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10-K - FORM 10-K - COVENANT TRANSPORTATION GROUP INCform10k.htm
EX-32.2 - EXHIBIT 32.2 (SECTION 906 CERTIFICATION - RICHARD B. CRIBBS) - COVENANT TRANSPORTATION GROUP INCexhibit322.htm
EX-32.1 - EXHIBIT 32.1 (SECTION 906 CERTIFICATION- DAVID R. PARKER) - COVENANT TRANSPORTATION GROUP INCexhibit321.htm
EX-31.2 - EXHIBIT 31.2 (SECTION 302 CERTIFICATION - RICHARD B. CRIBBS) - COVENANT TRANSPORTATION GROUP INCexhibit312.htm
EX-31.1 - EXHIBIT 31.1 (SECTION 302 CERTIFICATION - DAVID R. PARKER) - COVENANT TRANSPORTATION GROUP INCexhibit311.htm
EX-23.2 - EXHIBIT 23.2 (CONSENT OF LBMC, PC) - COVENANT TRANSPORTATION GROUP INCexhibit232.htm
EX-23.1 - EXHIBIT 23.1 (CONSENT OF KPMG LLP) - COVENANT TRANSPORTATION GROUP INCexhibit231.htm
EX-21 - EXHIBIT 21 (LIST OF SUBSIDIARIES) - COVENANT TRANSPORTATION GROUP INCexhibit21.htm
EX-10.27 - EXHIBIT 10.27 (FOURTEENTH AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEME - COVENANT TRANSPORTATION GROUP INCexhibit1027.htm

Exhibit 99

TRANSPORT ENTERPRISE LEASING, LLC

Financial Statements

December 31, 2017 and 2016

(With Independent Auditors' Report Thereon)

TRANSPORT ENTERPRISE LEASING, LLC

Table of Contents
 
 
 
 
 
 
Page
   
Independent Auditors' Report
1
 
 
 
Financial Statements:
 
 
 
 
 
Balance Sheets
2
 
 
 
  Statements of Income and Changes in Members' Equity  3
     
  Statements of Cash Flows  4
     
  Notes to the Financial Statements  5 - 12



INDEPENDENT AUDITORS' REPORT
The Members
Transport Enterprise Leasing, LLC

We have audited the accompanying financial statements of Transport Enterprise Leasing, LLC (a Georgia limited liability company), which comprise the balance sheets as of December 31, 2017 and 2016, the related statements of income and changes in members' equity, and cash flows for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Transport Enterprise Leasing, LLC as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

/s/ LBMC, PC

Chattanooga, Tennessee
February 14, 2018

TRANSPORT ENTERPRISE LEASING, LLC

Balance Sheets

December 31, 2017 and 2016
 
Assets
 
Current assets:
  2017    
2016
 
Cash
  $ 6,873,507    
$
4,797,808
 
Accounts receivable, net of allowance for doubtful accounts
    4,672,310      
2,798,784
 
Net investment in direct financing leases, current
    930,618      
723,472
 
Inventory
    3,210,676      
2,819,925
 
Prepaid expenses
    363,727      
295,416
 
Restricted cash
    3,609,170      
2,884,260
 
                 
Total current assets
    19,660,008      
14,319,665
 
                 
Net investment in direct financing leases, excluding current portion
    -      
1,691,983
 
Property and equipment, net
    183,258,334      
143,883,423
 
Other assets
    646,494      
506,032
 
                 
Total assets
  $ 203,564,836    
$
160,401,103
 
 
 
Liabilities and Members' Equity
 
Current liabilities:
           
Trade accounts payable
  $ 2,427,489    
$
382,025
 
Accounts payable to related party
    8,647,356      
3,668,411
 
Current portion of long‑term debt
    37,104,925      
25,982,642
 
Accrued liabilities
    5,801,457      
4,732,576
 
                 
Total current liabilities
    53,981,227      
34,765,654
 
                 
Long‑term debt, excluding current maturities
    115,407,966      
94,413,444
 
Deferred income taxes
    1,726,722      
1,726,722
 
                 
Total liabilities
    171,115,915      
130,905,820
 
                 
Members' equity
    32,448,921      
29,495,283
 
                 
Total liabilities and members' equity
  $ 203,564,836    
$
160,401,103
 
 
 
