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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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
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COVENANT TRANSPORT, INC.
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(Exact name of registrant as specified in its charter)
Nevada 88-0320154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Birmingham Highway
Chattanooga, Tennessee 37419
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 423/821-1212
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: $0.01 Par Value
Class A Common Stock
--------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $109 million as of March 20, 2003 (based upon the
$16.60 per share closing price on that date as reported by Nasdaq). In making
this calculation the registrant has assumed, without admitting for any purpose,
that all executive officers, directors, and holders of more than 10% of a class
of outstanding common stock, and no other persons, are affiliates.
As of March 20, 2003, the registrant had 12,032,664 shares of Class A common
stock and 2,350,000 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information set forth under Part III, Items 10, 11, 12, and 13 of this
Report is incorporated by reference from the registrant's definitive proxy
statement for the 2003 annual meeting of stockholders that will be filed no
later than April 18, 2003.
Cross Reference Index
---------------------
The following cross reference index indicates the document and location of the
information contained herein and incorporated by reference into the Form 10-K.
Part I Document and Location
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Item 1 Business Page 3 herein
Item 2 Properties Page 9 herein
Item 3 Legal Proceedings Page 9 herein
Item 4 Submission of Matters to a Vote of Security Holders Page 9 herein
Part II
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Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters Page 10 herein
Item 6 Selected Financial Data Page 11 herein
Item 7 Management's Discussion and Analysis of Financial Page 12 herein
Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk Page 27 herein
Item 8 Financial Statements and Supplementary Data Page 27 herein
Item 9 Changes in and Disagreements with Accountants on Page 27 herein
Accounting and Financial Disclosure
Part III
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Item 10 Directors and Executive Officers of the Registrant Pages 2-3, and 12 of Proxy Statement
Item 11 Executive Compensation Pages 5-7 of Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners and Pages 9-10, and 15 of Proxy Statement
Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions Page 4 of Proxy Statement
Item 14 Controls and Procedures Page 28 herein
Part IV
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Item 15 Exhibits, Financial Statement Schedules, and Reports on Page 28 herein
Form 8-K
- ------------------------------------------------------
This report contains "forward-looking statements." These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That May
Affect Future Results" for additional information and factors to be considered
concerning forward-looking statements.
PART I
ITEM 1. BUSINESS
References in this Annual Report to "we," "us," "our," or the "Company" or
similar terms refer to Covenant Transport, Inc. and its subsidiaries.
General
We are one of the ten largest truckload carriers in the United States measured
by revenue. We focus on longer lengths of haul in targeted markets where we
believe our service standards can provide a competitive advantage. We are a
major carrier for traditional truckload customers such as manufacturers and
retailers, as well as for transportation companies such as freight forwarders,
less-than-truckload carriers, and third-party logistics providers that require a
high level of service to support their businesses.
In our core long-haul business, we use the industry's largest fleet of tractors
operated by two-person driver teams to provide expedited transportation,
generally over distances from 1,500 to 2,500 miles. In this area, we offer
greater speed and reliability than rail or single-driver trucks at a lower cost
than air freight. We also operate a single driver fleet that concentrates on
expedited movements with an average length of haul of approximately 800 miles.
In both our single-driven and team-driven operations we are dedicated fleets,
which operate for the benefit of a single customer or on a defined route. This
part of our business has grown rapidly as we have expanded our participation in
the design, development, and execution of supply chain solutions for our
traditional truckload customers. In each of the past eight years, we have
provided 99% on-time performance to our customers. By targeting premium service
freight, we seek to obtain higher rates, build long-term service-based customer
relationships, and avoid competition from rail, intermodal, and trucking
companies that compete primarily on the basis of price.
Business Strategy
The key elements of our business strategy are:
Offer premium service. We offer just-in-time, transcontinental express, and
other premium services to shippers with exacting transportation requirements.
Our service standards include transporting loads coast-to-coast in 72 hours,
meeting schedules with delivery windows as narrow as 15 minutes, and delivering
99% of all loads on-time which we have accomplished in each of the last eight
years. We target such premium service freight to obtain higher rates, build
long-term, service-based customer relationships, and avoid competition from
rail, intermodal, and trucking companies that compete primarily on the basis of
price.
Operate in targeted markets. We operate in targeted markets where our service
can provide a competitive advantage. Our primary market historically has been
expedited long-haul freight transportation predominantly using two-person driver
teams. Our industry-leading 1,200 driver teams can provide significantly faster,
more predictable service than rail, intermodal, or single-driver service over
long lengths of haul at a fraction of the cost of air freight. In addition, we
offer dedicated fleets, which operate for the benefit of a single customer or on
a defined route. This part of our business has grown rapidly as we have expanded
our participation in the design, development, and execution of supply chain
solutions for customers. We also offer long-haul refrigerated service that
targets premium temperature-controlled business mainly originating on the West
Coast. We believe that our concentration on longer lengths of haul and our large
capacity of driver teams differentiate us from competitors in our targeted
markets.
Focus on equipment utilization. We use our longer lengths of haul and
disciplined operating lanes to enhance asset utilization and deliver operating
efficiencies. We seek to continue to improve our asset utilization by adding
freight within our existing traffic lanes faster than adding new equipment
capacity. We intend to grow our fleet only when profit margins justify
expansion. A high level of operational discipline creates more predictable
movements, reduces empty miles, and shortens turn times between loads.
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Seek partnerships with other transportation companies. A significant portion of
our business focuses on providing services to other transportation companies
that require a high level of service to support their operations. In 2002,
transportation providers, such as logistics companies, freight forwarders,
less-than-truckload companies, and deferred air freight providers, comprised the
largest market sector we served. We seek to grow by continuing to serve as a
partner, rather than a competitor, to other transportation providers.
Use technology to enhance operating efficiency. We have made significant
investments in technologies that reduce costs, afford a competitive advantage
with service-sensitive customers, and promote economies of scale. In particular,
we believe we are beginning to realize the benefits of freight optimization
software that allows us to more accurately analyze the profitability of each
customer, route, and load. We also use satellite-based tracking and
communication systems, document imaging, fuel routing software, and electronic
access to customer load information and electronic transmission of shipping
instructions.
Customers and Operations
We operate throughout the United States and in parts of Canada and Mexico, with
substantially all of our revenue generated from within the United States. All of
our assets are domiciled in the United States, and for the past three years less
than one percent of our revenue has been generated in Canada and Mexico. The
largest part of our business, which comprised 72% of our 2002 revenue, is
medium-to-long haul dry van service that we provide by using single and
two-person driver teams. Our dedicated fleets, which serve a defined customer or
route, comprised 13% of our 2002 revenue. We also operate a long-haul
temperature-controlled business, which frequently hauls dry freight to the West
Coast and temperature-controlled freight to the East, and this portion of our
business comprised 15% of 2002 revenue. Part of this business is operated by our
subsidiary, Southern Refrigerated Transport, Inc. under its own tradename.
Our primary customers include manufacturers and retailers, as well as other
transportation companies. In 2002, our five largest customers were Con-Way
Transportation, Eagle Global Logistics, Emery Air Freight, Shaw Industries, and
Target Corporation. In the aggregate, subsidiaries of CNF, Inc. accounted for
approximately 11%, 13%, and 11% of our revenue in 2000, 2001, and 2002,
respectively.
We approach our operations as an integrated effort of marketing, customer
service, and fleet management. Our customer service and marketing personnel
emphasize both new account development and expanded service for current
customers. Customer service representatives provide day-to-day contact with
customers, while the sales force targets driver-friendly freight that will
increase lane density.
Fleet managers at each operations center plan load coverage according to
customer requirements and relay pick-up, delivery, routing, and fueling
instructions to our drivers. The fleet managers attempt to route most of our
trucks over selected operating lanes. We believe this assists us in balancing
traffic between eastbound and westbound movements, reducing empty miles, and
improving the reliability of delivery schedules.
We use proven technology, including freight optimization software that permits
us to perform sophisticated analyses of profitability and other factors on each
customer, route, and load. We installed the software in late 2000 and in 2001
began inputting and tracking data and customizing our analyses. We have begun to
realize the benefits of superior freight selection based on several months of
history.
We equip our tractors with a satellite-based tracking and communications system
that permits direct communication between drivers and fleet managers. We believe
that this system enhances our operating efficiency and improves customer service
and fleet management. This system also updates the tractor's position every 30
minutes, which allows us and our customers to locate freight and accurately
estimate pick-up and delivery times. We also use the system to monitor engine
idling time, speed, performance, and other factors that affect operating
efficiency.
As an additional service to customers, we offer electronic data interchange and
Internet-based communication for customer usage in tendering loads and accessing
information such as cargo position, delivery times, and billing information.
These services allow us to communicate electronically with our customers,
permitting real-time
4
information flow, reductions or eliminations in paperwork, and the employment of
fewer clerical personnel. Since 1997, we have used a document imaging system to
reduce paperwork and enhance access to important information.
Our operations generally follow the seasonal norm for the trucking industry.
Equipment utilization is usually at its highest from May to August, maintains
high levels through October, and generally decreases during the winter holiday
season and as inclement weather impedes operations.
Drivers and Other Personnel
Driver recruitment, retention, and satisfaction are essential to our success,
and we have made each of these factors a primary element of our strategy. We
emphasize driver-friendly operations throughout the Company. We have implemented
automated programs to signal when a driver is scheduled to be routed toward
home, and we assign fleet managers specific tractor units, regardless of
geographic region, to foster positive relationships between the drivers and
their principal contact with us.
We use driver teams in a substantial portion of our tractors. Driver teams
permit us to provide expedited service over our long average length of haul,
because driver teams are able to handle longer routes and drive more miles while
remaining within Department of Transportation ("DOT") safety rules. We believe
that these teams contribute to greater equipment utilization than most carriers
with predominately single drivers. The use of teams, however, increases
personnel costs as a percentage of revenue and the number of drivers we must
recruit. At December 31, 2002, teams operated approximately 29% of our tractors.
