[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Nevada
|
|
88-0320154
|
(State
or other jurisdiction of incorporation
|
|
(I.R.S.
Employer Identification No.)
|
or
organization)
|
|
|
|
|
|
400
Birmingham Hwy.
|
|
|
Chattanooga,
TN
|
|
37419
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Yes
[X]
|
No
[ ]
|
Large
accelerated filer [ ]
|
Accelerated
filer [ X ]
|
Non-accelerated
filer
[ ]
|
Yes
[ ]
|
No
[ X ]
|
PART
I
FINANCIAL
INFORMATION
|
||
|
|
Page
Number
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Condensed Balance Sheets as of September 30, 2007 (Unaudited) and
December
31, 2006
|
|
|
|
|
|
Consolidated
Condensed Statements of Operations for the three and nine months
ended
September 30, 2007 and 2006 (Unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statements of Equity and Comprehensive Loss for the nine
months
ended September 30, 2007 (Unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows for the nine months ended September
30,
2007 and 2006 (Unaudited)
|
|
|
|
|
|
Notes
to Consolidated Condensed Financial Statements (Unaudited)
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
PART
II
OTHER
INFORMATION
|
||
|
|
Page
Number
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
|
|
|
Item
6.
|
Exhibits
|
|
|
|
CONSOLIDATED
CONDENSED BALANCE SHEETS
(In
thousands, except share data)
|
|
|||||||
ASSETS
|
|
September
30, 2007
(unaudited)
|
|
|
December
31,
2006
|
|
||
Current
assets:
|
|
|
|
|
|
|
||
Cash
and cash equivalents
|
|
$
|
4,372
|
|
|
$
|
5,407
|
|
Accounts
receivable, net of allowance of $1,199 in 2007 and $1,491 in
2006
|
|
|
74,409
|
|
|
72,581
|
|
|
Drivers'
advances and other receivables, net of allowance of $2,686 in 2007
and
$2,598 in 2006
|
|
|
5,443
|
|
|
|
4,259
|
|
Inventory
and supplies
|
|
|
3,932
|
|
|
4,985
|
|
|
Prepaid
expenses
|
|
|
9,756
|
|
|
|
11,162
|
|
Assets
held for sale
|
|
|
12,990
|
|
|
|
22,581
|
|
Deferred
income taxes
|
|
|
23,605
|
|
|
|
16,021
|
|
Income
taxes receivable
|
|
|
9,721
|
|
|
|
6,371
|
|
Total
current assets
|
|
|
144,228
|
|
|
|
143,367
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
347,489
|
|
|
|
349,663
|
|
Less
accumulated depreciation and amortization
|
|
|
(93,502
|
)
|
|
|
(74,689
|
)
|
Net
property and equipment
|
|
|
253,987
|
|
|
|
274,974
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
36,210
|
|
|
|
36,210
|
|
Other
assets, net
|
|
|
19,808
|
|
|
|
20,543
|
|
Total
assets
|
|
$
|
454,233
|
|
|
$
|
475,094
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Securitization
facility (See Note 10)
|
|
$
|
53,381
|
|
|
$
|
54,981
|
|
Current
maturities of long-term debt (See Note 10)
|
|
|
1,280
|
|
|
|
-
|
|
Checks
outstanding in excess of bank balances
|
|
|
3,244
|
|
|
|
4,280
|
|
Current
maturities of acquisition obligation
|
|
|
333
|
|
|
|
333
|
|
Accounts
payable and accrued expenses
|
|
|
36,406
|
|
|
|
30,521
|
|
Current
portion of insurance and claims accrual
|
|
|
18,153
|
|
|
|
20,097
|
|
Total
current liabilities
|
|
|
112,797
|
|
|
|
110,212
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (See Note 10)
|
|
|
96,581
|
|
|
|
104,900
|
|
Insurance
and claims accrual, net of current portion
|
|
|
14,056
|
|
|
|
18,002
|
|
Deferred
income taxes
|
|
|
56,309
|
|
|
|
50,685
|
|
Other
long-term liabilities
|
|
|
2,400
|
|
|
|
2,451
|
|
Total
liabilities
|
|
|
282,143
|
|
|
|
286,250
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Class
A common stock, $.01 par value; 20,000,000 shares authorized; 13,469,090
