income tax
benefit
|
|
|
(2.7 |
) |
|
|
(2.4 |
) |
Net
loss
|
|
|
(4.3 |
)%
|
|
|
(1.2 |
)%
|
Net
loss
|
|
|
(5.3 |
)%
|
|
|
(1.4 |
)% |
(1)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel
surcharge revenue is shown netted against the fuel expense category ($33.1
million and $22.9 million in the three months ended March 31, 2008 and
2007, respectively).
|
COMPARISON
OF THREE MONTHS ENDED MARCH 31, 2008 TO THREE MONTHS ENDED MARCH 31,
2007
For the
quarter ended March 31, 2008, total revenue increased $15.3 million, or 9.2%, to
$181.7 million from $166.4 million in the 2007 period. Total revenue
includes $33.1 million and $22.9 million of fuel surcharge revenue in the 2008
and 2007 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.
Freight
revenue (total revenue less fuel surcharges) increased $5.1 million, or 3.5%, to
$148.6 million in the three months ended March 31, 2008, from $143.5 million in
the same period of 2007. Average freight revenue per tractor per week, our
primary measure of asset productivity, increased 0.3%, to $3,001 in the first
three months of 2008 from $2,992 in the same period of 2007. The
increase was primarily generated by a 2.4% increase in average miles per
tractor, partially offset by a 0.9% decrease in our average freight revenue per
total mile.
The
lackluster freight environment continued to impact every subsidiary and service
offering. The consolidated freight obtained from freight brokers was
approximately 15% of revenue in the first quarter of 2008, compared with
approximately 13% of revenue in the first quarter of 2007. Although
freight from brokers helps keep tractors moving, most freight from brokers is
characterized by low rates and no fuel surcharge. The percentage of
broker freight negatively impacted the Company's net cost of fuel. We
continued to constrain the size of our tractor fleet to achieve greater fleet
utilization and attempt to improve profitability. Weighted average
tractors decreased 3.6% to 3,553 in the 2008 period from 3,686 in the 2007
period.
Salaries,
wages, and related expenses decreased $0.7 million, or 1.1%, to $66.7 million in
the 2008 period, from $67.4 million in the 2007 period. As a percentage of
freight revenue, salaries, wages, and related expenses decreased to 44.9% in the
2008 period, from 47.0% in the 2007 period. The decrease was attributable to
lower driver wages as more drivers have opted onto our driver per diem pay
program as well as a decrease in office salaries due to a reduction in work
force. Also, in the 2007 period, we had additional office salary
expense related to severance payments from our business
realignment. Driver pay decreased $0.8 million to $45.2 million in
the 2008 period, from $46.1 million in the 2007 period. Our payroll expense for
employees, other than over-the-road drivers, decreased $1.1 million to $10.9
million from $12.0 million. These reductions were partially offset by
an increase in workers compensation expense related to unfavorable development
of some outstanding claims during the 2008 period.
Fuel
expense, net of fuel surcharge revenue of $33.1 million in the 2008 period and
$22.9 million in the 2007 period, increased $7.2 million, or 31.3%, to $30.4
million in the 2008 period, from $23.1 million in the 2007 period. As a
percentage of freight revenue, net fuel expense increased to 20.4% in the 2008
period from 16.1% in the 2007 period.
The
Company receives a fuel surcharge on its loaded miles from most
shippers. However, this does not cover the entire increase in fuel
prices for several reasons, including the following: surcharges cover
only loaded miles, not the approximately 11% of non-revenue miles we operate;
surcharges do not cover miles driven out-of-route by our drivers; and surcharges
typically do not cover refrigeration unit fuel usage or fuel burned by tractors
while idling. Moreover, most of the approximately 15% of our business
during the first quarter relating to shipments obtained from freight brokers did
not carry a fuel surcharge. Finally, fuel surcharges vary in the
percentage of reimbursement offered, and not all surcharges fully compensate for
fuel price increases even on loaded miles.
The rate
of fuel price increases also can have an impact. Most fuel surcharges
are based on the average fuel price as published by the Department of Energy
("DOE") for the week prior to the shipment. In times of rapidly
escalating fuel prices, the lag time causes under-recovery.