The single driver fleets operate fewer miles per tractor and experience more
empty miles but these factors are expected to be offset by higher revenue per
loaded mile and the reduced employee expense of only one driver.
We are not a party to a collective bargaining agreement and our employees are
not represented by a union. At December 31, 2002, we employed approximately
4,894 drivers and approximately 1,169 nondriver personnel. We believe that we
have a good relationship with our personnel.
Revenue Equipment
We believe that operating high quality, late-model equipment contributes to
operating efficiency, helps us recruit and retain drivers, and is an important
part of providing excellent service to customers. Our historical policy has been
to operate our tractors while under warranty to minimize repair and maintenance
cost and reduce service interruptions caused by breakdowns. In conjunction with
the extension of our trade cycle on tractors from three to four years in 2001,
we purchased extended warranties on major components. We also order most of our
equipment with uniform specifications to reduce our parts inventory and
facilitate maintenance. At December 31, 2002, our 3,738 tractors had an average
age of 26 months and our 7,485 trailers had an average age of 55 months.
Approximately 84% of these trailers were dry vans and the remainder were
temperature-controlled vans.
We have taken delivery of our model year 2003 tractors from Freightliner and
expect to begin taking delivery of model year 2004 tractors shortly. The new
tractors are covered by tradeback agreements that guarantee us a defined
trade-in value if we purchase a replacement tractor from Freightliner. The
combination of an increased price for the new tractors and a decreased trade-in
value for used tractors is increasing our cost of equipment for future periods.
We are considering changing our tractor trade cycle back to a period of less
than four years. We are evaluating the decision based on maintenance costs,
capital requirements, prices of new and used tractors, and other factors. If we
decide to return to a shorter trade cycle, our capital expenditures and
financing costs would increase, and we would expect our maintenance costs to
decrease.
Industry and Competition
According to the American Trucking Associations (ATA), the U.S. market for
truck-based transportation services generated total revenues of approximately
$610 billion in 2001 and is projected to grow in line with the overall U.S.
economy. We operate in the highly fragmented for-hire truckload segment of this
market, which the ATA estimates
5
generated revenues of approximately $274 billion in 2001. Our dedicated business
also competes for the private fleet portion of the overall trucking market (also
estimated by the ATA at approximately $274 billion in revenues in 2001), by
seeking to convince private fleet operators to outsource or supplement their
private fleets. Measured by annual revenue, the ten largest dry van truckload
carriers accounted for approximately $12 billion or four percent of annual
for-hire truckload revenue in 2001.
The United States trucking industry is highly competitive and includes thousands
of for-hire motor carriers, none of which dominates the market. Service and
price are the principal means of competition in the trucking industry. We
compete to some extent with railroads and rail-truck intermodal service but
differentiate ourself from rail and rail-truck intermodal carriers on the basis
of service because rail and rail-truck intermodal movements are subject to
delays and disruptions arising from rail yard congestion, which reduces the
effectiveness of such service to customers with time-definite pick-up and
delivery schedules.
We believe that the cost and complexity of operating trucking fleets are
increasing and that economic and competitive pressures are likely to force many
smaller competitors and private fleets to consolidate or exit the industry. As a
result, we believe that larger, better capitalized companies, like us, will have
greater opportunities to increase profit margins and gain market share. In the
market for dedicated services, we believe that truckload carriers, like us, have
a competitive advantage over truck lessors, who are the other major participants
in the market, because we can offer lower prices by utilizing back-haul freight
within our network that traditional lessors do not have.
Insurance and Claims
We have increased the self-insured retention portion of our insurance coverage
for most claims significantly over the past several years. In 2000, our
deductible was $12,500 for our casualty program and $250,000 for workers'
compensation. During the first quarter of 2003, we renewed our casualty program
and increased our self insured retention level to a combined $2.0 million per
occurrence for liability, and $1.0 million per occurrence for cargo loss and
damage coverage. In our casualty program, we now self-insure for the first $2.0
million of exposure in our primary layer as well as the first $2.0 million of
exposure in our $15.0 million of excess coverage. Our aggregate limit of
coverage is $20.0 million for our casualty program. We maintain a workers'
compensation plan and group medical plan for our employees with a deductible
amount of $500,000 for each workers' compensation claim and a deductible amount
of $225,000 for each group medical claim. In the first quarter of 2003, we
adopted a workers' compensation plan with a deductible level of $1.0 million per
occurrence and renewed our group medical plan with a deductible amount of
$250,000. The following chart reflects the major changes in our casualty program
since March 1, 2001:
Primary Coverage Excess Coverage
Coverage Period Primary Coverage SIR/deductible Excess Coverage SIR/deductible
- -------------------------------------------------------------------------------------------------------------------
March 2000 - March 2001 $1.0 million $12,500 $15 million $0
March 2001 - March 2002 $1.0 million $250,000 $49 million $3.0 million
March 2002 - July 2002 $2.0 million $500,000 $48 million $3.0 million
July 2002 - November 2002 $2.0 million $500,000 $0 * $0 *
November 2002 - March 2003 $4.0 million $1.0 million $16.0 million $3.0 million
March 2003 - March 2004 $5.0 million $2.0 million** $15.0 million $2.0 million
* Represents period for which no proof of insurance was available from agent
and coverage was determined to be invalid. We are pursuing legal remedies
against the insurance agency and its errors and omissions policy, but we
can make no assurance of recovery.
** Does not include $1.0 million self insured retention for cargo.
On July 15, 2002, we received a binder for $48.0 million of excess insurance
coverage over our $2.0 million primary layer. Subsequently, we were forced to
seek replacement excess coverage after the insurance agent retained the premium
and failed to produce proof of insurance coverage. We obtained replacement
coverage of $4.0 million with
6
a $1.0 million self-insured retention in November 2002. We filed a lawsuit to
recover the premiums paid and to seek coverage from the insurance agency and its
errors and omissions policy, on any claims that exceed $2.0 million in exposure.
Currently, we are not aware of any such claims. If one or more claims from this
period exceeded $2.0 million in amount, our financial condition and results of
operations could be materially and adversely affected.
Regulation
We are a common and contract motor carrier of general commodities. Historically,
the Interstate Commerce Commission (the "ICC") and various state agencies
regulated motor carriers' operating rights, accounting systems, mergers and
acquisitions, periodic financial reporting, and other matters. In 1995, federal
legislation preempted state regulation of prices, routes, and services of motor
carriers and eliminated the ICC. Several ICC functions were transferred to the
DOT. We do not believe that regulation by the DOT or by the states in their
remaining areas of authority has had a material effect on our operations. Our
employees and independent contractor drivers also must comply with the safety
and fitness regulations promulgated by the DOT, including those relating to drug
and alcohol testing and hours of service. The DOT has rated us "satisfactory"
which is the highest safety and fitness rating.
Over the past three years, the DOT has considered proposals to amend the
hours-in-service requirements applicable to truck drivers. The DOT sent a final
rule, which has not been published, to the Office of Management and Budget
("OMB") in January, 2003 for OMB review and approval. Any change which reduces
the potential or practical amount of time that drivers can spend driving could
adversely affect us. We are unable to predict the nature of any changes that may
be adopted. The DOT also is considering requirements that trucks be equipped
with certain equipment that the DOT believes would result in safer operations.
The cost of the equipment, if required, could adversely affect our profitability
if shippers are unwilling to pay higher rates to fund the purchase of such
equipment.
Our operations are subject to various federal, state, and local environmental
laws and regulations, implemented principally by the Federal Environmental
Protection Agency and similar state regulatory agencies, governing the
management of hazardous wastes, other discharge of pollutants into the air and
surface and underground waters, and the disposal of certain substances. If we
should be involved in a spill or other accident involving hazardous substances,
if any such substances were found on our property, or if we were found to be in
violation of applicable laws and regulations, we could be responsible for
clean-up costs, property damage, and fines or other penalties, any one of which
could have a materially adverse effect on us. We believe that our operations are
in material compliance with current laws and regulations.
Fuel Availability and Cost
We actively manage our fuel costs by routing our drivers through fuel centers
with which we have negotiated volume discounts. During 2002, the cost of fuel
was in the range at which we received fuel surcharges. Even with the fuel
surcharges, the high price of fuel decreased our profitability. Although we
historically have been able to pass through a substantial part of increases in
fuel prices and taxes to customers in the form of higher rates and surcharges,
the increases usually are not fully recovered. We do not collect surcharges on
fuel used for non-revenue miles, out-of-route miles, or fuel used while the
tractor is idling. At December 31, 2002, we had purchase commitments for
approximately 36.0 million gallons in 2003 and 3.6 million gallons in 2004.
Additional Information
At December 31, 2002, our corporate structure included Covenant Transport, Inc.,
a Nevada holding company organized in May 1994 and its wholly owned
subsidiaries: Covenant Transport, Inc., a Tennessee corporation organized in
November 1985; Covenant Asset Management, Inc., a Nevada corporation; CIP, Inc.,
a Nevada corporation; Covenant.com, Inc., a Nevada corporation; Southern
Refrigerated Transport, Inc. ("SRT"), an Arkansas corporation; Tony Smith
Trucking, Inc., an Arkansas corporation; Harold Ives Trucking Co., an Arkansas
corporation; CVTI Receivables Corp. ("CRC"), a Nevada corporation, Terminal
Truck Broker, Inc., an Arkansas corporation, and Volunteer Insurance Limited, a
Cayman Island company.
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Our headquarters are located at 400 Birmingham Highway, Chattanooga, Tennessee
37419, and our website address is www.covenanttransport.com. Our Annual Report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
all other reports we file with the SEC pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge through our
website.