shares issued; 11,676,298 and 11,650,690 shares
outstanding
as of September 30, 2007 and December 31, 2006,
respectively
|
|
|
135
|
|
|
|
135
|
|
Class
B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000
shares issued and outstanding
|
|
|
24
|
|
|
|
24
|
|
Additional
paid-in-capital
|
|
|
92,238
|
|
|
|
92,053
|
|
Treasury
stock at cost; 1,792,792 shares and 1,818,400 shares as of September
30,
2007 and December 31, 2006, respectively
|
|
|
(21,278
|
)
|
|
|
(21,582
|
)
|
Retained
earnings
|
|
|
100,971
|
|
|
|
118,214
|
|
Total
stockholders' equity
|
|
|
172,090
|
|
|
|
188,844
|
|
Total
liabilities and stockholders' equity
|
|
$
|
454,233
|
|
|
$
|
475,094
|
|
|
|
Three
months ended
September
30,
(unaudited)
|
|
|
Nine
months ended
September
30,
(unaudited)
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
||||
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Freight
revenue
|
|
$
|
148,531
|
|
|
$
|
144,148
|
|
|
$
|
443,105
|
|
|
$
|
412,926
|
|
Fuel
surcharge revenue
|
|
|
27,256
|
|
|
|
32,513
|
|
|
|
76,519
|
|
|
|
84,621
|
|
Total
revenue
|
|
$
|
175,787
|
|
|
$
|
176,661
|
|
|
$
|
519,624
|
|
|
$
|
497,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Salaries,
wages, and related expenses
|
|
|
65,649
|
|
|
|
66,892
|
|
|
|
202,220
|
|
|
|
189,955
|
|
Fuel
expense
|
|
|
52,687
|
|
|
|
52,858
|
|
|
|
150,812
|
|
|
|
145,075
|
|
Operations
and maintenance
|
|
|
10,890
|
|
|
|
9,062
|
|
|
|
30,890
|
|
|
|
26,334
|
|
Revenue
equipment rentals and purchased transportation
|
|
|
15,406
|
|
|
|
16,462
|
|
|
|
46,718
|
|
|
|
46,598
|
|
Operating
taxes and licenses
|
|
|
3,451
|
|
|
|
3,423
|
|
|
|
10,862
|
|
|
|
10,190
|
|
Insurance
and claims
|
|
|
8,368
|
|
|
|
8,360
|
|
|
|
29,130
|
|
|
|
24,773
|
|
Communications
and utilities
|
|
|
1,748
|
|
|
|
1,785
|
|
|
|
5,715
|
|
|
|
4,902
|
|
General
supplies and expenses
|
|
|
5,801
|
|
|
|
5,675
|
|
|
|
17,321
|
|
|
|
15,719
|
|
Depreciation
and amortization, including gains and losses on disposition of
equipment
|
|
|
13,955
|
|
|
|
8,624
|
|
|
|
40,275
|
|
|
|
27,179
|
|
Asset
impairment charge
|
|
|
0
|
|
|
|
0
|
|
|
|
1,665
|
|
|
|
0
|
|
Total
operating expenses
|
|
|
177,955
|
|
|
|
173,141
|
|
|
|
535,608
|
|
|
|
490,725
|
|
Operating
income (loss)
|
|
|
(2,168
|
)
|
|
|
3,520
|
|
|
|
(15,984
|
)
|
|
|
6,822
|
|
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest
expense
|
|
|
2,917
|
|
|
|
1,752
|
|
|
|
8,924
|
|
|
|
3,951
|
|
Interest
income
|
|
|
(129
|
)
|
|
|
(169
|
)
|
|
|
(354
|
)
|
|
|
(491
|
)
|
Other
|
|
|
(34)
|
|
|
0
|
|
|
(150
|
)
|
|
|
(13
|
)
|
||
Other
expenses, net
|
|
|
2,754
|
|
|
|
1,583
|
|
|
|
8,420
|
|
|
|
3,447
|
|
Income
(loss) before income taxes
|
|
|
(4,922
|
)
|
|
|
1,937
|
|
|
|
(24,404
|
)
|
|
|
3,375
|
|
Income
tax expense (benefit)
|
|
|
(1,347
|
)
|
|
|
1,142
|
|
|
|
(7,502
|
)
|
|
|
3,862
|
|
Net
income (loss)
|
|
$
|
(3,575
|
)
|
|
$
|
795
|
|
$
|
(16,902
|
)
|
|
$
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic
and diluted earnings (loss) per share:
|
|
$
|
(0.25
|
)
|
|
$
|
0.06
|
|
$
|
(1.21
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic
weighted average common shares outstanding
|
|
|
14,026
|
|
|
|
14,000
|
|
|
|
14,016
|
|
|
|
14,074
|
|
Diluted
weighted average common shares outstanding
|
14,026
|
14,059
|
14,016
|
14,074
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Retained
|
|
|
Total
Stockholders'
|
|
|
Comprehensive
|
|
||||||||||
|
|
Class
A
|
|
|
Class
B
