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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 1997 Commission File No: 0-24180
MTL INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3239073
- ---------------------------- --------------------------------
(State of other jurisdiction (IRS Employer Identification No.)
of incorporation)
3108 Central Drive, Plant City, FL 33567
- --------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(813) 754-4725
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Registrant's telephone number, including Area Code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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
----- -----
As of December 31, 1997, 4,549,824 shares of common stock were outstanding, and
the aggregate market value of the common stock of MTL Inc. held by nonaffiliates
(2,046,097 shares) was approximately $51,663,949 based on the market price at
that date.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement Regarding the 1998 Special Shareholders
Meeting is Incorporated by Reference in Part III of this Report.
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PART I
Item 1. Business
MTL Inc. (the "Company") is a tank truck carrier engaged in the
transportation of bulk liquid products in both interstate and intrastate
commerce, and to a lesser extent international commerce. Footnote 11 to the
financial statements included herein as Exhibit (a) contains financial
information as it relates to geographic segments. The Company provides a
complete line of bulk liquid transportation services and provides dependable,
safe and timely service designed to meet the specialized needs of its customers.
The Company is headquartered in Plant City, Florida and serves a wide variety of
manufacturing and industrial users throughout the continental United States,
Canada and Mexico. The Company transports a broad range of chemical and
petroleum products, including resins, latex, acids, alcohols, solvents,
corrosives and compressed gasses. The Company, through a separate division, also
transports food products. Many of the products transported require specialized
trailers and experienced personnel skilled in the safe and efficient handling of
these various products. The Company also provides tractors and trailers to
customers, affiliates and drivers for use in the transportation business.
On February 10, 1998, the Company entered into an agreement with
Sombrero Acquisition Corporation ("Sombrero"), an affiliate of Apollo Management
LP ("Apollo") pursuant to which Sombrero will merge with the Company. According
to the terms of the merger agreement, shareholders of the Company will receive
$40.00 per share in cash. At the option of Apollo, however, up to $1.60 of the
purchase price can be in the form of common stock of the Company. The total
transaction value is approximately $250.0 million, including outstanding stock
options, fees and approximately $54.0 million of net debt.
The transaction will be subject to the customary conditions including
the affirmative vote of the holders of a majority of the outstanding shares of
MTL. It is expected that a special meeting of shareholders will be held in May
1998. Sombrero has signed agreements with certain existing shareholders of MTL
owning approximately 25% of the outstanding shares of common stock to vote for
the transaction.
The Company will be funded by an equity investment of approximately
$70.0 million from Apollo and members of the Company's existing management.
Approximately $200.0 million of senior subordinated and bank debt will be used
to finance the acquisition. Additionally, a $100.0 million revolving credit
facility will be available to the Company for working capital and acquisition
purposes.
Affiliate Program
The Company maintains an Affiliate program in order to leverage its
operating expertise, provide appropriate incentives to its terminal management,
and reduce fixed costs incurred in operating multiple terminals and maintaining
a large fleet of tractors and trailers. As of December 31, 1997, 48 of the 80
terminals in the Company's network were operated by Affiliates. In 1997,
Affiliates were responsible for $146.2 million in transportation revenue, or
approximately 51.1% of the Company's total revenues. Affiliate facilities are
frequently staffed by former Company employees who now work directly for an
Affiliate. The Company currently has Affiliate arrangements with 28
independently-owned businesses.
The Affiliates are established and maintained as independent
corporations in order to preserve the entrepreneurial motivation common to small
businesses. Each Affiliate enters into a comprehensive contract with the Company
pursuant
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to which it is required to operate exclusively for MTL. Each Affiliate is
supervised by MTL's corporate staff and is linked via computer to the Company's
central management information system located at its Plant City headquarters.
From a customer's viewpoint, the Affiliate operations are virtually
indistinguishable from Company-owned operations.
Affiliates obtain various benefits from their relationship with the
Company, such as greater equipment utilization through participation in the
Company's backhaul program, enhancement of customer networks, driver
recruitment, safety training, expanded marketing resources and access to
sophisticated management information systems. Affiliates also benefit from the
Company's purchasing leverage for insurance coverage, revenue equipment, fuel,
tires, and other significant operating requirements.