This report contains forward-looking statements. Additional written or oral
forward-looking statements may be made by us from time to time in our filings
with the Securities and Exchange Commission or otherwise. The words "believes,"
"expects," "anticipates," "estimates," and "projects," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Statements in this report, including the Notes to
the Consolidated Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," describe factors, among
others, that could contribute to or cause such differences. Additional factors
that could cause actual results to differ materially from those expressed in
such forward-looking statements are set forth in "Business" in this report. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
Non-Audit Services Performed by Independent Accountants
Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added
by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for
disclosing to investors the non-audit services approved by our Audit Committee
to be performed by KPMG LLP, our independent accountants. Non-audit services are
defined as services other than those provided in connection with an audit or a
review of our financial statements. Following the adoption of the Sarbanes-Oxley
Act of 2002, our Audit Committee preapproved non-audit services, consisting of
accounting advisory services with respect to SEC filings, which subsequently
were or are being performed by KPMG LLP. Additional non-audit services will be
preapproved in the future.
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ITEM 2. PROPERTIES
Our headquarters and main terminal are located on approximately 180 acres of
property in Chattanooga, Tennessee, that include an office building of
approximately 182,000 square feet, our approximately 65,000 square-foot
principal maintenance facility, a body shop of approximately 16,600 square feet,
and a truck wash. We maintain sixteen terminals located on our major traffic
lanes in the cities listed below. These terminals provide a base for drivers in
proximity to their homes, a transfer location for trailer relays on
transcontinental routes, parking space for equipment dispatch, and the other
uses indicated below.
Driver
Terminal Locations Maintenance Recruitment Sales Ownership
------------------ ----------- ----------- ----- ---------
Chattanooga, Tennessee x x x Owned
Dalton, Georgia x x Owned
Greensboro, North Carolina Leased
Dayton, Ohio Leased
Delanco, New Jersey Leased
Indianapolis, Indiana Leased
Ashdown, Arkansas x x x Owned
Little Rock, Arkansas x Owned
Oklahoma City, Oklahoma x Owned
Hutchins, Texas x Owned
El Paso, Texas Leased
Laredo, Texas Leased
French Camp, California Leased
Fontana, California x Leased
Long Beach, California Owned
Pomona, California x Owned
ITEM 3. LEGAL PROCEEDINGS
From time to time we are a party to litigation arising in the ordinary course of
business, most of which involves claims for personal injury and property damage
incurred in the transportation of freight. As of December 31, 2002, we were not
a party to any lawsuit or governmental proceeding that, if adversely determined,
would be expected to have a materially adverse effect on our financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 2002, no matters were
submitted to a vote of security holders.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our Class A Common Stock is traded on the Nasdaq National Market, under the
symbol "CVTI." The following table sets forth for the calendar periods indicated
the range of high and low sales price for our Class A Common Stock as reported
by Nasdaq from January 1, 2001 to December 31, 2002.
Period High Low
------ ---- ---
Calendar Year 2001
1st Quarter $16.313 $10.250
2nd Quarter $17.560 $11.130
3rd Quarter $15.500 $ 9.100
4th Quarter $16.700 $ 9.310
Calendar Year 2002
1st Quarter $17.190 $14.350
2nd Quarter $21.990 $14.250
3rd Quarter $23.000 $15.410
4th Quarter $19.260 $15.260
As of March 20, 2003, we had approximately 45 stockholders of record of our
Class A Common Stock. However, we estimate that we have approximately 2,200
stockholders because a substantial number of our shares are held of record by
brokers or dealers for their customers in street names.
Dividend Policy
We have never declared and paid a cash dividend on our common stock. It is the
current intention of our Board of Directors to continue to retain earnings to
finance our growth and reduce our indebtedness rather than to pay dividends. The
payment of cash dividends is currently limited by agreements relating to our
credit agreements. Future payments of cash dividends will depend upon our
financial condition, results of operations, and capital commitments,
restrictions under then-existing agreements, and other factors deemed relevant
by our Board of Directors.
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ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except per share and operating data amounts)
Years Ended December 31,
2002 2001 2000 1999 1998
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Statement of Operations Data:
Freight revenue $541,830 $ 547,028 $ 552,429 $ 472,741 $ 370,546
Fuel and accessorial surcharges 22,588 26,593 31,561 6,626 3,315
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Total revenue $564,418 $ 573,621 $ 583,990 $ 479,367 $ 373,861
Operating expenses:
Salaries, wages, and related expenses 227,332 244,849 244,704 205,686 167,309
Fuel expense 96,332 103,894 104,154 74,150 56,318
Operations and maintenance 39,625 39,410 36,267 29,985 24,503
Revenue equipment rentals and
purchased transportation 59,265 65,104 76,200 49,330 24,250
Operating taxes and licenses 13,934 14,358 14,940 11,777 10,334
Insurance and claims 31,761 27,838 18,907 14,096 11,936
Communications and utilities 7,021 7,439 7,189 5,682 4,328
General supplies and expenses 14,677 14,468 13,970 10,380 8,994
Depreciation and amortization, including
gains (losses) on disposition of
equipment and impairment of assets (1) 49,497 56,324 38,879 35,591 30,192
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Total operating expenses 539,444 573,684 555,210 436,677 338,164
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Operating income (loss) 24,974 (63) 28,780 42,690 35,697
Other (income) expense:
Interest expense 3,542 7,855 9,894 5,993 6,252
Interest income (63) (328) (520) (480) (328)
Other 916 799 (368) - -
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Other (income) expenses, net 4,395 8,326 9,006 5,513 5,924
----------------------------------------------------------------------------
Income (loss) before income taxes 20,579 (8,389) 19,774 37,177 29,773
Income tax expense (benefit) 11,415 (1,727) 7,899 14,900 11,490
----------------------------------------------------------------------------
Income (loss) before extraordinary loss on
early extinguishment of debt 9,164 (6,662) 11,875 22,277 18,283
Extraordinary loss on early extinguishment
of debt, net of income tax benefit 890 - - - -
----------------------------------------------------------------------------
Net income (loss) $ 8,274 $ (6,662) $ 11,875 $ 22,277 $ 18,283
============================================================================
(1) Includes a $3.3 million and a $15.4 million pre-tax impairment charges in
2002 and 2001, respectively.
Basic earnings per share $ 0.58 $ (0.48) $ 0.82 $ 1.49 $ 1.27
Diluted earnings per share 0.57 (0.48) 0.82 1.48 1.27
Weighted average common shares
outstanding 14,223 13,987 14,404 14,912 14,393
Weighted average common shares
outstanding for assumed conversions 14,519 13,987 14,533 15,028 14,440
11
Years Ended December 31,
Selected Balance Sheet Data 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------
Net property and equipment $ 238,488 $ 231,536 $ 256,049 $ 269,034 $ 200,537
Total assets 361,541 349,782 390,513 383,974 272,959
Long-term debt, less current maturities 1,300 29,000 74,295 140,497 84,331
Stockholders' equity $ 175,588 $ 161,902 $ 167,822 $ 163,852 $ 141,522
Selected Operating Data:
Net margin as a percentage of freight
revenue 1.5% (1.2%) 2.1% 4.7% 4.9%
Average revenue per loaded mile $ 1.22 $ 1.21 $ 1.23 $ 1.20 $ 1.18
Average revenue per total mile $ 1.13 $ 1.12 $ 1.13 $ 1.11 $ 1.10
Average revenue per tractor per week $ 2,812 $ 2,737 $ 2,790 $ 3,078 $ 3,045
Average miles per tractor per year 129,906 127,714 128,754 144,601 144,000
Weighted average tractors for year (1) 3,680 3,791 3,759 2,929 2,333
Total tractors at end of period (1) 3,738 3,700 3,829 3,521 2,608
Total trailers at end of period (2) 7,485 7,702 7,571 6,199 4,526
(1) Includes monthly rental tractors.
(2) Excludes monthly rental trailers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the discussion in this
annual report contains forward-looking statements that involve risk,
assumptions, and uncertainties that are difficult to predict. Statements that
constitute forward-looking statements are usually identified by words such as
"anticipates," "believes," "estimates," "projects," "expects," or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
upon the current beliefs and expectations of our management and are subject to
significant risks and uncertainties. Actual results may differ from those set
forth in the forward-looking statements. The following factors, among others,
could cause actual results to differ materially from those in forward-looking
statements: excess capacity in the trucking industry; decreased demand for our
services or loss of one or more or our major customers; surplus inventories;
recessionary economic cycles and downturns in customers' business cycles;
strikes or work stoppages; increases or rapid fluctuations in fuel prices,
interest rates, fuel taxes, tolls, and license and registration fees; increases
in the prices paid for new revenue equipment; the resale value of our used
equipment and the price of new equipment; increases in compensation for and
difficulty in attracting and retaining qualified drivers and owner-operators;
increases in insurance premiums and deductible amounts or claims relating to
accident, cargo, workers' compensation, health, and other matters; seasonal
factors such as harsh weather conditions that increase operating costs;
competition from trucking, rail, and intermodal competitors; regulatory
requirements that increase costs or decrease efficiency; and the ability to
identify acceptable acquisition candidates, consummate acquisitions, and
integrate acquired operations. Readers should review and consider these factors
along with the various disclosures we make in press releases, stockholder
reports, and public filings, as well as the factors explained in greater detail
under "Factors that May Affect Future Results" herein.
Overview
We are one of the ten largest truckload carriers in the United States measured
by revenue. We focus on longer lengths of haul in targeted markets where we
believe our service standards can provide a competitive advantage. We are a
major carrier for traditional truckload customers such as manufacturers and
retailers, as well as for transportation companies such as freight forwarders,
less-than-truckload carriers, and third-party logistics providers that require a
high level of service to support their businesses.
12
Between 1991 and 1999, we grew our revenue before fuel and other surcharges from
$41.2 million to $472.7 million through internal growth and acquisitions. Over
the same period, we grew net income from $823,000, or $.08 per diluted share, to
$22.3 million, or $1.48 per diluted share. We believe this rapid growth was
strategically important, as we gained the size and equipment capacity to cover
additional traffic lanes and geographic areas for customers, participate in
competitive bids to transport freight for major shippers and develop a
substantial dedicated service business.