See accompanying notes to the financial statements.
2

 
TRANSPORT ENTERPRISE LEASING, LLC

Statements of Income and Changes in Members' Equity

Years ended December 31, 2017 and 2016
 
    2017    
2016
 
             
Sales and lease revenue
  $ 84,865,141    
$
94,431,994
 
                 
Operating costs and expenses:
               
Cost of sales
    37,342,707      
55,398,764
 
Depreciation
    29,165,485      
21,103,637
 
Administrative and selling expenses
    5,962,641      
5,600,195
 
(Gain) loss on disposals of property and equipment
    (229,397 )    
985,585
 
Other operating expenses, net
    626,882      
387,172
 
                 
Total operating costs and expenses
    72,868,318      
83,475,353
 
                 
Operating income
    11,996,823      
10,956,641
 
                 
Interest expense, net
    5,043,185      
4,444,149
 
                 
Income before income taxes
    6,953,638      
6,512,492
 
                 
Income taxes benefit
   
-
     
(85,403
)
                 
Net income
    6,953,638      
6,597,895
 
                 
Distributions paid
    (4,000,000 )    
(3,000,000
)
Members' equity at beginning of year
    29,495,283      
25,897,388
 
                 
Members' equity at end of year
  $ 32,448,921    
$
29,495,283
 

     
See accompanying notes to the financial statements.
3

TRANSPORT ENTERPRISE LEASING, LLC

Statements of Cash Flows

Years ended December 31, 2017 and 2016


    2017    
2016
 
Cash flows from operating activities:
           
Net income
  $ 6,953,638    
$
6,597,895
 
Adjustments to reconcile net income to cash flows provided by operating activities:
               
Depreciation
    29,165,485      
21,103,637
 
Bad debt expense
    292,620      
252,262
 
(Gain) loss on disposals of property and equipment
    (229,397 )    
985,585
 
Other
    -      
(15,081
)
                 
Changes in operating assets and liabilities:
               
Accounts receivable
    (2,166,146 )    
(1,221,001
)
Inventory
    (390,751 )    
3,009,175
 
Prepaid expenses
    (68,311 )    
(46,602
)
Restricted cash
    (724,910 )    
(934,260
)
Accounts payable
    7,024,409      
(1,434,050
)
Accrued liabilities
    1,068,881      
1,463,195
 
                 
Net cash provided by operating activities
    40,925,518      
29,760,755
 
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (79,719,226 )    
(48,988,990
)
Collections on direct financing leases
    1,149,917      
1,656,746
 
Proceeds from disposals of property and equipment
    11,743,147      
7,662,619
 
Other
    (140,462 )     (276,037 )
         
Net cash used in investing activities
    (66,966,624     (39,945,662
                 
Cash flows from financing activities:
               
Proceeds from line of credit
    4,000,000      
1,998,130
 
Payments of line of credit
   
(4,000,000
)
   
(1,998,130
)
Proceeds from long‑term debt
   
69,063,355
     
66,503,324
 
Payments of long‑term debt
   
(36,946,550
)
   
(49,765,936
)
Distributions to members
   
(4,000,000
)
   
(3,000,000
)
                 
Net cash provided by financing activities
   
28,116,805
     
13,737,388
 
                 
Change in cash
   
2,075,699
     
3,552,481
 
                 
Cash at beginning of year
   
4,797,808
     
1,245,327
 
                 
Cash at end of year
 
$
6,873,507
   
$
4,797,808
 

        
See accompanying notes to the financial statements.
4

TRANSPORT ENTERPRISE LEASING, LLC

Notes to the Financial Statements

December 31, 2017 and 2016
 
(1)
Nature of operations

Transport Enterprise Leasing, LLC (the "Company"), is organized as a limited liability company under the laws of the state of Georgia. The Company is headquartered in Chattanooga, Tennessee and is engaged in selling previously owned over‑the‑road tractors and tractor‑trailers, and leasing new and previously owned over‑the‑road tractors and tractor‑trailers, to commercial trucking firms, owner‑operators, and others.