Affiliates operate under the marketing identity of MTL and receive 85%
of gross revenues from each shipment they transport. Affiliates are responsible
for their own operating expenses and debt service. The Company pays its
Affiliates weekly on the basis of completed billings to customers. The Company
collects all accounts receivable and deducts any amounts advanced for fuel,
insurance, or other miscellaneous expenses, including charges (as applicable)
for the Company's tank trailers, from these weekly billing settlements.
Contracts with Affiliates typically carry a one year term, renewable on
a yearly basis unless terminated by either party. During the last five years,
the Company has terminated nine Affiliates from the Company's network for
failing to meet the Company's standards. None of the terminated Affiliates had
annual revenues in excess of $5 million. Contracts between the Company and its
Affiliates contain restrictive covenants which prohibit Affiliates from
competing directly with the Company in a specific geographic area for a period
of one year following termination of a contract.
Affiliates engage their own drivers and personnel. They also utilize
the services of owner operators. The Affiliate assumes all operating expenses
such as fuel, licenses, fuel taxes and tank cleaning. However, the Company
reimburses Affiliates for certain expenses passed through to its customers, such
as tolls and scaling charges.
Affiliates are required to pay for their own workers' compensation
coverage and liability insurance, which must meet both Company and statutory
coverage levels. Liability beyond the obligations of the Affiliate is the
responsibility of the Company or its insurer. The Company makes additional
insurance coverage available to its Affiliates for physical damage, bobtail
(tractor only), health and life, and garage-keepers insurance.
Owner-Operators
The Company and its Affiliates extensively utilize owner-operators.
Owner-operators are independent contractors who, through a contract with the
Company, supply one or more tractors and drivers for Company or Affiliate use.
Owner-operators are compensated on the basis of a fixed percentage of the
revenue generated from shipments they haul. The owner-operator must pay all
operating expenses for his tractor, including wages, benefits, fuel, insurance,
maintenance, highway use taxes, and debt service. An owner-operator may decline
to accept a particular load if it fails to meet his financial expectations. All
owner-operators utilized by either the Company or an Affiliate must meet
specified guidelines relating to driving experience, safety records, tank
carriage experience, and physical examinations in accordance with DOT
regulations. The Company emphasizes safety to its independent contractors and
their drivers and maintains driver safety inspection programs, safety awards,
terminal safety meetings and stringent driver qualifications. The
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contract between the owner-operator and the Company is terminable by either
party upon short notice.
The Company and its Affiliates dedicate significant resources to
recruiting and retaining owner-operators. The Company attempts to enhance the
profitability of its owner-operators through purchasing programs which take
advantage of the Company's significant purchasing power. Programs cover such
operating expense items as fuel, tires and insurance. As of December 31, 1997,
the Company had contracts with 930 owner-operators.
Marketing
The Company conducts its marketing activities at both the national and
local levels. The Company employs 15 geographically dispersed sales managers who
market the Company's services primarily to national accounts. These sales
managers have extensive experience in marketing specialized tank truck
transportation services. The corporate sales staff also concentrates on
developing dedicated logistics opportunities. The Company's senior management is
actively involved in the marketing process, especially in marketing to national
accounts. In addition, a large part of the Company's marketing is conducted
locally by the Company's terminal managers and dispatchers who act as local
customer service representatives. These managers and dispatchers maintain
regular contact with shippers and are uniquely positioned to identify the
changing transportation needs of customers in their respective geographic areas.
Customers
The Company's client base consists of customers located throughout
North America, including many Fortune 500 companies. The Company's large and
varied customer base limits the Company's dependence upon any one customer or
group of customers. During 1997, no single customer accounted for more than 7.8%
of the Company's total revenues.
Equipment Charges
The Company provides dedicated tractors and trailers (including ISO
containers) to Affiliates and other third parties, including shippers. The
Company deducts equipment payments from the weekly settlements paid to its
Affiliates. This program generated revenues of approximately $19.7 million in
1997. Trailer terms range from 1 to 84 months. Tractor terms range from 12 to 60
months and may include a purchase option.