Beginning in 2000, the combination of softening freight demand and our rapid
expansion affected our profitability, as we were unable to obtain the freight
rates and levels of asset utilization we expected. At the same time, rising
insurance premiums and depressed used truck prices increased our operating
costs. As a result, our freight revenue declined slightly and our net income
declined to $11.9 million in 2000. We experienced a net loss of $6.7 million in
2001, including a $15.4 million pre-tax impairment charge relating to the
reduced market value of our used tractors.
Following the setbacks in 2000 and early 2001, we adopted several business
practices in 2001 that were designed to improve our profitability and
particularly, our average revenue per tractor, our chief measure of asset
utilization. The most significant of these practices were constraining the size
of our tractor and trailer fleets until profit margins justify expansion,
increasing freight volumes within our existing traffic lanes, replacing lower
yielding freight, implementing selective rate increases, and reinforcing our
cost control efforts. We believe that a combination of these business practices
and an improved freight environment contributed to substantial improvement in
our operating performance between 2001 and 2002. For 2002, our revenue declined
from $547.0 million to $541.8 million, but our net income improved to $8.3
million, including a $3.3 million pre-tax charge relating to the market value of
our used tractors and a $890,000 after-tax extraordinary item relating to early
extinguishment of debt, both in the first quarter of 2003.
Revenue
We generate substantially all of our revenue by transporting freight for our
customers. We also derive revenue from fuel surcharges, loading and unloading
activities, equipment detention, and other accessorial services. Freight
revenue, which is our revenue before fuel and accessorial surcharges, has
accounted for approximately 95% of our revenue over the past three years.
Generally, we are paid by the mile or by the load for our services. The main
factors that affect our revenue are the revenue per mile we receive from our
customers, the percentage of miles for which we are compensated, and the numbers
of miles we generate with our equipment. These factors relate, among other
things, to the U.S. economy, inventory levels, the level of truck capacity in
our markets, specific customer demand, the percentage of team-driven tractors in
our fleet, and our average length of haul.
Since 2000 we have held our fleet size relatively constant. An overcapacity of
trucks in our fleet and the industry generally as the economy slowed contributed
to lower equipment utilization and pricing pressure.
Revenue from an acquired operation that generated approximately $80 million in
revenue in the year prior to its acquisition helped offset the loss of revenue
from certain existing customers whose freight volumes were affected by the
economy or who sought lower priced service. The main constraints on our internal
growth are the ability to recruit and retain a sufficient number of qualified
drivers and, in times of slower economic growth, to add profitable freight.
In addition to constraining fleet size, we reduced our number of two-person
driver teams during 2001 and into 2002 to better match the demand for expedited
long-haul service. Our single driver fleets generally operate in shorter lengths
of haul, generate fewer miles per tractor, and experience more non-revenue
miles, but the additional expenses and lower productive miles are expected to be
offset by generally higher revenue per loaded mile and the reduced employee
expense of compensating only one driver. We expect operating statistics and
expenses to shift with the mix of single and team operations.
13
Expenses and Profitability
Over the past three years the trucking industry has experienced a significant
increase in operating costs. The main factors for the industry as well as for us
have been an increased annual cost of tractors due to higher initial prices and
lower used truck values, a higher overall cost of insurance and claims, and
elevated fuel prices. Other than those categories, our expenses have remained
relatively constant or have declined.
Looking forward, our profitability goal is to return to an operating ratio of
approximately 90%. We expect this to require additional improvements in revenue
per tractor per week to overcome expected additional cost increases of new
revenue equipment (discussed below), and other general increases in operating
costs, as well as to expand our margins. Because a large percentage of our costs
is variable, changes in revenue per mile affect our profitability to a greater
extent than changes in miles per tractor.
Revenue Equipment
We operate approximately 3,738 tractors and 7,485 trailers. Of our tractors, at
December 31, 2002, approximately 2,471 were owned, 891 were financed under
operating leases, and 376 were provided by owner-operators, who own and drive
the tractors. Of our trailers, at December 31, 2002, approximately 4,857 were
owned and approximately 2,628 were financed under operating leases. Over the
past several years, the market value of used equipment has deteriorated. In
recognition of this fact, we recognized pre-tax impairment charges of $15.4
million in the fourth quarter of 2001 and $3.3 million in the first quarter of
2003 in relation to the reduced value of our model year 1998 through 2000
tractors. In addition, we increased the depreciation rate/lease expense on our
remaining tractors to reflect our expectations concerning market value at
disposition. We estimate the impact of the change in the estimated useful lives
and depreciation on the 2001 model year tractors to be approximately $1.5
million pre-tax or $.06 per share annually. Although we believe the additional
depreciation will bring the carrying values of the model year 2001 tractors in
line with future disposition values, we do not have trade-in agreements covering
those tractors. Our assumptions represent our best estimate, and actual values
could differ by the time those tractors are scheduled for trade.
Because of the adverse change from historical purchase prices and residual
values, the annual expense per tractor on model year 2003 and 2004 tractors is
expected to be higher than the annual expense on the model year 1999 and 2000
units being replaced. We believe the increase in depreciation expense was
approximately one-half cent per mile pre-tax during 2002 and will grow to
approximately one cent per mile pre-tax in 2003 as all of these new units are
delivered. By the time the model year 2001 tractors are traded and the entire
fleet is converted in 2004, we expect the total increase in expense to be
approximately one and one-half cent pre-tax per mile. The timing of these
expenses could be affected if we change our tractor trade cycle to three years,
which we are considering. If the tractors are leased instead of purchased, the
references to increased depreciation would be reflected as additional lease
expense.
We finance a portion of our tractor and trailer fleet with off-balance sheet
operating leases. These leases generally run for a period of three years for
tractors and seven years for trailers. With our tractor trade cycle currently at
approximately four years, we have been purchasing the leased tractors at the
expiration of the lease term, although there is no commitment to purchase the
tractors. The first trailer leases expire in 2005, and we have not determined
whether to purchase trailers at the end of these leases.
Owner-operators provide a tractor and a driver and are responsible for all
operating expenses in exchange for a fixed payment per mile. We do not have the
capital outlay of purchasing the tractor.
The payments to owner-operators and the financing of equipment under operating
leases are recorded in revenue equipment rentals and purchased transportation.
Expenses associated with owned equipment, such as interest and depreciation, are
not incurred, and for owner-operator tractors, driver compensation, fuel, and
other expenses are not incurred. Because obtaining equipment from
owner-operators and under operating leases effectively shifts financing expenses
from interest to "above the line" operating expenses, we evaluate our efficiency
using net margin rather than operating ratio.
14
Transplace
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 operates an Internet-based global transportation
logistics service. Initially, we accounted for our 12.4% investment in
Transplace using the equity method of accounting. During the third quarter of
2001, Transplace changed its filing status to a C corporation and as a result,
we determined it appropriate to account for our investment using the cost method
of accounting.
The following table sets forth the percentage relationship of certain items to
freight revenue, excluding fuel and accessorial surcharges for each of the three
years-ended December 31:
2002 2001 2000
-----------------------------------------
Freight revenue (1) 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses (1) 40.7 43.8 43.4
Fuel expense (1) 15.2 15.4 14.3
Operations and maintenance (1) 6.9 6.9 6.3
Revenue equipment rentals and purchased
transportation 10.9 11.9 13.8
Operating taxes and licenses 2.6 2.6 2.7
Insurance and claims 5.9 5.1 3.4
Communications and utilities 1.4 1.4 1.3
General supplies and expenses 2.7 2.6 2.5
Depreciation and amortization, including gains
(losses) on disposition of equipment and
impairment of assets(2) 9.1 10.3 7.0
-----------------------------------------
Total operating expenses 95.4 100.0 94.8
-----------------------------------------
Operating income 4.6 0.0 5.2
Other (income) expense, net 0.8 1.5 1.6
-----------------------------------------
Income (loss) before income taxes 3.8 (1.5) 3.6
Income tax expense (benefit) 2.1 (0.3) 1.4
-----------------------------------------
Income (loss) before extraordinary loss on early
extinguishment of debt 1.7 (1.2) 2.1
Extraordinary loss on early extinguishment of
debt, net of income tax benefit 0.2 0.0 0.0
-----------------------------------------
Net income (loss) 1.5% (1.2%) 2.1%
=========================================
(1) Freight revenue is total revenue less fuel surcharge and accessorial
revenue. In this table, fuel surcharge and accessorial revenue are shown
netted against the appropriate expense category. Salaries, wages, and
related expenses, $6.7 million, $5.4 million, and $4.7 million; fuel
expense, $13.8 million, $19.5 million, and $25.3 million; operations and
maintenance, $2.0 million, $1.6 million, and $1.5 million in 2002, 2001 and
2000, respectively.
(2) Includes a $3.3 million and a $15.4 million pre-tax impairment charge or
2.8% and 0.6% of freight revenue in 2002 and 2001, respectively.
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Freight revenue (total revenue less fuel surcharge and accessorial revenue)
decreased $5.2 million (1.0%), to $541.8 million in 2002, from $547.0 million in
2001. Our revenue was affected by a 2.9% decrease in weighted average number of
tractors partially offset by a 2.7% increase in revenue per tractor per week to
$2,812 in 2002 from $2,737 in 2001. The revenue per tractor per week increase
was primarily generated by a 1.7% higher utilization of equipment and a 1.0%
higher rate per total mile. Weighted average tractors decreased 2.9% to 3,680 in
2002 from
15
3,791 in 2001. We have elected to constrain the size of our tractor fleet until
fleet production and profitability improve.