During
the first quarter of 2008, the Company's average cost of diesel fuel increased
93 cents per gallon compared with the first quarter of 2007. The
DOE price of fuel increased 82 cents per gallon in January, 89 cents
per gallon in February, and 121 cents per gallon in March, compared with
the same months of 2007. On a gross basis, fuel expense increased
$17.5 million versus the first quarter of 2007, while miles operated by
Company-owned trucks decreased approximately 0.7%. Due to the factors
explained above, fuel surcharges covered only $10.2 million, or 58%, of the
increase. Accordingly, the Company's net cost of fuel rose by
$7.2 million, or approximately 7.5 cents per mile. This had
a negative impact of approximately 33 cents per share on the Company's
financial results for the quarter.
The
Company has established several initiatives to combat the rising cost of
fuel. First and foremost, the Company has invested in auxiliary power
units for its tractors that provide heat, cooling, and power for its tractors
without idling the engine. These units had been installed in
approximately 15% of the Company's tractors at March 31,
2008. The Company has also reduced the maximum speed of many of its
trucks, implemented strict idling guidelines for its drivers, encouraged the use
of shore power units in truck stops, and imposed standards for accepting broker
freight that include a minimum combined rate and assumed fuel surcharge
component. At the same time, the Company is approaching shippers with
less compensatory overall freight rate and fuel surcharge programs to explain
the need for relief if the Company is to continue hauling that shipper's
freight. Despite these efforts, however, fuel expense is expected to
remain a major concern for the foreseeable future. During the month
of April, fuel costs continued to escalate from March levels. Fuel
costs may continue to 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 $1.2 million to $10.8 million in the 2008
period from $9.6 million in the 2007 period. The increase resulted from
increased tractor and trailer maintenance costs, as well as increased tire
expense associated with a somewhat older average fleet age and the associated
tire replacement cycle.. As a percentage of freight revenue,
operations and maintenance increased to 7.3% in the 2008 period from 6.7% in the
2007 period.
Revenue
equipment rentals and purchased transportation increased $4.9 million, or 31.6%,
to $20.3 million in the 2008 period, from $15.5 million in the 2007
period. As a percentage of freight revenue, revenue equipment rentals
and purchased transportation expense increased to 13.7% in the 2008 period from
10.8% in the 2007 period. Payments to third-party transportation providers
primarily from Covenant Transport Solutions, our brokerage subsidiary were $8.2
million in the 2008 period, compared to $1.7 million in the 2007 period. Tractor
and trailer equipment rental and other related expenses decreased $1.4 million,
to $8.0 million compared with $9.4 million in the same period of 2007. We had
financed approximately 703 tractors and 6,205 trailers under operating leases at
March 31, 2008, compared with 790 tractors and 7,022 trailers under operating
leases at March 31, 2007. Payments to independent contractors decreased $0.2
million, or 3.8%, to $4.2 million in the 2008 period from $4.4 million in the
2007 period, mainly due to a slight decrease in the independent contractor
fleet.
Operating
taxes and licenses decreased $0.5 million, or 13.4%, to $3.4 million in the 2008
period from $3.9 million in the 2007 period. As a percentage of freight revenue,
operating taxes and licenses decreased to 2.3% in the 2008 period from 2.7% in
the 2007 period.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, increased
$1.7 million, or 27.4%, to approximately $8.0 million in the 2008 period from
approximately $6.3 million in the 2007 period. As a percentage of freight
revenue, insurance and claims increased to 5.4% in the 2008 period from 4.4% in
the 2007 period.
The
increase was due to the receipt of a $1.0 million refund from our insurance
carrier during the 2007 period, which was not received in the 2008 period, and
an increase in our casualty claims accrual. The 2007 rebate related to achieving
certain monetary claim targets for our casualty policy in the policy year ended
February 28, 2007, and the release of the insurance carrier for certain of the
claims.
In
general for casualty claims, we currently have insurance coverage up to $50.0
million per claim. 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.
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 subsequently released the policy.