In 1995, the Company developed a tractor purchasing program to enable
owner-operators to purchase and finance equipment directly through various
lenders. The Company is willing to sign a re-marketing agreement with lenders in
return for a management or agency fee from the lender.
In addition, customers pay a dedicated equipment charge when they
desire equipment of a specialized nature.
Revenue Equipment
As of December 31, 1997, the Company owned, or held directly under
lease, 3,434 tank trailers, of which 1,978 were leased to Affiliates and 548
were leased to other third parties. In addition, the Company's fleet is
supplemented by 640 trailers owned by Affiliates and 74 trailers owned by
shippers. A typical tank trailer measures 42.5 feet in length, eight feet in
width and 10.5 feet in height. The volume of the trailer ranges from 5,000 to
7,000 gallons with a payload capacity of up to 55,000 pounds. The cost of a
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new standard stainless steel tank trailer ranges from $47,000 to $64,000,
depending on specifications. The Company's capital expenditures for new and used
trailers in 1997 were $23.9 million for the purchase of approximately 500
trailers.
Management believes that the quality of the Company's tank trailer
fleet helps differentiate the Company from other carriers within its industry.
The majority of the Company's linehaul tank trailers were manufactured according
to detailed specifications by a former subsidiary of the Company, which is now
owned by a corporation owned by the adult child of Elton Babbitt, the Company's
Chairman of the Board. Management believes that these customized stainless steel
trailers are superior to those of other manufacturers. The Company's stainless
steel linehaul tank trailers have an average age of 9.8 years, well below the
industry average. The useful life expectancy of these high-quality tanks is
approximately 20 years.
As of December 31, 1997, the Company owned or operated under
capitalized leases 556 tractors, of which 182 were leased to Affiliates and
owner-operators. The Company primarily purchases high-end tractors manufactured
by Mack, Freightliner, and/or Peterbilt. In 1997, the Company purchased 164 new
tractors at an average cost of $63,000 to $80,000 per tractor and affiliates and
owner-operators purchased an additional 119. The Company generally finances its
tractors under its unsecured revolving credit facility. The Company attempts to
standardize its equipment purchases which reduces training and parts inventory
costs and allows for a more standardized preventive maintenance program.
Quality Assurance Program
The Company has implemented a Quality Assurance Program at all levels
of the Company. The primary goal of this program is to create the highest level
of customer and employee satisfaction. In furtherance of this goal, the Company
achieved ISO9002 certification in 1994. ISO9002 is an internationally recognized
quality standard, increasingly requested by shippers.
Management has demonstrated its continued commitment to this program by
appointing a Quality Director empowered to organize, implement, and direct the
Company's Quality Assurance Program. The Company organized a national steering
council, corporate teams, six regional teams and individual terminal teams which
meet periodically to discuss and review the Company's performance. The Company
measures various quality related factors on a monthly basis such as prevention
of accidents, spills and work injuries, driver turnover and tractor-trailer
inspection compliance. The Company also utilizes employee and driver award
programs to reward outstanding individual performance.
The Company is a Partner in the Chemical Manufacturers Association's
(CMA) Responsible Care(R) Partnership Program, a voluntary industry initiative
designed to enhance the safe management and transportation of chemicals.
The program was developed to assist the chemical industry and those who
are involved with its products and processes in improving their performance in
health, safety and environmental quality in response to heightened public
concerns. Responsible Care(R), a broad chemical industry commitment, is becoming
widely recognized as the leading performance improvement initiative in the U.S.,
with carrier participation in this program viewed favorably by shippers.
Intermodal and Bulk Rail Operations
The Company offers a wide range of Intermodal services by transporting
ISO containers on specialized chassis to and from a primary mode of
transportation
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such as rail, barge or vessel. The Company also provides rail transloading
services which enable products to be transloaded directly from rail car to
trailer. This allows shippers to combine the economy of long-haul rail
transportation with the flexibility of local truck delivery.
Tank Wash Operations
To maximize equipment utilization, the Company relies on 20 Company and
Affiliate tank wash facilities, as well as the services of other unrelated
commercial tank wash facilities located throughout its operating network. The
Company and Affiliate facilities allow MTL to generate additional tank washing
fees from non-affiliated carriers and shippers. Management believes that the
availability of these facilities enables the Company to provide an integrated
service package to its customers. New tank washing facilities require
significant capital investment and regulatory approvals.