Covenant Transportation Group, Inc. ("Covenant") owns a 49% interest in the equity of the Company, and the remaining 51% equity interest is owned by the original members.

(2)
Summary of significant accounting policies

 
(a)
Accounts receivable and credit policies
 
Accounts receivable primarily represent monthly payments due from customers under operating and direct financing leases.  The carrying amount of accounts receivable is reduced by a valuation allowance, if necessary, which reflects management's best estimate of the amounts that will not be collected.  The allowance is estimated based on management's knowledge of its customers, historical loss experience, and existing economic conditions.
 
(b)
Inventory
 
                   Inventory consists of tractors and trailers held for sale and is stated at the lower of cost, determined on the specific identification basis, or market.
 
(c)
Restricted cash
 
                   Restricted cash consists of amounts collected from lessees and held in escrow for lessee equipment maintenance.
 
(d)
Property and equipment
 
Property and equipment, which consists primarily of equipment subject to operating leases, is stated at cost.  Assets subject to operating leases are depreciated on the straight‑line method over the term of the lease to reduce the asset to its estimated residual value.  Estimated residual values are based on assumptions for used equipment prices at lease termination.  Other property and equipment is depreciated over the assets' estimated useful lives using the straight‑line method.  Certain assets are held for lease, and are not depreciated unless under lease.
 
Expenditures for maintenance and repairs are expensed when incurred.  Expenditures for renewals or betterments are capitalized.  When property, including off lease equipment,  is retired or sold, the cost and the related accumulated depreciation are removed from the accounts, and the resulting gain or loss is included in operations.
5

TRANSPORT ENTERPRISE LEASING, LLC

Notes to the Financial Statements

December 31, 2017 and 2016
(e)
Income taxes

The Company has elected to be taxed as a pass through entity for federal income tax purposes.  As such, federal taxable income and losses pass through to the individual members for inclusion in their personal income tax returns and the Company recognizes only certain state income taxes in the financial statements.

The amount provided for state income taxes is based upon the amounts of current and deferred taxes payable or refundable at the date of the financial statements as a result of all events recognized in the financial statements as measured by the provisions of enacted tax laws.

For financial reporting purposes, a tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. It is the Company's policy to recognize interest and/or penalties related to income tax matters in income tax expense.

The Company files federal and certain state income tax returns.

(f)
Revenue recognition

Revenue from equipment sales is recognized upon transfer of title.

Revenue from lease and rental agreements is recognized based on the classification of the arrangement, as either an operating or direct financing lease. Revenue from rental payments received on operating leases is recognized on a straight‑line basis over the term of the lease.  Revenues from direct financing leases are recognized using the effective interest method, which provides a constant periodic rate of return on the outstanding investment on the lease.  A direct financing lease receivable is considered impaired, based on current information and events, when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the lease.  Lease and rental revenues were approximately 53% and 38% of total revenues for the years ended December 31, 2017 and 2016, respectively.

(g)
Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
6

TRANSPORT ENTERPRISE LEASING, LLC

Notes to the Financial Statements

December 31, 2017 and 2016
 
(h)
Events occurring after reporting date
 
The Company has evaluated events and transactions that occurred between December 31, 2017, and February 14, 2018, which is the date that the financial statements were available to be issued, for possible recognition or disclosure in the financial statements.
 
(3)
Credit risk and other concentrations

The Company generally maintains cash on deposit at banks in excess of federally insured amounts.  The Company has not experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk related to cash.

The Company generally does not extend credit in connection with sales of equipment.  When originating equipment leases, management evaluates credit quality of the lessee using several factors, including customer characteristics, credit bureau reports, employment history, and ability to pay.  Subsequent to origination, management reviews the credit quality of open leases based on customer payment activity, as well as updated credit bureau reports and other inputs.  Sales to the largest customer accounted for an aggregate of $11,271,900, or 12% of total revenues, during 2016.  There were no such concentrations during 2017.