Communications
and utilities expense decreased to $1.8 million in the 2008 period from $2.1
million in the 2007 period. As a percentage of freight revenue,
communications and utilities decreased to 1.2% in the 2008 period from 1.5% in
the 2007 period.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $0.3 million to $6.0 million in the 2008 period
from $5.7 million in the 2007 period. As a percentage of freight revenue,
general supplies and expenses remained constant at 4.0% in the 2008 and 2007
periods. The increase was primarily due to increased sales agent commissions,
from our growing brokerage subsidiary, which increased $0.8 million to $0.9
million in 2008, compared to $0.1 million in 2007. We were able to partially
offset the increased fees by reducing expenses such as airplane expense,
security services, and outside professional fees.
Depreciation and amortization,
consisting primarily of depreciation of revenue equipment, decreased $1.8 million, or 14.3%, to $10.9 million in the 2008 period from $12.7 million in the 2007 period. As a percentage of freight revenue,
depreciation and amortization decreased to 7.3% in the 2008 period from 8.9% in
the 2007 period. The decrease was primarily related to the sale of excess
equipment and terminals. During the first quarter of 2008, we recorded a $0.6
million net gain on sale of equipment, compared with a $0.3 million net loss on
sale of equipment for the first quarter of 2007. The market for used
tractors and trailers was reasonably good during the initial part of the first
quarter of 2008, but has deteriorated since March.
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, decreased $0.7 million, to
$2.2 million in the 2008 period from $2.8 million in the 2007 period. The
decrease is due to lower debt balances during the quarter.
Our
income tax benefit was $3.9 million for the 2008 period compared to $3.5 million
for the 2007 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 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 three months ended March 31,
2007.
During
the first quarter 2007, the Company recognized an atypical tax
item. The Company recognized net losses of approximately $2.1 million
or $0.15 per share in the first quarter of 2007. The loss included a
large tax benefit that was based on the Company’s forecasted annual earnings for
2007 at that time. Subsequently, the effective tax rate increased
because the annual forecasted profitability at March 31, 2007 changed
dramatically based on the actual poor results of the second quarter of
2007. Accordingly, an amount representing approximately
$0.12 per share was recorded as additional tax expense in the second
quarter of 2007. That amount would have been recorded in the first quarter of
2007, had the forecast been more in line with actual results.
Primarily
as a result of the factors described above, we experienced net losses of $7.8
million and $2.1 million in the 2008 and 2007 periods, respectively. As a result
of the foregoing, our net loss as a percentage of freight revenue deteriorated
to (5.3%) in the 2008 period from (1.4%) in the 2007 period.
LIQUIDITY
AND CAPITAL RESOURCES
In recent
years, we have financed our capital requirements with borrowings under our
Securitization Facility and Credit Facility, cash flows from operations,
long-term operating leases, and secured installment notes with finance
companies. Our primary sources of liquidity at March 31, 2008, were
funds provided by operations, proceeds from the sale of used revenue equipment,
proceeds under the Securitization Facility, borrowings under our Credit
Facility, borrowings from secured installment notes (each as defined in
Note 10 to our consolidated condensed financial statements contained
herein), and operating leases of revenue equipment. Based on our expected
financial condition, results of operation, and net cash flows during the next
twelve months, which contemplate an improvement compared with the past twelve
months, we believe our sources of liquidity will be adequate to meet our current
and projected needs for at least the next twelve months. On a longer term basis,
based on anticipated financial condition, results of operations, and cash flows,
continued availability under our Credit Facility and Securitization Facility,
secured installment notes, and other sources of financing that we expect will be
available to us, we do not expect to experience material liquidity constraints
in the foreseeable future.
Cash
Flows
During
the 2008 quarter, cash flow remained positive primarily due to low capital
expenditures and managing the payment of accounts payable.
Net cash
provided by operating activities was $1.4 million in the 2008 period and $3.0
million in the 2007 period. Our cash from operating activities was lower in
2008, primarily due to our larger net loss, less efficient collection of
customer accounts receivable, and an increase in income tax receivables
resulting from the Company’s estimated 2007 fiscal tax loss which will be
carried back to offset previous years’ taxable income resulting in a current
income tax receivable. These factors were offset partially by more
efficient payment of payables and accrued liabilities, which resulted in an
approximate $17.4 million increase in cash from operating activities in the 2008
period.