Maintenance
Most terminals provide preventive maintenance and service and receive
computer generated reports which indicate when inspection and/or servicing of
units is required. Major repairs are performed by unaffiliated third parties.
The Company complies with DOT periodic inspection requirements by performing
inspections on its tractors every 60 days as part of its company-wide
service/inspection program. MTL's maintenance facilities are registered with DOT
and are qualified to perform tank inspections and repairs for the Company's
fleet and equipment owned by third parties.
Drivers and Other Personnel
At December 31, 1997, the Company employed 452 persons, of whom 170
were drivers, 25 were mechanics, 33 were tankwashers and the balance were
support personnel, including clerical, administrative and dispatch personnel. In
addition, the Company and its Affiliates utilized the services of 930
owner-operators as of December 31, 1997. The Company estimates its Affiliates
also employed directly 1,200 persons in various driver, support and
administrative capacities. The Company dedicates significant resources to driver
recruiting and retention. The annual turnover rate for Montgomery Tank Lines,
Inc. drivers (including those employed by Affiliates and owner-operators) was
approximately 44% in 1997.
Each terminal manager has direct responsibility for hiring drivers and
administrative personnel. Where appropriate, the terminal manager is also
responsible for hiring mechanics, customer service, and tank wash personnel.
Company drivers and owner-operators are hired in accordance with specific
guidelines regarding safety records, driving experience and a personal
evaluation of the Company's staff. The Company employs only qualified tank truck
drivers with a minimum of two years of over-the-road, tractor trailer
experience. These drivers are then enrolled in a rigorous training program
conducted at one of the Company's five safety schools.
Owner-operators are retained by the Company under contracts cancelable
by either party upon written notice. Owner-operators retain responsibility for
their own operating expenses and debt service. The Company provides its
employees with health, dental, vision, life, and certain other insurance
coverage. These same insurance programs are available to Affiliates and
owner-operators for a fee.
One employee of a subsidiary (one terminal) and approximately 116
employees of two Affiliates (three terminals) are members of the International
Brotherhood of Teamsters.
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Risk Management and Insurance/Safety
The primary risks associated with the Company's business are bodily
injury and property damage, workers' compensation claims and cargo loss and
damage. The Company maintains insurance against these risks and is subject to
liability as a self-insurer to the extent of the deductible under each policy.
The Company currently maintains liability insurance for bodily injury and
property damage in the amount of $100,000,000 per incident, subject to a
$500,000 deductible. The Company currently maintains first dollar Workers
Compensation Insurance coverage. The Company is also self-insured for damage or
loss to the equipment it owns or leases, and the Company is self-insured for
cargo losses.
MTL has received national safety awards from the National Tank Truck
Carriers Association. In addition to following DOT regulations requiring random
drug testing and post-accident drug testing, the Company rigorously enforces its
accident and incident reporting and follow-up standards.
The Company employs a safety and insurance staff of 22 professionals.
In addition, the Company employs specialists to perform compliance checks and
conduct safety tests throughout the Company's operations. The Company conducts a
number of safety programs designed to promote compliance with rules and
regulations and to reduce accidents and cargo claims. These programs include
training programs, driver recognition programs, an ongoing Substance Abuse
Prevention Program, driver safety meetings, distribution of safety bulletins to
drivers, and participation in national safety associations.
Fuel
Any increase in fuel taxes or in fuel prices could have a direct effect
on the Company's operating results to the extent that such increases could not
be passed along to its customers. Similarly, any increase in fuel taxes or in
fuel prices could also adversely affect the profitability of the Affiliates and
owner-operators to the extent such increases could not be passed along to
customers. Management believes that the Company's and Affiliates' operations are
no more susceptible to fuel price increases or fuel shortages than its
competitors. The Company has a fuel purchase program for Affiliates and
owner-operators pursuant to which the Company negotiates fuel discounts with
truck-stop operations which are then passed along to the Affiliates and
owner-operators. The Company stores only a small amount of fuel at its terminals
and has few underground storage tanks.