The Company purchases equipment from a member, as well as unrelated companies.  During 2017, less than 1% of equipment purchases were from a member, and purchases from four unrelated suppliers represented 60% of total equipment purchases.  During 2016, less than 1% of equipment purchases were from a member, and purchases from two unrelated suppliers represented 41% of total equipment purchases.

Substantially all direct financing leases are guaranteed by subsidiaries of an unrelated entity.  Revenue from these leases totaled $165,548 and $1,656,623 during 2017 and 2016, respectively.

(4)
Accounts receivable

A summary of  accounts receivable as of December 31, 2017 and 2016, is as follows:
 
    2017    
2016
 
                 
Trade receivables
  $ 4,672,310    
$
2,814,360
 
Less allowance for doubtful accounts
    -      
15,576
 
                 
    $ 4,672,310    
$
2,798,784
 

    
7

TRANSPORT ENTERPRISE LEASING, LLC

Notes to the Financial Statements

December 31, 2017 and 2016
(5)
Net investment in direct financing leases

Investment in direct financing leases as of December 31, 2017 and 2016, consisted of the following:

    2017    
2016
 
                 
Total minimum lease payments to be received
  $ 498,019    
$
1,807,130
 
Estimated residual values
    463,519      
1,006,521
 
Less unearned income
    (30,920 )    
(398,196
)
                 
Net investment in direct financing leases
    930,618      
2,415,455
 
                 
Less: current portion
    (930,618 )    
(723,472
)
                 
Net investment in direct financing leases, excluding current portion
  $ -    
$
1,691,983
 

All future minimum lease payments from direct financing leases at December 31, 2017, are due in 2018.

 
(6)
Operating leases

The Company leases tractors and trailers to customers under operating lease agreements with terms generally ranging from 12 to 48 months.

Amounts contractually due for rentals on operating leases as of December 31, 2017, are as follows:
 
Year
 
Amount
 
       
2018
 
$
45,414,094
 
2019
   
35,987,972
 
2020
   
21,724,530
 
2021    
10,197,235
 
2022    
1,696,013
 
         
   
$
115,019,844
 
 
8

TRANSPORT ENTERPRISE LEASING, LLC

Notes to the Financial Statements

December 31, 2017 and 2016
 
(7)
Property and equipment

A summary of property and equipment as of December 31, 2017 and 2016, is as follows:

   
2017
   
2016
 
Assets subject to operating leases:
           
Tractors
  $ 149,550,381    
$
109,046,757
 
Trailers
    76,472,128      
57,795,652
 
                 
     
226,022,509
     
166,842,409
 
Accumulated depreciation
   
(51,326,492
)
   
(33,239,074
)
                 
     
174,696,017
     
133,603,335
 
                 
Other equipment
   
235,920
     
292,013
 
Accumulated depreciation
   
(114,501
)
   
(138,532
)
                 
     
121,419
     
153,481
 
                 
Assets held for lease
   
8,440,898
     
10,126,607
 
                 
    $ 183,258,334    
$
143,883,423
 

 
(8)
Accrued liabilities
 
          A summary of accrued liabilities as of December 31, 2017 and 2016, is as follows:
 
 
 
2017
   
2016
 
                 
Maintenance escrow
 
$
3,498,391
   
$
2,837,863
 
Security deposits
   
1,788,843
     
1,389,352
 
Other
   
347,499
     
384,477
 
Accrued interest
   
166,724
     
120,884
 
                 
 
 
$
5,801,457
   
$
4,732,576
 
 
9

TRANSPORT ENTERPRISE LEASING, LLC

Notes to the Financial Statements

December 31, 2017 and 2016
 
(9)
Long‑term debt

A summary of long‑term debt as of December 31, 2017 and 2016, is as follows:

 
 
2017
   
2016
 
             
Revenue equipment installment notes; weighted average interest rate of 3.75% and 3.69% at December 31, 2017 and 2016, respectively; due in monthly installments with final maturities at various dates ranging from January 2018 to December 2021; collateralized by tractors and trailers.
 