Net cash
provided by investing activities was $3.5 million in the 2008 period compared to
net cash used in investing activities of $12.8 million in the 2007
period in each case relating primarily to net proceeds from the sale or net
purchases of property and equipment. Assuming that we proceed as
planned with minimal new tractor and trailer purchase activity during 2008, that
we dispose of assets held for sale during 2008 at expected prices, and that we
do not complete any business acquisitions, we expect our capital expenditures,
net of proceeds of dispositions, to be approximately $35 million to
$45 million in 2008. However, given the continued lack of freight demand,
the Company is revisiting its capital expenditure and equipment sale
plans.
Net cash
used in financing activities was $4.2 million in the 2008 period compared to net
cash provided by financing activities of $8.7 million in the 2007 period. In the
2007 period, we borrowed additional funds primarily to fund the exercise of
purchase options available at the end of certain revenue equipment leases. At
March 31, 2008, the Company had outstanding balance sheet debt of $136.8
million, primarily consisting of $65.0 million drawn under the Credit Facility
and approximately $58.5 million from the Securitization Facility. Interest rates
on this debt range from 3.7% to 5.7%.
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 quarter of 2008. At March 31, 2008, 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, the Company entered into our Credit Facility with a group of
banks. The Credit Facility matures in December 2011. The Company signed
Amendment No. 1 to the Credit Facility on August 28, 2007, which, among other
revisions, modified the financial covenants to levels better aligned with the
Company's expected ability to maintain compliance and granted and expanded the
security interest to include, with limited exceptions, then owned revenue
equipment, as well as revenue equipment acquired subsequently utilizing proceeds
from the Credit Facility. 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 0.875% and 2.250% 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 2.25% at March 31, 2008). At March 31, 2008, the
Company had borrowings outstanding under the Credit Facility totaling $65.0
million, with a weighted average interest rate of 5.0%. The Company's
obligations under the Credit Facility are guaranteed by the Company and all of
its subsidiaries, except CVTI Receivables Corp., a Nevada corporation ("CRC")
and Volunteer Insurance Limited, a Cayman Island company
("Volunteer").
In
January 2008, the Company chose to reduce the maximum borrowing limit by $10.0
million in order to reduce its unused fees on the Credit Facility. As of March
31, 2008, the Credit Facility has a maximum borrowing limit of $190.0 million
with an accordion feature which permits an increase up to a maximum borrowing
limit of $265.0 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. As amended, the Credit Facility is secured by a pledge of the
stock of most of the Company's subsidiaries and certain owned revenue equipment,
as well as revenue equipment acquired subsequently utilizing proceeds from the
Credit Facility. A commitment fee, which is adjusted quarterly between 0.175%
and 0.500% 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 March 31, 2008 and December 31, 2007,
the Company had undrawn letters of credit outstanding of approximately $41.7
million and $62.5 million, respectively. As of March 31, 2008, the Company had
approximately $52.6 million of available borrowing capacity under the Credit
Facility.
In
December 2000, the Company entered into our 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. On December 4, 2007, the Company and CRC entered into
certain amendments to the Securitization Facility. Among other
things, the amendments to the Securitization Facility extended the scheduled
commitment termination date to December 2, 2008, reduced the facility limit from
$70.0 million to $60.0 million, tightened certain performance ratios required to
be maintained with respect to accounts receivable including, the default ratio,
the delinquency ratio, the dilution ratio, and the accounts receivable turnover
ratio, and amended the master servicer event of default relating to
cross-defaults on material indebtedness with the effect that such master
servicer event of default may now be more readily triggered. As a
result of the amendments to the Securitization Facility, the Company can receive
up to $60.0 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 March 31, 2008
and December 31, 2007, the Company had $58.5 million and $48.0 million in
outstanding current liabilities related to the Securitization Facility,
respectively, with weighted average interest rates of 3.7% and 5.3%
respectively. CRC's Securitization Facility 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. 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. We were in
compliance with the covenants as of March 31, 2008.