Competition
The tank truck business is extremely competitive and fragmented. The
Company competes primarily with other tank truck carriers and private carriers
in the various states. With respect to certain aspects of its business, the
Company also competes with intermodal transportation, railroads and
less-than-truckload carriers. Intermodal transportation has increased in recent
years as reductions in train crew size and the development of new rail
technology have reduced costs of intermodal shipping.
Competition for the freight transported by the Company is based
primarily on rates and service. Management believes that the Company enjoys
significant competitive advantages over other tank truck carriers because of the
Company's overall fleet size, the wide range of equipment, its geographically
dispersed terminals and tank wash facilities, and its low cost structure.
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The Company's largest competitors are Matlack Systems, Inc. and
Chemical Leaman Tank Lines, Inc. In addition, the Company competes with Trimac
Transportation Services, Ltd., an operation based in Canada, and with DSI
Transports, Inc. and its affiliated companies. There are approximately 195 other
recognized tank truck carriers, most of whom are primarily regional operators.
The Company also competes with other motor carriers for the services of
Company drivers and owner-operators. The Company's overall size and its
reputation for good relations with Affiliates and owner-operators have enabled
it to attract a sufficient number of qualified professional drivers and
owner-operators. At times, however, the Company has experienced temporary
shortages of qualified drivers.
Competition from non-trucking modes of transportation and from
intermodal transportation would likely increase if state or federal fuel taxes
were to increase without a corresponding increase in taxes imposed upon other
modes of transportation.
Environmental Program
The Company's environmental program was designed to assist in the
overall maintenance of the Company's environmental affairs as required in
today's regulatory environment. The program works to promote an atmosphere of
environmental compliance throughout the Company. The program is jointly
administered by the WCM Group, an environmental consulting firm based in
Houston, and the Company's internal environmental and safety staff. Internal
environmental audits are conducted at each of the Company's facilities twice per
year. The audits cover all areas of the terminal including tank wash facilities,
safety training and procedures, equipment and grounds and waste water
management. The audit also evaluates the facilities' emergency response
capabilities.
The Company's internal program is supplemented by unannounced facility
compliance audits performed by the WCM Group. The purpose of these audits is to
identify any "Recognized Environmental Conditions," defined as the presence or
likely presence of any hazardous substances designated as such by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA") or petroleum products on a property which indicates an
existing release, a past release or a threat of release of CERCLA hazardous
substances or petroleum products into structures on the property or into the
ground, surface water, or groundwater of the property or from neighboring
properties.
Claims against the Company for hazardous materials shipments have been
negligible in terms of both frequency and cost, primarily as a result of an
ongoing driver training program. The Company is a transporter of hazardous
materials but does not recommend disposal sites or methods. Accordingly, the
Company has not borne and does not believe it will be required to bear any
material liability with respect to remediation of disposal sites to which it may
have delivered hazardous materials. Potential claims, nonetheless, may arise
under various laws and regulations, including CERCLA. There can be no assurance
that the Company will not in the future be identified as a "Potentially
Responsible Party" at CERCLA sites because of its past actions or because of the
actions of its predecessors in interest.
Regulation
As a motor carrier, the Company is subject to regulation. There are
additional regulations specifically relating to the tank truck industry
9
including testing and specifications of equipment and product handling
requirements. The Company may transport most types of freight to and from any
point in the United States over any route selected by the Company. The trucking
industry is subject to possible regulatory and legislative changes (such as
increasingly stringent environmental regulations or limits on vehicle weight and
size) that may affect the economics of the industry by requiring changes in
operating practices or by changing the demand for common or contract carrier
services or the cost of providing truckload services. In addition, the Company's
tank wash facilities are subject to stringent local, state and federal
environmental regulations.
The Federal Motor Carrier Act of 1980 (the "Act") served to increase
competition among motor carriers and limit the level of regulation in the
industry (sometimes referred to as "deregulation"). The Act also enabled
applicants to obtain ICC operating authority more readily and allowed interstate
motor carriers such as the Company to change their rates by a certain percentage
each year without ICC approval. The law also removed many route and commodity
restrictions on the transportation of freight. In 1994, Congress adopted the
Negotiated Rates Act which requires, among other things, written contracts
between shippers and carriers.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. Such matters as weight and dimension of equipment are
also subject to federal and state regulations. Since 1989, DOT regulations have
imposed mandatory drug testing of drivers. To date, the DOT's national
commercial driver's license and drug testing requirement have not adversely
affected the availability to the Company of qualified drivers. New alcohol
testing rules adopted by the DOT in January 1994, became effective in January
1995. These rules require certain tests for alcohol levels in drivers and other
safety personnel. The Company does not believe the rules will adversely affect
the availability of qualified drivers.