Salaries, wages, and related expenses, net of accessorial revenue of $6.7
million in 2002 and $5.4 million in 2001, decreased $18.8 million (7.9%), to
$220.7 million in 2002, from $239.5 million in 2001. As a percentage of freight
revenue, salaries, wages, and related expenses decreased to 40.7% in 2002, from
43.8% in 2001. Wages for over the road drivers as a percentage of freight
revenue decreased to 27.2% in 2002 from 30.1% in 2001. The decrease was largely
attributable to us utilizing a larger percentage of single-driver tractors, with
only one driver per tractor to be compensated, implementing changes in our pay
structure and implementing a per diem pay program for our drivers during August
2001. As a percentage of freight revenue, our payroll expense for employees
other than over the road drivers increased to 7.2% in 2002 from 6.7% in 2001 due
to growth in headcount and local drivers in the dedicated fleet. Health
insurance, employer-paid taxes, workers' compensation, and other employee
benefits decreased to 6.2% in 2002 from 6.6% in 2001. The decrease was primarily
due to lower employer-paid taxes related to lower wage levels and was partially
offset by increases in workers' compensation and health insurance costs related
to rising medical expenses, which are expected to continue to increase in future
periods.
Fuel expense, net of fuel surcharge revenue of $13.8 million in 2002 and $19.5
million in 2001, decreased $1.9 million (2.2%), to $82.5 million in 2002, from
$84.4 million in 2001. As a percentage of freight revenue, net fuel expense
remained relatively constant at 15.2% in 2002 and 15.4% in 2001. Fuel surcharges
amounted to $.031 per loaded mile in 2002 compared to $.043 per loaded mile in
2001. Fuel prices have increased sharply during the first two months of 2003
because of reasons such as unrest in Venezuela and the Middle East and low
inventories. Higher fuel prices will increase our operating expenses. Fuel costs
may be affected in the future by volume purchase commitments, the collectibility
of fuel surcharges, and lower fuel mileage due to government mandated emissions
standards that were effective October 1, 2002, and will result in less fuel
efficient engines. We did not have any fuel hedging contracts at December 31,
2002.
Operations and maintenance consist primarily of vehicle maintenance, repairs and
driver recruitment expenses. Net of accessorial revenue of $2.0 million in 2002
and $1.6 million in 2001, operations and maintenance decreased $0.2 million to
$37.6 million in 2002 from $37.8 million in 2001. As a percentage of freight
revenue, operations and maintenance remained essentially constant at 6.9% in
2002 and 2001. We extended the trade cycle on our tractor fleet from three years
to four years, which resulted in an increase in the number of required repairs.
However, the increased repair costs were offset by reduced driver recruitment
expenses. We expect maintenance costs to decrease as we take delivery of new
tractors. Driver recruiting expense may increase if shipping volumes increase
and create greater demand for trucking services.
Revenue equipment rentals and purchased transportation decreased $5.8 million
(9.0%), to $59.2 million in 2002, from $65.1 million in 2001. As a percentage of
freight revenue, revenue equipment rentals and purchased transportation
decreased to 10.9% in 2002 from 11.9% in 2001. The decrease was the result of
lower lease payments (3.2% of freight revenue in 2002 compared to 3.9% of
freight revenue in 2001) and a smaller fleet of owner-operators during 2002 (an
average of 355 in 2002 compared to an average of 360 in 2001). The smaller fleet
of owner-operators resulted in lower payments to owner-operators (7.7% of
freight revenue in 2002 compared to 8.0% of freight revenue in 2001). We expect
our annual cost of tractor and trailer ownership and/or leasing to increase in
future periods. The increase is expected to result from a combination of higher
initial prices of new equipment, lower resale values for used equipment, and
increased depreciation/lease payments on some of our existing equipment over
their remaining lives in order to better match expected book values or lease
residual values with market values at the equipment disposal date. To the extent
equipment is leased under operating leases, the amounts will be reflected in
revenue equipment rentals and purchased transportation. To the extent equipment
is owned or obtained under capitalized leases, the amounts will be reflected as
depreciation expense and interest expense. Those expense items will fluctuate
with changes in the percentage of our equipment obtained under operating leases
versus owned and under capitalized leases.
Operating taxes and licenses decreased $0.4 million (3.0%), to $13.9 million in
2002, from $14.4 million in 2001. As a percentage of freight revenue, operating
taxes and licenses remained essentially constant at 2.6% in 2002 and 2001.
16
Insurance and claims, consisting primarily of premiums and deductible amounts
for liability, physical damage, and cargo damage insurance and claims, increased
$3.9 million (14.1%), to $31.8 million in 2002 from $27.8 million in 2001. As a
percentage of freight revenue, insurance increased to 5.9% in 2002 from 5.1% in
2001. The increase is a result of an industry-wide increase in insurance rates,
which we addressed by adopting an insurance program with significantly higher
self insured retention exposure that is partially offset by lower premium rates.
The retention level for our primary insurance layer increased from $12,500 in
2000 to $250,000 in 2001 to $500,000 in March of 2002, to $1.0 million in
November of 2002, and to $2.0 million on March 1, 2003. From July 15, 2002 to
November 10, 2002, our excess insurance coverage over the $2.0 million primary
layer we had in effect ($4.0 million from November 11 to November 22, 2002) was
determined to be invalid. Although we are not aware of any claim that is
expected to exceed our primary coverage, any such claim would be uninsured
unless the agent's errors and omissions policy provides coverage. In the event
of an uninsured claim our financial condition and results of operations could be
materially and adversely affected.
We accrue the estimated cost of the uninsured portion of pending claims. These
accruals are based on our evaluation of the nature and severity of the claim and
estimates of future claims development based on historical trends. Insurance and
claims expense will vary based on the frequency and severity of claims, the
premium expense, and the level of self insured retention. Because of higher
self-insured retentions, our future expenses of insurance and claims may be
higher or more volatile than in historical periods.
Communications and utilities decreased $0.4 million (5.6%), to $7.0 million in
2002, from $7.4 million in 2001. As a percentage of freight revenue,
communications and utilities remained essentially constant at 1.4% in 2002 and
2001.
General supplies and expenses, consisting primarily of headquarters and other
terminal facilities expenses, increased $0.2 million (1.4%), to $14.7 million in
2002, from $14.5 million in 2001. As a percentage of freight revenue, general
supplies and expenses remained essentially constant at 2.7% in 2002 and 2.6% in
2001.
Depreciation, amortization and impairment charge, consisting primarily of
depreciation of revenue equipment, decreased $6.8 million (12.1%), to $49.5
million in 2002 from $56.3 million in 2001. As a percentage of freight revenue,
depreciation and amortization decreased to 9.1% in 2002 from 10.3% in 2001. The
decrease is the result of impairment charges, partially offset by increased
depreciation expense and losses on the sale of equipment. We recognized pre-tax
charges of approximately $3.3 million and $15.4 million, in 2002 and 2001,
respectively, to reflect an impairment in tractor values. Depreciation and
amortization expense is net of any gain or loss on the sale of tractors and
trailers. Loss on the sale of tractors and trailers was approximately $2.4
million in 2002 and $217,000 in 2001. We expect our annual cost of tractor and
trailer ownership and/or leasing to increase in future periods. The increase is
expected to result from a combination of higher initial prices of new equipment,
lower resale values for used equipment, and increased depreciation/lease
payments on some of our existing equipment over their remaining lives in order
to better match expected book values or lease residual values with market values
at the equipment disposal date. To the extent equipment is leased under
operating leases, the amounts will be reflected in revenue equipment rentals and
purchased transportation. To the extent equipment is owned or obtained under
capitalized leases, the amounts will be reflected as depreciation expense and
interest expense. Those expense items will fluctuate with changes in the
percentage of our equipment obtained under operating leases versus owned and
under capitalized leases. Amortization expense relates to deferred debt costs
incurred and covenants not to compete from five acquisitions. Goodwill
amortization ceased beginning January 1, 2002, in accordance with SFAS No. 142,
and we evaluate goodwill and certain intangibles for impairment, annually.
During the second quarter of 2002, we tested our goodwill for impairment and
found no impairment. The positive impact of goodwill no longer being amortized
was approximately $310,000 for 2002.
Other expense, net, decreased $3.9 million (47.2%), to $4.4 million in 2002,
from $8.3 million in 2001. As a percentage of freight revenue, other expense
decreased to 0.8% in 2002 from 1.5% in 2001. The decrease was the result of
lower debt balances and more favorable interest rates. Included in the other
expense category are interest expense, interest income, and pre-tax non-cash
losses related to the accounting for interest rate derivatives under SFAS No.
133, which amounted to $0.9 million in 2002 and $0.7 million in 2001.
17
Our income tax expense in 2002 was $11.4 million or 55.5% of income before
taxes. Our income tax benefit for 2001 was $1.7 million or 20.6% of loss before
income taxes. The effective tax rate is different from the expected combined tax
rate due to permanent differences related to a per diem pay structure
implemented during the third quarter of 2001. Due to the nondeductible effect of
per diem, our tax rate will fluctuate in future periods as income fluctuates.
As a result of the factors described above, net earnings increased $14.9 million
(224.2%), to $8.3 million income in 2002 (1.5% of revenue), from $6.7 million
loss in 2001 (1.2% of revenue). Prior to the $3.3 million and $15.4 million
pre-tax charges for impairment, net income for 2002 and 2001 would have been
$11.2 million ($0.77 diluted earnings per share) and $2.9 million ($0.21 diluted
earnings per share) respectively.
As a result of the foregoing, our net margin increased to 1.5% in 2002 from
(1.2%) in 2001.
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Revenue decreased $5.4 million (1.0%), to $547.0 million in 2001, from $552.4
million in 2000. Our growth was affected by a 1.9% decrease in revenue per
tractor per week to $2,737 in 2001 from $2,790 in 2000. The revenue per tractor
per week decrease was primarily generated by a 0.8% lower utilization of
equipment and a 1.3% lower rate per total mile due to a less robust freight
environment. Weighted average tractors increased 0.9% to 3,791 in 2001 from
3,759 in 2000. Due to a weak freight environment, we have elected to constrain
the size of our tractor fleet until profitability improves.