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Equity
|
|
|
Loss
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Balances
at December 31, 2006
|
|
$
|
135
|
|
|
$
|
24
|
|
|
$
|
92,053
|
|
|
$
|
(21,582
|
)
|
|
$
|
118,214
|
|
|
$
|
188,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock to
non-employee
directors from
treasury
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
304
|
|
|
|
-
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
impact of change in
accounting for uncertainties in
income taxes (FIN 48 – see Note 7)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(341
|
)
|
|
|
(341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 123R stock-based employee
compensation cost
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,902
|
)
|
|
|
(16,902
|
)
|
|
|
(16,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss for nine
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(16,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 30, 2007
|
|
$
|
135
|
|
|
$
|
24
|
|
|
$
|
92,238
|
|
|
$
|
(21,278
|
)
|
|
$
|
100,971
|
|
|
$
|
172,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended
September
30,
(unaudited)
|
|
|||||
|
|
2007
|
|
|
2006
|
|
||
Cash
flows from operating activities:
|
|
|
|
|
|
|
||
Net
loss
|
|
$
|
(16,902
|
)
|
|
$
|
(487
|
)
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
||
Provision
for losses on accounts receivable
|
|
|
664
|
|
|
|
441
|
|
Depreciation
and amortization, including impairment charge
|
|
|
39,809
|
|
|
|
29,946
|
|
Amortization
of deferred financing fees
|
|
|
201
|
|
|
|
0
|
|
Deferred
income taxes (benefit)
|
|
|
(2,301
|
)
|
|
|
(1,380
|
)
|
Loss
(gain) on disposition of property and equipment
|
|
|
2,131
|
|
|
|
(2,884
|
)
|
Non-cash
stock compensation
|
|
|
489
|
|
|
|
171
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
||
Receivables
and advances
|
|
|
(3,744
|
)
|
|
|
4,618
|
|
Prepaid
expenses and other assets
|
|
|
1,595
|
|
|
|
6,044
|
|
Inventory
and supplies
|
|
|
1,023
|
|
|
|
130
|
|
Insurance
and claims accrual
|
|
|
(5,890
|
)
|
|
|
(4,387
|
)
|
Accounts
payable and accrued expenses
|
|
|
1,070
|
|
|
|
9,085
|
|
Net
cash flows provided by operating activities
|
|
|
18,145
|
|
|
|
41,297
|
|
|
|
|
|
|
|
|
||
Cash
flows from investing activities:
|
|
|
|
|
|
|
||
Acquisition
of property and equipment
|
|
|
(51,328
|
)
|
|
|
(118,958
|
)
|
Purchase
of Star Transportation, Inc., net of cash acquired
|
0
|
(39,004
|
)
|
|||||
Proceeds
from building sale leaseback
|
|
|
0
|
|
|
|
29,630
|
|
Proceeds
from disposition of property and equipment
|
|
|
42,770
|
|
|
|
44,947
|
|
Payment
of acquisition obligation
|
|
|
(250
|
)
|
|
|
0
|
|
Net
cash flows used in investing activities
|
|
|
(8,808
|
)
|
|
|
(83,385
|
)
|
|
|
|
|
|
|
|
||
Cash
flows from financing activities:
|
|
|
|
|
|
|
||
Exercise
of stock options
|
|
|
0
|
|
|
246
|
|
|
Excess
tax benefits from exercise of stock options
|
|
|
0
|
|
|
|
17
|
|
Change
in checks outstanding in excess of bank balances
|
|
|
(1,036
|
)
|
|
|
0
|
|
Proceeds
from issuance of debt
|
|
|
48,361
|
|
|
|
104,807
|
|
Repayments
of debt
|
|
|
(57,000
|
)
|
|
|
(58,272
|
)
|
Debt
refinancing costs
|
|
|
(697
|
)
|
|
|
0
|
|
Net
cash provided by financing activities
|
|
|
(10,372
|
)
|
|
|
46,798
|
|
|
|
|
|
|
|
|
||
Net
change in cash and cash equivalents
|
|
|
(1,035
|
)
|
|
|
4,710
|
|
|
|
|
|
|
|
|
||
Cash
and cash equivalents at beginning of period
|
|
|
5,407
|
|
|
|
3,618
|
|
|
|
|
|
|
|
|
||
Cash
and cash equivalents at end of period