The "Airport Improvement Act" (the "Act"), which became effective on
January 1, 1995, essentially deregulated intra-state transportation by motor
carriers. This Act prohibits individual states from regulating entry, pricing or
service levels. However, the states retained the right to continue to require
certification of carriers, but this certification is based only upon two primary
fitness criteria: that of safety and insurance. Prior to January 1, 1995, the
Company held intra-state authority in several states. Since that date, the
Company has either been "grandfathered in" or has obtained the necessary
certification to continue to operate in those states. In states that the Company
was not previously authorized to operate, it has obtained certificates (or
permits) allowing it to operate or is in the process of obtaining said
certificates in order of importance to the Company.
From time to time, various legislative proposals are introduced to
increase federal, state, or local taxes, including taxes on motor fuels. The
Company cannot predict whether, or in what form, any increase in such taxes
applicable to the Company will be enacted.
Acquisition of Levy
On June 11, 1996, the Company closed on a share purchase agreement
wherein the Company acquired all the outstanding stock of Levy Transport Ltd.
("Levy"), a Quebec-based tank truck carrier. Levy services the chemical,
petroleum and glass industries with a fleet of over 400 trucks and tank
trailers. The company intends to continue providing these services and expand
upon existing customer relationships by increasing fleet size in these markets.
The purchase price of $5,148,745 was financed with borrowings from the Company's
unsecured line of credit with SunTrust Bank. The terms of the
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agreement stipulated $4,416,949 be paid in cash at the time of closing and a
promissory note in the amount of $365,898 be executed. Additionally, $365,898
will be held in escrow as security for the Company in the event any
unanticipated claim is asserted. The purchase price was determined based upon
fair market value of assets acquired and the discounted, projected profit
potential of the Levy operation after consolidation with the Company.
Item 2. Properties
As of year end the Company operated through 80 trucking terminals
located throughout the United States, Canada and Mexico. Each of the 32 Company
and 48 Affiliate terminals operate as separate profit centers, and terminal
managers retain responsibility for most operational decisions in their given
service area. Effective supervision of a service area requires maximum personal
contact with both customers and drivers. Therefore, to achieve mutually defined
operating objectives, the functions of dispatch, customer service, and general
administration typically rest within each separate terminal. Cooperation and
coordination of the terminals is further encouraged by the Company's backhaul
policy. Any terminal which generates a backhaul shipment for another terminal
receives a commission on the revenue generated by the backhaul shipment.
From its headquarters in Florida, management constantly monitors each
terminal's operating and financial performance, safety and training record, and
customer service effort. All terminals are required to adhere to Company safety,
maintenance, customer service and other operating procedures, and the terminal
manager is responsible for insuring compliance with these strict guidelines.
Senior corporate executives and safety department personnel conduct unannounced
visits to verify terminal compliance. The Company attempts to achieve uniform
service and safety at all Company and Affiliate terminals, while simultaneously
providing terminal managers the freedom to focus on generating business in their
region.