$
152,512,891
   
$
120,396,086
 
                 
Less current installments
   
(37,104,925
)
   
(25,982,642
)
                 
Long‑term debt, excluding current installments
 
$
115,407,966
   
$
94,413,444
 
 

A summary of future maturities of long‑term debt as of December 31, 2017, is as follows:
      
Year
 
Installment Payments
   
Balloon Payments
   
Total
 
                         
2018
 
$
27,072,603
   
$
10,032,322
   
$
37,104,925
 
2019
   
23,453,882
     
24,117,806
     
47,571,688
 
2020
   
14,013,098
     
19,767,534
     
33,780,632
 
2021
   
6,487,210
     
27,568,436
     
34,055,646
 
                         
 
 
$
71,026,793
   
$
81,486,098
   
$
152,512,891
 
     

At December 31, 2017 and 2016, the Company maintained the following bank lines of credit:

$2,000,000 facility with Capital Bank & Trust:  Interest was payable monthly at a variable rate equal to the greater of one month Wall Street Journal Prime plus .75% or 4.50% at December 31, 2016.  Advances under the line of credit were collateralized by equipment and guaranteed by a member. This line matured on April 19, 2017.  Advances outstanding at December 31, 2016, were $0.

$9,000,000 facility with Atlantic Capital Bank:  Interest is payable monthly at a variable rate equal to one month London Interbank Offered Rate plus 2.375%, which was 3.93% at December 31, 2017. Advances under the line of credit are collateralized by equipment. This line matures on July 6, 2018.  Advances outstanding at December 31, 2017, were $0.

The Company is subject to certain financial covenants, which among other things, require the Company to maintain certain debt service coverage ratios.
10

TRANSPORT ENTERPRISE LEASING, LLC

Notes to the Financial Statements

December 31, 2017 and 2016
 
(10)
Income taxes

State income taxes during 2017 and 2016 reflect deferred income taxes.  The actual income tax amounts differ from the expected income tax expense due to changes in state apportionment factors, which generally offset changes in temporary differences.

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities.  The deferred income tax liabilities of $1,726,722 for both December 31, 2017 and 2016, result primarily from the use of accelerated methods of depreciation of property and equipment for income tax purposes.

State net operating loss carryforwards of the Company approximate $30,740,075 at December 31, 2017, and are generally available for state tax purposes through 2028.

 
(11)
Contingent liabilities

The Company is sometimes a party to litigation arising in the ordinary course of business. The Company currently does not have any pending legal proceedings or knowledge of any asserted or unasserted claims where a loss contingency is probable and/or estimable and thus has not provided for any loss contingencies in the financial statements. The Company maintains insurance to cover potential property damage for inventory held in Chattanooga, Tennessee.  In addition, the Company’s lease agreements require the lessees to maintain certain property coverage, whereby the Company is named as the beneficiary to any proceeds should a loss event occur.

 
(12)
Other commitments

The Company had commitments outstanding at December 31, 2017, to acquire revenue equipment totaling approximately $21,200,000 in 2018. These commitments are cancelable upon stated notice periods, subject to certain adjustments in the underlying obligations and benefits. These purchase commitments are expected to be financed by long‑term debt, proceeds from sales of existing equipment, and/or cash flows from operations.
11

TRANSPORT ENTERPRISE LEASING, LLC

Notes to the Financial Statements

December 31, 2017 and 2016
 
(13)
Related party transactions

The Company engaged in the following transactions with a member during the years ended December 31, 2017 and 2016, respectively:

·
Purchases of previously owned equipment amounting to $228,000 and $352,000, respectively.

·
Payment of fees for miscellaneous equipment items, equipment maintenance, and management services amounting to $5,853,195 and $4,967,085, respectively.

·
Receipt of lease payments for use of equipment amounting to $504,542 and $102,355, respectively.

At December 31, 2017 and 2016, accounts payable for cash disbursements made by a member on behalf of the Company under a cash management arrangement totaled $8,647,356 and $3,668,411, respectively. Accounts receivable from a member totaled $79,250 and $240,325 at December 31, 2017 and 2016, respectively.
 
 
(14)
Supplemental disclosures of cash flow statement information
 
   
2017
   
2016
 
             
Interest paid
  $ 4,996,868    
$
4,427,638