|
|
$
|
4,372
|
|
|
$
|
8,328
|
|
(in
thousands except per share data)
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
||||
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net
earnings (loss)
|
|
$
|
(3,575
|
)
|
|
$
|
795
|
|
$
|
(16,902
|
)
|
|
$
|
(487
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Denominator
for basic earnings per share – weighted-average
shares
|
|
|
14,026
|
|
|
|
14,000
|
|
|
|
14,016
|
|
|
|
14,074
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Employee
stock options
|
|
|
-
|
|
|
|
59
|
|
|
|
-
|
|
|
|
-
|
|
Denominator
for diluted earnings per share – adjusted weighted-average shares and
assumed conversions
|
|
|
14,026
|
|
|
|
14,059
|
|
|
|
14,016
|
|
|
|
14,074
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Basic
and diluted earnings (loss) per share:
|
|
$
|
(0.25
|
)
|
|
$
|
0.06
|
|
$
|
(1.21
|
)
|
|
$
|
(0.03
|
)
|
|
|
Number
of
options
(in
thousands)
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
term
|
|
Aggregate
intrinsic
value
(in
thousands)
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
Outstanding
at beginning of the period
|
|
|
1,287
|
|
|
$
|
13.98
|
|
68
months
|
|
$
|
685
|
|
Options
granted
|
|
|
112
|
|
|
|
6.76
|
|
|
|
|
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Options
forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Options
expired
|
|
|
(43
|
)
|
|
$
|
16.74
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
1,356
|
|
|
$
|
13.30
|
|
66
months
|
|
$
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
1,162
|
|
|
$
|
13.95
|
|
58
months
|
|
$
|
427
|
|
|
Number
of
stock
awards
|
Weighted
average
grant
date
fair value
|
Unvested
at January 1, 2007
|
456,984
|
$12.65
|
Granted
|
113,533
|
$10.83
|
Vested
|
-
|
-
|
Forfeited
|
-
|
-
|
Unvested
at September 30, 2007
|
570,517
|
$12.29
|
(in
thousands)
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
||||||||||
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
||||
Securitization
Facility
|
|
$
|
53,381
|
|
|
$
|
-
|
|
|
$
|
54,981
|
|
|
$
|
-
|
|
Borrowings
under Credit Facility
|
|
|
-
|
|
|
|
90,000
|
|
|
|
-
|
|
|
|
104,900
|
|
Revenue
equipment installment notes with finance company, weighted average
interest rate of 5.55% at September 30, 2007, due in monthly
installments with final maturities at various dates ranging from
September
2010 to March 2011, secured by related revenue
equipment
|
|
|
1,280
|
|
|
|
6,581
|
|
|
|
-
|
|
|
|
-
|
|
Total
debt
|
|
$
|
54,661
|
|
|
$
|
96,581
|
|
|
$
|
54,981
|
|
|
$
|
104,900
|
|
(in
thousands)
|
|
|
|
|
Current
assets
|
|
$
|
10,970
|
|
Property
and equipment
|
|
|
62,339
|
|
Deferred
tax assets
|
|
|
275
|
|
Other
assets – Interest rate swap
|
|
|
252
|
|
Identifiable
intangible assets:
|
|
|
|
|
Tradename
(4-year estimated useful life)
|
|
|
920
|
|
Noncompetition
agreement (7-year useful life)
|
|
|
1,000
|
|
Customer
relationships (20-year estimated useful life)
|
|
|
3,490
|
|
Goodwill
|
|
|
24,655
|
|
Total
assets
|
|
$
|
103,901
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
13,181
|
|
Long-term
debt, net of current maturities
|
|
|
36,298
|
|
Deferred
tax liabilities
|
|
|
14,361
|
|
Total
liabilities
|
|
$
|
63,840
|
|
|
|
|
|
|
Total
purchase price
|
|
$
|
40,061
|
|
●
|
Expedited
long haul service. We increased the fleet by approximately 8%, primarily
through the January 2007 assimilation of the former Covenant Refrigerated
service offering's team-driver trucks into this service offering.