Salaries, wages, and related expenses decreased $0.6 million (0.2%), to $239.4
million in 2001, from $240.0 million in 2000. As a percentage of revenue,
salaries, wages, and related expenses increased to 43.8% in 2001, from 43.4% in
2000. Even though the percentage of total miles driven by company trucks
increased (89.8% in 2001 vs. 86.1% in 2000), wages for over the road drivers as
a percentage of revenue decreased to 30.1% in 2001 from 30.6% in 2000, partially
due to our implementation of cost reduction strategies including a per diem pay
program for our drivers during August 2001. Our payroll expense for employees
other than over the road drivers increased to 6.7% of revenue in 2001 from 6.2%
of revenue in 2000 due to growth in headcount and local drivers in the dedicated
fleet. Health insurance, employer paid taxes, and workers' compensation
increased to 6.6% of revenue in 2001, from 6.4% in 2000. The increase as a
percentage of revenue was primarily the result of increased group health
insurance claims in 2001 as compared to 2000.
Fuel expense increased $5.6 million (7.1%), to $84.4 million in 2001, from $78.8
million in 2000. As a percentage of revenue, fuel expense increased to 15.4% in
2001 from 14.3% in 2000. This increase was due to the increased usage of company
trucks (due to the decrease in our utilization of owner-operators, who pay for
their own fuel purchases), lower quantities and less efficient pricing of fuel
contracted using purchase commitments, and slightly lower fuel economy. These
increases were partially offset by fuel surcharges, which amounted to $.043 per
loaded mile or approximately $19.5 million in 2001 compared to $.057 per loaded
mile or approximately $25.3 million in 2000. Fuel costs may be affected in the
future by lower fuel mileage if government mandated emissions standards
effective October 1, 2002, are implemented as scheduled.
Operations and maintenance, consisting primarily of vehicle maintenance, repairs
and driver recruitment expenses, increased $3.0 million (8.5%), to $37.8 million
in 2001, from $34.8 million in 2000. As a percentage of revenue, operations and
maintenance increased to 6.9% in 2001, from 6.3% in 2000. We extended the trade
cycle on our tractor fleet from three years to four years, which resulted in an
increase in the number of required repairs.
Revenue equipment rentals and purchased transportation decreased $11.1 million
(14.5%), to $65.1 million in 2001, from $76.1 million in 2000. As a percentage
of revenue, revenue equipment rentals and purchased transportation decreased to
11.9% in 2001 from 13.8% in 2000. The decrease was primarily the result of a
smaller fleet of owner-operators during 2001 (an average of 360 in 2001 compared
to an average of 509 in 2000). Over the past year, it has become more difficult
to retain owner-operators due to the challenging operating conditions. The
smaller fleet resulted in lower payments to owner operators (8.0% of revenue in
2001 compared to 10.7% of revenue in 2000).
18
Owner-operators are independent contractors, who provide a tractor and driver
and cover all of their operating expenses in exchange for a fixed payment per
mile. Accordingly, expenses such as driver salaries, fuel, repairs,
depreciation, and interest normally associated with company-owned equipment are
consolidated in revenue equipment rentals and purchased transportation when
owner-operators are utilized. The decrease from lower owner operator expense was
partially offset by our entry into additional operating leases. As of December
31, 2001, we had financed approximately 963 tractors and 2,564 trailers under
operating leases as compared to 1,090 tractors and 1,541 trailers under
operating leases as of December 31, 2000. The equipment leases will increase
this expense category in the future, while reducing depreciation and interest
expense.
Operating taxes and licenses decreased $0.6 million (3.9%), to $14.4 million in
2001, from $14.9 million in 2000. As a percentage of revenue, operating taxes
and licenses remained essentially constant at 2.6% in 2001 as compared to 2.7%
in 2000.
Insurance and claims, consisting primarily of premiums and deductible amounts
for liability, physical damage, and cargo damage insurance and claims, increased
$8.9 million (47.2%), to $27.8 million in 2001 from $18.9 million in 2000. As a
percentage of revenue, insurance increased to 5.1% in 2001 from 3.4% in 2000.
The increase is a result of an industry-wide increase in insurance rates, which
we addressed by adopting an insurance program with significantly higher
deductible exposure that is partially offset by lower premium rates. The
deductible amount increased from $5,000 in 2000 to $250,000 in 2001. In 2002, we
increased our deductible to $500,000. Our insurance program for liability,
physical damage, and cargo damage involves self-insurance with varying risk
retention levels. Claims in excess of these risk retention levels are covered by
insurance in amounts which we consider adequate. We accrue the estimated cost of
the uninsured portion of pending claims. These accruals are based on our
evaluation of the nature and severity of the claim and estimates of future
claims development based on historical trends. Insurance and claims expense will
vary based on the frequency and severity of claims, the premium expense and the
lack of self insured retention.
Communications and utilities increased $0.3 million (3.5%), to $7.4 million in
2001, from $7.2 million in 2000. As a percentage of revenue, communications and
utilities remained essentially constant at 1.4% in 2001 as compared to 1.3% in
2000.
General supplies and expenses, consisting primarily of headquarters and other
terminal facilities expenses, increased $0.5 million (3.6%), to $14.5 million in
2001, from $14.0 million in 2000. As a percentage of revenue, general supplies
and expenses remained essentially constant at 2.6% in 2001 and 2.5% in 2000.
Depreciation and amortization, including gains (losses) on disposition of
equipment and impairment of assets, consisting primarily of depreciation of
revenue equipment, increased $17.4 million (44.9%), to $56.3 million in 2001
from $38.9 million in 2000. As a percentage of revenue, depreciation and
amortization increased to 10.3% in 2001 from 7.0% in 2000. The increase is
primarily the result of a $15.4 million pre-tax impairment charge related to
approximately 1,770 model year 1998 through 2000 tractors in use. We will
recognize an additional impairment charge on 325 tractors in the first quarter
of 2002. See "Critical Accounting Policies/Impairment of Long-Lived Assets" for
additional information. Our approximately 1,400 model year 2001 tractors are not
affected by the charge. We have increased the annual depreciation expense on the
2001 model year tractors to approximate our recent experience with disposition
values. Depreciation and amortization expense is net of any gain or loss on the
sale of tractors and trailers. Loss on the sale of tractors and trailers was
approximately $217,000 in 2001 compared to a gain of $1.0 million in 2000
period. Amortization expense relates to deferred debt costs incurred and
covenants not to compete from five acquisitions, as well as goodwill from eight
acquisitions. Goodwill amortization will cease beginning January 1, 2002, in
accordance with SFAS 142 and we will evaluate goodwill and certain intangibles
for impairment, annually prospectively beginning January 2002.
Other expense, net, decreased $0.7 million (7.6%), to $8.3 million in 2001, from
$9.0 million in 2000. As a percentage of revenue, other expense remained
essentially constant at 1.5% in the 2001 period from 1.6% in the 2000 period.
Included in the other expense category is interest expense, interest income, and
a $0.7 million pre-tax non-cash adjustment related to the accounting for
interest rate derivatives under SFAS 133. Excluding the non-cash
19
adjustment, other expense decreased $1.4 million (15.6%), to $7.6 million in the
2001 period from $9.0 million in the 2000 period. The decrease was the result of
lower debt balances and interest rates.
As a result of the foregoing, our pre-tax margin decreased to (1.5%) in 2001
compared with 3.6% in 2000.
Our income tax benefit for 2001 was $1.7 million or 20.6% of loss before income
taxes. Our income tax expense for 2000 was $7.9 million or 39.9% of earnings
before income taxes. In 2001, the effective tax rate is different from the
expected combined tax rate due to permanent differences related to a per diem
pay structure implemented during the third quarter of 2001. Due to the
nondeductible effect of per diem, our tax rate will fluctuate in future periods
as earnings fluctuate.
As a result of the factors described above, net earnings decreased $18.5 million
(156.1%), to $6.6 million loss in 2001 (1.2% of revenue), from $11.9 million
income in 2000 (2.1% of revenue). Prior to the $15.4 million pre-tax charge for
impairment, net income and earnings per share for 2001 would have been $2.9
million and $0.21, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically our growth has required significant capital investments. We
historically have financed our expansion requirements with borrowings under a
line of credit, cash flows from operations and long-term operating leases. Our
primary sources of liquidity at December 31, 2002, were funds provided by
operations, proceeds under the Securitization Facility (as defined below),
proceeds under the Credit Agreement (as defined below) and operating leases of
revenue equipment. We believe our sources of liquidity are adequate to meet our
current and projected needs for at least the next twelve months.
Net cash provided by operating activities was $67.2 million in 2002, $73.8
million in 2001 and $48.7 million in 2000. Our primary sources of cash flow from
operations in 2002 were net income and depreciation and amortization, which
included a $3.3 million pre-tax impairment charge. The 2001 period included an
unusually large collection of receivables that had resulted from billing
problems during 2000 and a large increase in depreciation and amortization,
associated with the $15.4 million pre-tax impairment charge. Our number of days
sales in accounts receivable increased to 43 days in 2002 from 41 days in 2001.
Net cash used in investing activities was $56.4 million in 2002, $31.3 million
in 2001 and $33.3 million in 2000. In 2002, net cash used in investing
activities related to the purchase of tractors, which were previously financed
through operating leases, and the acquisition of new revenue equipment (net of
trade-ins) using proceeds from the Credit Agreement. During 2000 and 2001,
capital expenditures were lower than in previous years due to our planned slower
fleet growth as well as our decision to lengthen our tractor trade cycle. In
2001, approximately $15 million was related to the financing of our headquarters
facility, which was previously financed through an operating lease that expired
in March 2001. We financed the facility using proceeds from the Credit
Agreement. During 2000, approximately $12.7 million related to a $5.0 million
investment in Transplace and $7.7 million for the acquisition of certain assets
of CTS. We expect capital expenditures, primarily for revenue equipment (net of
trade-ins), to be approximately $80.0 million in 2003, exclusive of
acquisitions, if we remain on a four-year trade cycle for tractors. If we change
our trade cycle back to three years, our capital expenditures could increase
significantly. We also are considering alternatives for accelerating our trailer
disposition schedule, which could affect our capital expenditures or lease
commitments.