OFF-BALANCE
SHEET ARRANGEMENTS
Operating
leases have been an important source of financing for our revenue equipment,
computer equipment, and certain real estate. At March 31, 2008, we had financed
approximately 703 tractors and 6,205 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 condensed statements of operations in the line
item "Revenue equipment rentals and purchased transportation." Our
revenue equipment rental expense was $8.0 million in the first quarter of 2008,
compared to $9.4 million in the first quarter of 2007. The total
amount of remaining payments under operating leases as of March 31, 2008, was
approximately $129.6 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 March 31, 2008, the maximum amount of the residual value guarantees was
approximately $25.9 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
financial statements is contained in Note 1, "Summary of Significant Accounting
Policies," of the consolidated condensed financial statements attached hereto.
The following discussion addresses our most critical accounting policies, which
are those that are both important to the portrayal of our financial condition
and results of operations and that require significant judgment or use of
complex estimates.
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. 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. During 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 condensed 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 March 31, 2008, 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. 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 and
computer equipment. 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 FIN 48. 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 December 31,
2007.
Deferred
income taxes represent a substantial liability on our consolidated condensed
balance sheets and are determined in accordance with SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities (tax benefits and liabilities expected to be
realized in the future) are recognized for the expected future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry forwards.
The
carrying value of our deferred tax assets assumes that we will be able to
generate, based on certain estimates and assumptions, sufficient future taxable
income in certain tax jurisdictions to utilize these deferred tax benefits. If
these estimates and related assumptions change in the future, we may be required
to establish a valuation allowance against the carrying value of the deferred
tax assets, which would result in additional income tax expense. On a periodic
basis we assess the need for adjustment of the valuation
allowance. Based on forecasted income and prior years' taxable
income, no valuation reserve has been established at March 31, 2008, 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 taxable income.
While it
is often difficult to predict the final outcome or the timing of resolution of
any particular tax matter, the Company believes that its reserves reflect the
probable outcome of known tax contingencies. The Company adjusts these reserves,
as well as the related interest, in light of changing facts and circumstances.
Settlement of any particular issue would usually require the use of cash.
Favorable resolution would be recognized as a reduction to the Company's annual
tax rate in the year of resolution.
Performance-Based Employee Stock
Compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
No. 123R (revised 2004) Share-Base Payment ("SFAS No.
123R"), under which we estimate compensation expense that is recognized in our
consolidated condensed 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.
New Accounting
Pronouncements
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities ("SFAS No. 161"), which amends and
expands the disclosure requirements of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), to provide an
enhanced understanding of an entity’s use of derivative instruments, how they
are accounted for under SFAS 133 and their effect on the entity’s financial
position, financial performance and cash flows. The provisions of SFAS 161 are
effective as of the beginning of our 2009 fiscal year. We are currently
evaluating the impact of adopting SFAS 161 on our consolidated condensed
financial statements.
In
December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 (revised 2007), Business
Combinations ("SFAS No. 141R"). This statement establishes
requirements for (i) recognizing and measuring in an acquiring company's
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree, (ii) recognizing and measuring
the goodwill acquired in the business combination or a gain from a bargain
purchase, and (iii) determining what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. The provisions of SFAS No. 141R are effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The Company does not believe the adoption of SFAS No. 141R will
have a material impact in the consolidated condensed financial
statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51 ("SFAS No.
160"). This statement amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The provisions of SFAS No. 160 are
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company does not believe the
adoption of SFAS No. 160 will have a material impact in the consolidated
condensed financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities ("SFAS No. 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 adopted SFAS No. 159 as of the beginning of the
2008 fiscal year and its adoption did not have a material impact to the
consolidated condensed financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). 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 adopted SFAS No. 157 as of the
beginning of the 2008 fiscal year and its adoption did not have a material
impact to the consolidated condensed financial statements.
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, the compensation
paid to the drivers and fuel prices. New emissions control regulations and
increases in commodity prices, wages of manufacturing workers, and other items
have resulted in higher tractor prices, and there has been an industry-wide
increase in wages paid to attract and retain qualified drivers. The cost of fuel
also has risen substantially over the past three years; 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, and certain cost control efforts, and we
further seek 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 additional and more
stringent regulation began in 2002. As of March 31, 2008, our entire
tractor fleet has such emissions compliant engines and is experiencing
approximately 2% to 4% reduced fuel economy compared with pre-2002
equipment. In 2007, stricter regulations regarding emissions became
effective. Compliance with such regulations 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 through 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 2008 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. Typically, our
equipment utilization 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 usually occurs between May and
August, as 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
March 31, 2008, we had no derivative financial instruments to reduce our
exposure to fuel price fluctuations.