The
Expedited service offering suffered from lower fuel surcharge collection
and a reduction in team drivers within this fleet, resulting in an
increase in solo-driver loads. Average freight revenue per truck
per week
declined by 4.7%, with
average
freight revenue per total mile down less than one percent
and miles down about 3.9%.
|
|
|
●
|
Refrigerated
service. In January 2007, we assimilated the single-driver trucks
from our
former Covenant Refrigerated service offering into our Southern
Refrigerated Transport ("SRT") service offering. The addition
of the unprofitable Covenant Refrigerated operations into SRT resulted
in
a deterioration of SRT's performance, primarily due to a significant
increase in freight from freight brokers and acceptance of new customer
contracts at lower rates to keep trucks loaded. SRT’s rates declined by
approximately $.02 per mile. Fuel surcharge recovery also suffered,
primarily led by the additional broker freight and an increase in
non-revenue miles from 9.8% to 10.3% of total miles. Since the
assimilation of the single-driver trucks from our Covenant Refrigerated
service offering, SRT has gradually reduced its dependency on broker
freight.
|
|
|
●
|
Dedicated
service. We increased the fleet by approximately 2%. Average revenue
per
truck was basically flat as we were able to maintain rates and miles
per
truck
in a
difficult freight environment.
|
|
|
●
|
Covenant
regional solo-driver service. We decreased the average fleet by
approximately 324 trucks or 37%. Average freight revenue per truck
declined 1.7%, due primarily to a 3.1% decrease in average freight
revenue
per total mile, partially offset by a 2.6% increase in average miles
per
truck. Fuel surcharge recovery also declined. Substantial additional
improvements are needed for this service offering to become
profitable.
|
|
|
●
|
Star
regional solo-driver service. On September 14, 2006, we acquired
100% of
the outstanding stock of Star, a short-to-medium haul dry van regional
truckload carrier based in Nashville, Tennessee. Star's total revenue
for
the quarter ended September 30, 2007 totaled approximately $24.2
million.
Especially soft freight demand in the southeastern United States,
where
Star’s lanes are concentrated, resulted in rate pressure, fewer
loaded miles, a larger percentage of unloaded miles, and reduced
fuel
surcharge collection, related in part, to greater reliance on brokered
freight.
|
|
|
●
|
Covenant
Transport Solutions’ brokerage freight service. Covenant Transport
Solutions has continued to grow through the addition of agents, who
are
paid a commission for each load of freight they provide. The number
of
loads increased to 2,580 from 985
loads
in the third quarter of 2006. Average revenue per load also increased
23.6% to $1,773 from $1,435 per load in the third quarter of 2006.
The brokerage operation has helped us continue to serve customers
when we lacked capacity in a given area or when the load has not
met the
operating profile of one of our service
offerings.
|
|
|
Three
Months
Ended
September
30,
|
|
|
|
Three
Months
Ended
September
30,
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
|
2007
|
|
|
2006
|
|
||||
Total
revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Freight
revenue(1)
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses
|
|
|
37.3
|
%
|
|
|
37.9
|
%
|
Salaries,
wages, and related expenses
|
|
|
44.2
|
%
|
|
|
46.4
|
%
|
Fuel
expense
|
|
|
30.0
|
%
|
|
|
29.9
|
%
|
Fuel
expense (1)
|
|
|
17.1
|
%
|
|
|
14.1
|
%
|
Operations
and maintenance
|
|
|
6.2
|
%
|
|
|
5.2
|
%
|
Operations
and maintenance
|
|
|
7.3
|
%
|
|
|
6.3
|
%
|
Revenue
equipment rentals and purchased
transportation
|
|
|
8.8
|
%
|
|
|
9.3
|
%
|
Revenue
equipment rentals and purchased
transportation
|
|
|
10.4
|
%
|
|
|
11.4
|
%
|
Operating
taxes and licenses
|
|
|
1.9
|
%
|
|
|
1.9
|
%
|
Operating
taxes and licenses
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