Net cash used in financing activities was $11.2 million in 2002, $44.3 million
in 2001 and $14.1 million in 2000. During 2002, we reduced outstanding balance
sheet debt by $13.8 million. At December 31, 2002, we had outstanding debt of
$83.5 million, primarily consisting of $43.0 million drawn under the Credit
Agreement, $39.2 million in the Securitization Facility, and a $1.3 million
interest bearing note to the former primary stockholder of SRT. Interest rates
on this debt range from 1.5% to 6.5%.
In 2000, we authorized a stock repurchase plan for up to 1.5 million shares to
be purchased in the open market or through negotiated transactions. In 2000, a
total of 971,500 shares had been purchased with an average price of
20
$8.17. During 2001 and 2002, we did not purchase any additional shares through
the repurchase plan. The stock repurchase program has no expiration date.
In December 2000, we entered into the Credit Agreement with a group of banks,
which matures December 2003 and was extended in February 2003 for an additional
two years. Borrowings under the Credit Agreement are based on the banks' base
rate or LIBOR and accrue interest based on one, two, or three month LIBOR rates
plus an applicable margin that is adjusted quarterly between 0.75% and 1.25%
based on cash flow coverage. At December 31, 2002, the margin was 0.875%. The
Credit Agreement is guaranteed by the Company and all of the Company's
subsidiaries except CVTI Receivables Corp. and Volunteer Insurance Limited.
At December 31, 2002, the Credit Agreement had a maximum borrowing limit of
$120.0 million. When the facility was extended in February 2003, the borrowing
limit was reduced to $100.0 million with an accordion feature which permits an
increase up to a borrowing limit of $160 million. Borrowings related to revenue
equipment are limited to the lesser of 90% of net book value of revenue
equipment or the maximum borrowing limit. Letters of credit were limited to an
aggregate commitment of $20.0 million at December 31, 2002, and were increased
to a limit of $50.0 million in February 2003. The Credit Agreement includes a
"security agreement" such that the Credit Agreement may be collateralized by
virtually all of our assets if a covenant violation occurs. A commitment fee,
that is adjusted quarterly between 0.15% and 0.25% per annum based on cash flow
coverage, is due on the daily unused portion of the Credit Agreement. As of
December 31, 2002, we had borrowings under the Credit Agreement in the amount of
$43.0 million with a weighted average interest rate of 2.3%.
In December 2000, we entered into a $62 million revolving accounts receivable
securitization facility (the "Securitization Facility"). On a revolving basis,
we sell our interests in our accounts receivable to CRC, a wholly-owned
bankruptcy-remote special purpose subsidiary incorporated in Nevada. CRC sells a
percentage ownership in such receivables to an unrelated financial entity. We
can receive up to $62 million of proceeds, subject to eligible receivables and
will pay a service fee recorded as interest expense, based on commercial paper
interest rates plus an applicable margin of 0.41% per annum and a commitment fee
of 0.10% per annum on the daily unused portion of the Facility. As discussed in
the financial statement footnotes, the net proceeds under the Securitization
Facility are required to be shown as a current liability because the term,
subject to annual renewals, is 364 days. As of December 2002, there were $39.2
million in proceeds received. CRC does not meet the requirements for off-balance
sheet accounting, therefore, it is reflected in our consolidated financial
statements.
In October 1995, we issued $25 million in ten-year senior notes to an insurance
company. The notes were retired on March 15, 2002, with borrowings from the
Credit Agreement. We incurred a $0.9 million after-tax extraordinary item ($1.4
million pre-tax) to reflect the early extinguishment of this debt in the first
quarter of 2002.
The Credit Agreement and Securitization Facility contain certain restrictions
and covenants relating to, among other things, dividends, tangible net worth,
cash flow, acquisitions and dispositions, and total indebtedness and are
cross-defaulted. We are in compliance with the Credit Agreement and
Securitization Facility as of December 31, 2002.
Contractual Obligations and Commitments - We had commitments outstanding related
to equipment, debt obligations, and diesel fuel purchases as of December 31,
2002. These purchases are expected to be financed by debt, proceeds from sales
of existing equipment, and cash flows from operations. We have the option to
cancel commitments relating to equipment with 60 days notice.
21
The following table sets forth our contractual cash obligations and commitments
as of December 31, 2002.
Payments Due By Period There-
(in thousands) Total 2003 2004 2005 2006 2007 after
-------------------------------------------------------------------------------------
Long Term Debt $ 1,300 $ - $ 1,300 $ - $ - $ - $ -
Short Term Debt 82,230 82,230 - - - - -
Operating Leases 62,308 21,017 12,502 10,852 6,823 4,665 6,449
Lease residual value guarantees 56,802 25,699 - 9,910 3,553 5,590 12,050
Purchase Obligations:
Diesel fuel 52,477 48,020 4,457 - - - -
Equipment 85,986 85,986 - - - - -
-------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $341,103 $262,952 $18,259 $20,762 $10,376 $10,255 $18,499
=====================================================================================
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make decisions
based upon estimates, assumptions, and factors it considers as relevant to the
circumstances. Such decisions include the selection of applicable accounting
principles and the use of judgment in their application, the results of which
impact reported amounts and disclosures. Changes in future economic conditions
or other business circumstances may affect the outcomes of our estimates and
assumptions. Accordingly, actual results could differ from those anticipated. A
summary of the significant accounting policies followed in preparation of the
financial statements is contained in Note 1 of the financial statements attached
hereto. Other footnotes describe various elements of the financial statements
and the assumptions on which specific amounts were determined.
Our critical accounting policies include the following:
Revenue Recognition - Revenue, drivers' wages and other direct operating
expenses are recognized on the date shipments are delivered to the customer. We
record revenue on a net basis for transactions on which we functioned as a
broker in 1999 and 2000. Prior to January 1, 2002, we reported revenue net of
fuel surcharges and accessorial revenue and netted such amounts against the
related expense items. Effective January 1, 2002, we began including those items
in revenue in our statement of operations, and the prior period statements of
operations have been conformed with the reclassification.
Property and Equipment - Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Historically, we
depreciated revenue equipment over five to seven years with salvage values
ranging from 25% to 33 1/3%. During 2000, we extended our estimate for the
useful life of our dry van trailers acquired between July 2000 and March 2001
from seven to eight years and increased the salvage value to approximately 48%
of cost. We based this decision on market experience at that time. We are
re-evaluating the salvage value, useful life, and annual depreciation of these
trailers based on the current market environment. Any change could result in
greater annual expense in the future. In September 2001, we changed our
estimated useful life and salvage value to seven years and 43% of cost for new
trailers. Gains or losses on disposal of revenue equipment are included in
depreciation in the statements of income.
22
Impairment of Long-Lived Assets - In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"), which supersedes both SFAS 121 and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("Opinion 30") for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions in SFAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset that
is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business). We
adopted SFAS 144 on January 1, 2002. We evaluate the carrying value of
long-lived assets by analyzing the operating performance and future cash flows
for those assets, whenever events or changes in circumstances indicate that the
carrying amounts of such assets may not be recoverable. We adjust the carrying
value of the underlying assets if the sum of the expected cash flows is less
than the carrying value. Impairment can be impacted by our projection of future
cash flows, the level of cash flows and salvage values, the methods of
estimatation used for determining fair values and the impact of guaranteed
residuals.
Insurance and Other Claims - Our insurance program for liability, property
damage, and cargo loss and damage, involves self insurance with high risk
retention levels. We have increased the self-insured retention portion of our
insurance coverage from $12,500 for each claim in 2000 to $1.0 million plus an
additional layer from $4.0 million to $7.0 million for each claim at November
2002. Effective March 2003, we increased our primary coverage to $5.0 million
with a $2.0 million retention level, plus an additional layer from $5.0 million
to $7.0 million for each claim. We accrue the estimated cost of the uninsured
portion of pending claims. These accruals are based on our evaluation of the
nature and severity of the claim and estimates of future claims development
based on historical trends. The rapid and substantial increase in our
self-insured retention makes these estimates an important accounting judgment.
Insurance and claims expense will vary based on the frequency and severity of
claims, the premium expense and the lack of self insured retention.
In addition to our primary insurance coverage we normally carry excess coverage
in amounts that have ranged from $16.0 million to $49.0 million. On July 15,
2002, we received a binder for $48.0 million of excess insurance coverage over
our $2.0 million primary layer. Subsequently, we were forced to seek replacement
coverage after the insurance agent retained the premium and failed to produce
proof of insurance coverage. If one or more claims from the period July to
November 2002 exceeded $2.0 million in amount, we would be required to accrue
for the potential or actual loss and our financial condition and results of
operations could be materially and adversely affected. We are not aware of any
such claims at this time.
We maintain a workers' compensation plan and group medical plan for our
employees with a deductible amount of $500,000 for each workers' compensation
claim and a deductible amount of $225,000 for each group medical claim. In the
first quarter of 2003, we adopted a workers' compensation plan with a self
insured retention level of $1.0 million per occurrence and renewed our group
medical plan with a deductible amount of $250,000.
Lease Accounting - We lease a significant portion of our tractor and trailer
fleet using operating leases. Substantially all of the leases have residual
value guarantees under which we must insure that the lessor receives a
negotiated amount for the equipment at the expiration of the lease. In
accordance with SFAS No. 13, Accounting for Leases, the rental expense under
these leases is reflected as an operating expense under "revenue equipment
rentals and purchased transportation." To the extent the expected value at the
lease termination date is lower than the residual value guarantee, we accrue for
the difference over the remaining lease term. The estimated values at lease
termination involve management judgments. Operating leases are carried off
balance sheet in accordance with SFAS No. 13.
23
INFLATION AND FUEL COSTS
Most of our operating expenses are inflation-sensitive, with inflation generally
producing increased costs of operations. During the past three years, the most
significant effects of inflation have been on revenue equipment prices and the
compensation paid to the drivers. Innovations in equipment technology and
comfort have resulted in higher tractor prices, and there has been an
industry-wide increase in wages paid to attract and retain qualified drivers. We
historically have limited the effects of inflation through increases in freight
rates and certain cost control efforts.
In addition to inflation, fluctuations in fuel prices can affect profitability.