INTEREST
RATE RISK
Our
market risk is also affected by changes in interest
rates. Historically, we have used a combination of fixed-rate and
variable-rate obligations to manage our interest rate exposure. Fixed-rate
obligations expose us to the risk that interest rates might
fall. Variable-rate obligations expose us to the risk that interest
rates might rise.
Our
variable rate obligations consist of our Credit 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 0.875% and
2.250% based on a consolidated leverage ratio, which is generally defined
as the ratio of borrowings, letters of credit, and the present value of
operating lease obligations to our earnings before interest, income taxes,
depreciation, amortization, and rental payments under operating leases. The
applicable margin was 2.25% at March 31, 2008. At March 31, 2008, we had
variable borrowings of $65.0 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 March 31, 2008,
borrowings of approximately $58.4 million had been drawn on the Securitization
Facility. Assuming variable rate borrowings under the Credit Facility and
Securitization Facility at March 31, 2008 levels, a one percentage point
increase in interest rates could increase our annual interest expense by
approximately $1.2 million.
ITEM 4. CONTROLS AND
PROCEDURES
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, 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.
On
April 16, 2008, BNSF Logistics, LLC ("BNSF"), a subsidiary of BNSF
Railway, filed an amended complaint (the "Amended Complaint") in the
Circuit Court of Washington County, Arkansas to name the Company and
Covenant Transport Solutions, Inc. ("Solutions") as defendants in a
lawsuit previously filed by BNSF on December 21, 2007 against nine former
employees of BNSF (the "Individuals") who, after leaving BNSF, accepted
employment with Solutions. The original complaint alleged that the
Individuals misappropriated and otherwise misused BNSF's trade secrets,
proprietary information, and confidential information (the "BNSF
Information") with the purpose of unlawfully competing with BNSF in the
transportation logistics and brokerage business, and that the Individuals
interfered unlawfully with BNSF's customer relationships. In
addition to the allegations from the original complaint, the Amended
Complaint alleges that the Company and Solutions acted in conspiracy with
the Individuals (the Company, Solutions, and the Individuals collectively,
the "Amended Defendants") to misappropriate the BNSF Information and to
use it unlawfully to compete with BNSF. The Amended Complaint also
alleges that the Company and Solutions interfered with the business
relationship that existed between BNSF and the Individuals and between
BNSF and its customers. BNSF seeks injunctive relief, specific
performance, as well as an unspecified amount of damages against the
Amended Defendants. On April 28, 2008, the Amended Defendants filed
an Answer to the Amended Complaint and intend to vigorously defend this
lawsuit. A jury trial in this matter has been set for November 3,
2008. An estimate of the possible loss, if any, or the range of the loss
cannot be made and, therefore, the Company has not accrued a loss
contingency related to this matter.
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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, 2007, 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. We do not believe that there have been any material
changes to the risk factors previously disclosed in our 2007 Form
10-K.
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EXHIBITS
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Exhibit
Number
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Reference
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Description
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3.1
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(1)
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Amended
and Restated Articles of Incorporation
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3.2
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(1)
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Amended
and Restated Bylaws dated December 6, 2007
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4.1
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(1)
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Amended
and Restated Articles of Incorporation
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4.2
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(1)
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Amended
and Restated Bylaws dated December 6, 2007
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#
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Covenant
Transportation Group, Inc. 2008 Named Executive Bonus Program, dated April
9, 2008
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#
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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
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#
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Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the
Company's Chief Financial Officer
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#
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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
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#
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Chief
Financial Officer
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References:
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(1)
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Incorporated
by reference to Form 10-K, filed March 17, 2008 (SEC Commission File
No. 000-24960).
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#
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Filed
herewith.
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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.
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COVENANT
TRANSPORTATION GROUP, INC.
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Date: May
8, 2008
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By:
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/s/ Joey B. Hogan
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Joey
B. Hogan
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Senior
Executive Vice President and
Chief
Operating Officer
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in
his capacity as such and on behalf of the
issuer.
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