Insurance
and claims
|
|
|
4.8
|
%
|
|
|
4.7
|
%
|
Insurance
and claims
|
|
|
5.6
|
%
|
|
|
5.8
|
%
|
Communications
and utilities
|
|
|
1.0
|
%
|
|
|
1.0
|
%
|
Communications
and utilities
|
|
|
1.2
|
%
|
|
|
1.2
|
%
|
General
supplies and expenses
|
|
|
3.3
|
%
|
|
|
3.2
|
%
|
General
supplies and expenses
|
|
|
3.9
|
%
|
|
|
3.9
|
%
|
Depreciation
and amortization
|
|
|
7.9
|
%
|
|
|
4.9
|
%
|
Depreciation
and amortization
|
|
|
9.4
|
%
|
|
|
6.0
|
%
|
Asset
impairment charge
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Asset
impairment charge
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Total
operating expenses
|
|
|
101.2
|
%
|
|
|
98.0
|
%
|
Total
operating expenses
|
|
|
101.5
|
%
|
|
|
97.5
|
%
|
Operating
income (loss)
|
|
|
(1.2
|
)%
|
|
|
2.0
|
%
|
Operating
income (loss)
|
|
|
(1.5
|
)%
|
|
|
2.5
|
%
|
Other
expense, net
|
|
|
1.6
|
%
|
|
|
0.9
|
%
|
Other
expense, net
|
|
|
1.8
|
%
|
|
|
1.1
|
%
|
Income
(loss) before income taxes
|
|
|
(2.8
|
)%
|
|
|
1.1
|
%
|
Income
(loss) before income taxes
|
|
|
(3.3
|
)%
|
|
|
1.4
|
%
|
Income
tax expense (benefit)
|
|
|
(0.8
|
)%
|
|
|
0.6
|
%
|
Income
tax expense (benefit)
|
|
|
(0.9
|
)%
|
|
|
0.8
|
%
|
Net
income (loss)
|
|
|
(2.0
|
)%
|
|
|
0.5
|
%
|
Net
income (loss)
|
|
|
(2.4
|
)%
|
|
|
0.6
|
%
|
(1)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel
surcharge revenue is shown netted against the fuel expense category
($27.3
million and $32.5 million in the three months ended September 30,
2007 and
2006, respectively).
|
|
|
Nine
Months
Ended
June
30,
|
|
|
|
Nine
Months
Ended
June
30,
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
|
2007
|
|
|
2006
|
|
||||
Total
revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Freight
revenue(2)
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses
|
|
|
38.9
|
%
|
|
|
38.2
|
%
|
Salaries,
wages, and related expenses
|
|
|
45.6
|
%
|
|
|
46.0
|
%
|
Fuel
expense
|
|
|
29.0
|
%
|
|
|
29.1
|
%
|
Fuel
expense (2)
|
|
|
16.8
|
%
|
|
|
14.6
|
%
|
Operations
and maintenance
|
|
|
6.0
|
%
|
|
|
5.2
|
%
|
Operations
and maintenance
|
|
|
7.0
|
%
|
|
|
6.4
|
%
|
Revenue
equipment rentals and purchased
transportation
|
|
|
9.0
|
%
|
|
|
9.4
|
%
|
Revenue
equipment rentals and purchased
transportation
|
|
|
10.4
|
%
|
|
|
11.3
|
%
|
Operating
taxes and licenses
|
|
|
2.1
|
%
|
|
|
2.0
|
%
|
Operating
taxes and licenses
|
|
|
2.5
|
%
|
|
|
2.5
|
%
|
Insurance
and claims
|
|
|
5.6
|
%
|
|
|
5.0
|
%
|
Insurance
and claims
|
|
|
6.6
|
%
|
|
|
6.0
|
%
|
Communications
and utilities
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
Communications
and utilities
|
|
|
1.3
|
%
|
|
|
1.2
|
%
|
General
supplies and expenses
|
|
|
3.3
|
%
|
|
|
3.2
|
%
|
General
supplies and expenses
|
|
|
3.9
|
%
|
|
|
3.8
|
%
|
Depreciation
and amortization
|
|
|
7.8
|
%
|
|
|
5.5
|
%
|
Depreciation
and amortization
|
|
|
9.1
|
%
|
|
|
6.6
|
%
|
Asset
impairment charge
|
|
|
0.3
|
%
|
|
|
0.0
|
%
|
Asset
impairment charge
|
|
|
0.4
|
%
|
|
|
0.0
|
%
|
Total
operating expenses
|
|
|
103.1
|
%
|
|
|
98.6
|
%
|
Total
operating expenses
|
|
|
103.6
|
%
|
|
|
98.4
|
%
|
Operating
income (loss)
|
|
|
(3.1
|
)%
|
|
|
1.4
|
%
|
Operating
income (loss)
|
|
|
(3.6
|
)%
|
|
|
1.6
|
%
|
Other
expense, net
|
|
|
1.6
|
%
|
|
|
0.7
|
%
|
Other
expense, net
|
|
|
1.9
|
%
|
|
|
0.8
|
%
|
Income
(loss) before income taxes
|
|
|
(4.7
|
)%
|
|
|
0.7
|
%
|
Income
(loss) before income taxes
|
|
|
(5.5
|
)%
|
|
|
0.8
|
%
|
Income
tax expense (benefit)
|
|
|
(1.4
|
)%
|
|
|
0.8
|
%
|
Income
tax expense (benefit)
|
|
|
(1.7
|
)%
|
|
|
0.9
|
%
|
Net
loss
|
|
|
(3.3
|
)%
|
|
|
(0.1
|
)%
|
Net
loss
|
|
|
(3.8
|
)%
|
|
|
(0.1
|
)%
|
(2)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel
surcharge revenue is shown netted against the fuel expense category
($76.5
million and $84.6 million in the nine months ended September 30,
2007 and
2006, respectively).