Fuel expense comprises a larger percentage of revenue for us than many other
carriers because of our long average length of haul. Most of our contracts with
customers contain fuel surcharge provisions. Although we historically have been
able to pass through most long-term increases in fuel prices and taxes to
customers in the form of surcharges and higher rates, increases usually are not
fully recovered. Fuel prices have remained high throughout most of 2000, 2001,
and 2002, which has increased our cost of operating. The elevated level of fuel
prices has continued into 2003.
SEASONALITY
In the trucking industry, revenue generally decreases as customers reduce
shipments during the winter holiday season and as inclement weather impedes
operations. At the same time, operating expenses generally increase, with fuel
efficiency declining because of engine idling and weather creating more
equipment repairs. For the reasons stated, first quarter net income historically
has been lower than net income in each of the other three quarters of the year.
Our equipment utilization typically improves substantially between May and
October of each year because of the trucking industry's seasonal shortage of
equipment on traffic originating in California and our ability to satisfy some
of that requirement. The seasonal shortage typically occurs between May and
August because California produce carriers' equipment is fully utilized for
produce during those months and does not compete for shipments hauled by our dry
van operation. During September and October, business increases as a result of
increased retail merchandise shipped in anticipation of the holidays.
The table below sets forth quarterly information reflecting our equipment
utilization (miles per tractor per period) during 2000, 2001, and 2002. We
believe that equipment utilization more accurately demonstrates the seasonality
of our business than changes in revenue, which are affected by the timing of
deliveries of new revenue equipment. Results of any one or more quarters are not
necessarily indicative of annual results or continuing trends.
Equipment Utilization Table
(Miles Per Tractor Per Period)
First Quarter Second Quarter Third Quarter Fourth Quarter
-----------------------------------------------------------------------------------
2000 31,095 31,869 32,948 32,784
2001 30,860 32,073 32,496 32,286
2002 30,986 33,461 32,664 32,801
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of factors, over which we have little or no control, may affect our
future results. Factors that might cause such a difference include, but are not
limited to, the following:
Economic Factors - Negative economic factors such as recessions, downturns in
customers' business cycles, surplus inventories, inflation, and higher interest
rates could impair our operating results by decreasing equipment utilization or
increasing costs of operations.
24
Fuel Prices - The price of diesel fuel has remained at elevated levels for much
of the past three years. Fuel is one of our largest operating expenses, and high
fuel prices have a negative impact on our profitability. Significant
fluctuations can make collection of fuel surcharges more difficult. Continued
high fuel prices and fluctuations may affect our future results. In addition,
our volume purchase commitments during 2003 and 2004 obligate us to purchase
approximately 36 million and 3.6 million gallons in 2003 and 2004, respectively.
Rising prices of fuel will negatively impact our profitability to the extent of
purchase commitments, less the effects of fixed price arrangements and financial
hedges.
Capital Requirements - The truckload industry is very capital intensive.
Historically, we have depended on cash from operations and our credit facility
to expand the size of our fleet and maintain modern revenue equipment. We review
our tractor and trailer trade cycle from time-to-time. In 2001, we extended our
trade cycle for tractors from three years to four years because of a depressed
market for used equipment. We are considering returning to a tractor trade cycle
of less than four years if the expected overall costs of maintenance and capital
would benefit the Company. Such a change, or other changes in tractor and
trailer acquisition and financing, could materially increase our borrowing. If
we are unable to generate sufficient cash from operations and obtain financing
on favorable terms in the future, we may have to limit our growth, enter into
less favorable financing arrangements, or operate our revenue equipment for
longer periods, any of which could have a materially adverse affect on our
profitability.
Growth - We experienced significant growth in revenue between our founding in
1986 and 1999. Since 2000, however, our revenue base has remained relatively
constant. There can be no assurance that our revenue growth rate will return to
historical levels or that we can effectively adapt our management,
administrative, and operational systems to respond to any future growth. Our
operating margins could be adversely affected by future changes in and expansion
of our business or by changes in economic conditions. Slower or less profitable
growth could adversely affect our stock price.
Resale of Used Revenue Equipment - Prior to 2000, we historically recognized
gains on the sale of our revenue equipment. The market for used tractors
experienced a sharp drop in late 1999 and low resale values have continued into
2002 which led to the impairment charges described herein. The prices of used
trailers also are depressed. If the prices for used equipment remain depressed,
we could find it necessary to dispose of our equipment at lower prices, increase
our depreciation expense, and/or retain some of our equipment longer, with a
resulting increase in operating expenses.
Recruitment, Retention, and Compensation of Qualified Drivers - Competition for
drivers is intense in the trucking industry. There historically has been, and
continues to be, an industry-wide shortage of qualified drivers. This shortage
could force us to significantly increase the compensation we pay to driver
employees, curtail our growth, or experience the adverse effects of tractors
without drivers.
Competition - The trucking industry is highly competitive and fragmented. We
compete with other truckload carriers, private fleets operated by existing and
potential customers, railroads, rail-intermodal service, and to some extent with
air-freight service. Competition is based primarily on service, efficiency, and
freight rates. Many competitors offer transportation service at lower rates than
the Company. Our results could suffer if we are forced to compete solely on the
basis of rates or if economic and competitive factors increase the downward
pressure on rates.
Regulation - The trucking industry is subject to various governmental
regulations. The DOT sent a final rule, which has not been published, to the
Office of Management and Budget ("OMB") in January, 2003 for OMB review and
approval. That rule, if approved, may limit the hours-in-service during which a
driver may operate a tractor. The DOT is also considering a proposal that would
require installing certain safety equipment on tractors. The EPA has promulgated
air emission standards that have increased the cost of tractor engines and are
expected to reduce fuel mileage. Although we are unable to predict the nature of
any changes in regulations, the cost of any changes, if implemented, may
adversely affect our profitability.
25
Insurance and claims - From 2001 to present, we have adopted an insurance
program with significantly higher deductibles. An increase in the number or
severity of accidents, stolen equipment, or other loss events over those
anticipated could have a materially adverse effect on our profitability.
Acquisitions - A significant portion of our growth has occurred through
acquisitions, and acquisitions are an important component of our growth
strategy. We must continue to identify desirable target companies and negotiate,
finance, and close acceptable transactions or our growth could suffer.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 provides new guidance on the recognition and measurement
of an asset retirement obligation and its associated asset retirement cost. It
also provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective for our fiscal
year beginning in 2003 and is not expected to materially impact our consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 provides new guidance on the recognition
of impairment losses on long-lived assets to be held and used or to be disposed
of and also broadens the definition of what constitutes discontinued operations
and how the results of discontinued operations are to be measured and presented.
SFAS 144 was effective for our fiscal year beginning in 2002 and is not expected
to materially change the methods we use to measure impairment losses on
long-lived assets.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 amends existing guidance on reporting gains and losses on
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS 145 also amends SFAS 13 to require
sale-leaseback accounting for certain lease modifications that have economic
effects similar to sale-leaseback transactions. The provisions of the Statement
related to the rescission of Statement No. 4 is applied in fiscal years
beginning after May 15, 2002. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002.
The adoption of SFAS No. 145 is expected to result in reclassification of the
fiscal year 2002 loss on extinguishment of debt.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. Interpretation No. 45
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on our financial statements. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. We have guarantees which are included in the
notes to these consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation/Transition and Disclosure, an amendment of FASB Statement No. 123.
SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002 and are included in the notes to these consolidated financial statements.
We do not anticipate adopting the fair value method of accounting promulgated by
SFAS 123.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks from changes in (i) certain commodity prices and
(ii) certain interest rates on our debt.
COMMODITY PRICE RISK
Prices and availability of all petroleum products are subject to political,
economic, and market factors that are generally outside our control. Because our
operations are dependent upon diesel fuel, significant increases in diesel fuel
costs could materially and adversely affect our results of operations and
financial condition. Historically, we have been able to recover a portion of
long-term fuel price increases from customers in the form of fuel surcharges.
The price and availability of diesel fuel can be unpredictable as well as the
extent to which fuel surcharges could be collected to offset such increases. For
2002, diesel fuel expenses net of fuel surcharge represented 15.3% of our total
operating expenses and 15.2% of freight revenue. At December 31, 2002, we had no
derivative financial instruments to reduce our exposure to fuel price
fluctuations.
We do not trade in derivatives with the objective of earning financial gains on
price fluctuations, on a speculative basis, nor do we trade in these instruments
when there are no underlying related exposures.
INTEREST RATE RISK
The Credit Agreement, provided there has been no default, carries a maximum
variable interest rate of LIBOR for the corresponding period plus 1.25%. During
the first quarter of 2001, we entered into two $10 million notional amount
interest rate swap agreements to manage the risk of variability in cash flows
associated with floating-rate debt. At December 31, 2002, we had drawn $43
million under the Credit Agreement. Approximately $23 million was subject to
variable rates and the remaining $20 million was subject to interest rate swaps
that fixed the interest rates at 5.16% and 4.75% plus the applicable margin per
annum. The swaps expire January 2006 and March 2006. These derivatives are not
designated as hedging instruments under SFAS No. 133 and consequently are marked
to fair value through earnings, in other expense in the accompanying statement
of operations. At December 31, 2002, the fair value of these interest rate swap
agreements was a liability of $1.6 million. Assuming the December 31, 2002
variable rate borrowings, each one-percentage point increase or decrease in
LIBOR would affect our pre-tax interest expense by $230,000 on an annualized
basis, excluding the portion of variable rate debt covered by cancelable
interest rate swaps, and the effect of changes in fair values resulting from
those swaps.
We do not trade in derivatives with the objective of earning financial gains on
price fluctuations, on a speculative basis, nor do we trade in these instruments
when there are no underlying related exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited consolidated balance sheets, statements of operations, cash flows,
stockholders' equity and comprehensive loss, and notes related thereto, are
contained at Pages 34 to 54 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the third quarter of 2001, we filed a report on Form 8-K involving a
change of account