|
PART
II
OTHER
INFORMATION
|
|
|
|
|
LEGAL
PROCEEDINGS
From
time to time we are a party to routine litigation arising in the
ordinary
course of business, most of which involves claims for personal injury
and
property damage incurred in connection with the transportation of
freight.
We maintain insurance to cover liabilities arising from the transportation
of freight for amounts in excess of certain self-insured
retentions.
|
RISK
FACTORS
While
we attempt to identify, manage, and mitigate risks and uncertainties
associated with our business, some level of risk and uncertainty
will
always be present. Our Form 10-K for the year ended December
31, 2006, in the section entitled Item 1A. Risk Factors,
describes some of the risks and uncertainties associated with our
business. These risks and uncertainties have the potential to
materially affect our business, financial condition, results of
operations, cash flows, projected results, and future prospects.
In
addition to the risk factors set forth on our Form 10-K, we believe
that
the following additional issues, uncertainties, and risks, should
be
considered in evaluating our business and growth outlook:
We
were in
default of our financial covenants under our Credit Facility as of
June
30, 2007. We obtained a waiver from our bank group and modified the
financial covenants in the Credit Facility to levels better aligned
with
our expected future results and granted and expanded the security
interest
to include, with limited exceptions, then owned revenue equipment,
as well as revenue equipment acquired subsequently utilizing proceeds
from the Credit Facility. We were in compliance with the financial
covenants at September 30, 2007. A future default could result in
the
acceleration of our outstanding indebtedness under the Credit Facility,
increased fees and expenses, restrictions on our operations, dilutive
stock issuances, and an inability to obtain financing on acceptable
terms,
which could have a materially adverse effect on our liquidity, financial
condition, and results of operations.
We
have a
$200.0 million Credit Facility with a group of banks under which
we had
borrowings outstanding totaling $90.0
million as
of September
30, 2007.
The Company signed Amendment No. 1 to the Credit Facility
on August
28, 2007, which among other revisions, granted and expanded the security
interest to include, with limited exceptions, then owned revenue
equipment, as well as revenue equipment acquired subsequently
utilizing proceeds from the Credit Facility. As amended, the
Credit Facility is secured by a pledge of the stock of most of the
Company's subsidiaries and certain owned revenue equipment, as well
as revenue equipment acquired subsequently utilizing proceeds from
the Credit Facility. The
Credit
Facility includes a number of covenants, including financial
covenants.
If
we experience future defaults under our Credit Facility, our bank
group
could cease making further advances, declare our debt to be immediately
due and payable, impose significant restrictions and requirements
on our
operations, and institute foreclosure procedures against their
security. If we were required to obtain waivers of defaults,
we may incur significant fees and transaction costs. If waivers of
defaults are not obtained and acceleration occurs, we may have difficulty
in borrowing sufficient additional funds to refinance the accelerated
debt
or we may have to issue equity securities, which would dilute stock
ownership. Even if new financing is made available to us, it may
not be
available on acceptable terms. As a result, our liquidity, financial
condition, and results of operations would be adversely
affected.
We
may not be able to renew Dedicated service offering contracts on
the terms
and schedule we expect.
As
part of the plan to improve profitability and increase the average
freight
revenue per tractor per week in our Dedicated service offering, we
are
attempting to renew and negotiate contracts covering the Dedicated
fleet. The current freight environment has resulted in
increased competition for these contracts, which has in turn placed
more
pressure on rates. If contract renewals do not proceed on an
acceptable basis, we may not be successful in executing this plan
on the
terms and schedule we expect.
|
|
We
may not be able to cause the performance of Star Transportation,
Inc. to
return to historical levels.
The
profitability of our Star subsidiary has declined substantially
since we
acquired Star in September 2006. We believe the primary factor
has been lack of freight demand in the southeastern United States,
where
Star's operations are concentrated. However, other factors may
be contributing, as well. We may not be able to cause Star to
operate at its former level of profitability. If we do not, our
financial results may suffer and we could be forced to write-down
all or a
portion of the goodwill associated with the Star
acquisition.
We
may not be able to successfully integrate the former operations
of our
Covenant Refrigerated service offering into our SRT and Expedited
Long-Haul operations.
In
the first quarter of 2007, we reallocated the assets formerly operated
by
our Covenant Refrigerated service offering to our SRT and Expedited
long
haul service offerings. The Covenant Refrigerated service
offering had produced significant losses, and absorbing these operations
adversely affected the results in our SRT and Expedited long haul
service
offerings. Particularly in the SRT service offering, we were forced
to
rely on freight from freight brokers to haul adequate loads and
to move
the trucks to lanes where SRT operates. Improving SRT's results
will require reducing the percentage of freight derived from freight
brokers, raising freight rates, and improving related fuel surcharge
collection. We may not be successful in reducing our dependency
on broker
freight or in returning our SRT and Expedited long haul service
offerings
to their historical levels of profitability.
We
operate in a highly regulated industry and changes in regulations
could
have a materially adverse effect on our
business.
Our
operations are regulated and licensed by various government agencies,
including the Department of Transportation ("DOT"). The DOT,
through the Federal Motor Carrier Safety Administration, or FMCSA,
imposes
safety and fitness regulations on us and our drivers. New rules
that limit
driver hours-of-service were adopted effective January 4, 2004,
and then modified effective October 1, 2005 (the "2005
Rules"). On July 24, 2007, a federal appeals court vacated
portions of the 2005 Rules. Two of the key portions that were
vacated include the expansion of the driving day from 10 to 11
hours, and
the "34 hour restart" requirement that drivers must have a break
of at
least 34 consecutive hours during each week. On September 28,
2007, the court
,
in
response to a request by the FMCSA for a 12-month extension of
the vacated
rules, ruled that the vacated rules may remain in effect for 90
days. At the end of the 90 day period, the 11 hour driving
limit and the 34 hour restart provisions of the 2005 Rules could
be
eliminated. We
understand that the FMCSA is currently evaluating its options in
light of
the court's ruling and it is unclear whether the FMCSA will issue
any
interim regulations at this time.
The
court's decision may have varying effects, in that reducing driving
time
to 10 hours daily may reduce productivity in certain instances,
while
eliminating the 34-hour restart may enhance productivity in certain
instances. On the whole, however, we would expect the court's
decision to reduce productivity and cause some loss of efficiency
as our
drivers are retrained and some shipping lanes may need to be
reconfigured. Additionally, we are unable to predict the effect
of any new rules that might be proposed, but any such proposed
rules could
increase costs in our industry or decrease productivity.
|
EXHIBITS
|
Exhibit
Number
|
Reference
|
Description
|
3.1
|
(1)
|
Amended
and Restated Articles of Incorporation
|
3.2
|
(2)
|
Amended
Bylaws dated September 27, 1994
|
4.1
|
(1)
|
Amended
and Restated Articles of Incorporation
|
4.2
|
(2)
|
Amended
Bylaws dated September 27, 1994
|
#
|
Amendment
No. 1 to the Second Amended and Restated Credit Agreement dated December
21, 2006 among Covenant Asset Management, Inc., Covenant Transport,
Inc.,
Bank of America, N.A., and each financial institution which is a
party to
the Credit Agreement Amendment
|
|
#
|
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker,
the
Company's Chief Executive Officer
|
|
#
|
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan,
the
Company's Principal Financial Officer
|
|
#
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's
Chief
Executive Officer
|
|
#
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the
Company's Principal Financial
Officer
|
References:
|
|
(1)
|
Incorporated
by reference from the Company’s Schedule 14A, filed April 20, 2007 (File
No. 000-24960).
|
(2)
|
Incorporated
by reference from Form S-1, Registration No. 33-82978, effective
October
28, 1994.
|
#
|
Filed
herewith.
|
|
COVENANT
TRANSPORTATION GROUP, INC.
|
|
|
|
|
|
|
|
Date: November
6, 2007
|
By:
|
/s/
Joey B. Hogan
|
|
|
Joey
B. Hogan
|
|
|
Senior Executive
Vice President and Chief Operating Officer,
|
|
|
in
his capacity as such and on behalf of the
issuer.
|