Operating facilities are currently located in the following cities:
Birmingham, AL Mobile, AL (O) Tuscaloosa, AL Los Angeles, CA (C)
Oakley, CA (C) Branford, CT New Castle, DE(*) Tampa, FL
Atlanta, GA Augusta, GA Savannah, GA Tucker, GA (C)
Mediapolis, IA Chicago, IL Lansing, IL Summit, IL (C,O)
Wilmington, IL (O) Gary, IN* (O) Lafayette, IN (C) Calvert City, KY
Louisville, KY Owensboro, KY Bastrop, LA Baton Rouge, LA
Lake Charles, LA New Orleans, LA* Fall River, MA* (C) Elkridge, MD
Detroit, MI (C,O) Austin, MN (O) St. Louis, MO Omaha, NE
Avenel, NJ Keasbey, NJ (C) Concord, NC (C) Mt. Holly, NC (C)
Salisbury, NC Albany, NY (C) Bergen, NY (C) Akron, OH
Barberton, OH Cincinnati, OH Columbus, OH Lima, OH (C)
South Point, OH (C) Bradford, PA Parker, PA (O) Philadelphia, PA (O)
Pittsburgh, PA Southampton, PA (C) Charleston, SC Leeds, SC
Chattanooga, TN (O) Memphis, TN Beaumont, TX (C) Ft. Worth, TX (C,O)
Freeport, TX (O) Houston, TX Longview, TX (C) Pasadena, TX (O)
Winnie, TX Dumfries, VA Norfolk, VA (O) Pearisburg, VA (O)
Roanoke, VA Kelso, WA (C) Inwood, WV St. Albans, WV (C)
Appleton, WI (C) Bristol, WI (O) Oshkosh, WI (C)
Canadian Provinces: Mexican Locations:
Ville-Becacour, Quebec (C) Guadalajara
Montreal, Quebec (C) Mexico City
Oakville, Ontario (C)
Coteau-du-Lac (C)
(*) Two Affiliates operate from this location.
(C) Company Operated Facility (O) Company Owned Facility
11
The Company's executive and administrative offices are located in a
17,600 sq. ft. Building in Plant City, Florida. The facility is owned by the
Company and is located on 5.2 acres of land. In addition, the Company owns 15
terminals (12 of which are leased to Affiliates) and leases 26 terminals.
Item 3. Legal Proceedings
The Company has been designated a Potentially Responsible Party at six
CERCLA sites. Four involve activities which occurred more than six years ago and
each resulted from either the transportation of waste to facilities that were
subsequently audited by the EPA or the cleaning of tank trailers at a third
party tankwash that was subsequently audited by the EPA. In addition, the
Company is subject to litigation in the normal course of its business, primarily
claims for property damage, personal injury or workers' compensation. Management
does not believe that any currently pending litigation will have a materially
adverse effect on the financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its security
holders during the fourth quarter of the year covered by this report.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The shares of the Company are traded over the counter and are quoted on
the National Association of Securities Dealers Automated Quotation ("NASDAQ")
system under the symbol MTLI. The Company consummated its initial public
offering on June 17, 1994.
Below is the high and low sales price of the Company's Common Stock.
1997................................ HIGH LOW
Quarter ended
First............................... $24-1/4 $20-5/8
Second.............................. $24-1/8 $22-7/8
Third............................... $28 $21-1/4
Fourth.............................. $29-3/8 $25-1/4
1996................................ HIGH LOW
Quarter ended
First............................... $17-1/4 $13-3/8
Second.............................. $17-1/2 $15-5/8
Third............................... $19-1/2 $17-1/8
Fourth.............................. $21-5/8 $18-1/4
1995................................ HIGH LOW
Quarter ended
First............................... $14-3/4 $11-1/4
Second.............................. $15-5/16 $13
Third............................... $16-1/4 $13-1/2
Fourth.............................. $15-1/4 $12-5/8
12
Dividend Policy
The Company has never paid dividends on the Common Stock and does not
intend to pay dividends in the foreseeable future, as it intends to retain any
earnings for the operation and expansion of its business. In addition, the
payment of dividends by the Company is subject to certain restrictions under its
loan agreements. Any determination to pay dividends in the future will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant at that time by the Company's Board of
Directors.
Number of Shareholders
As of February 23, 1997, there were approximately 1,917 shareholders of
Common Stock of the company.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data presented below should be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations, and with the Consolidated Financial Statements
(including Notes thereto) presented elsewhere. The selected consolidated
financial data have been derived from the Consolidated Financial Statements.
Year ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
Income Statement Data(1):
Operating revenues ............ $ 142,376 $ 168,290 $ 190,054 $ 235,599 $ 286,047
Operating expenses:
Purchased transportation ..... 96,392 112,288 120,011 145,895 178,116
Compensation ................. 9,186 13,061 20,099 26,201 31,566
Depreciation & amortization .. 7,335 8,213 10,156 13,892 20,392
Fuel, supplies, maintenance .. 6,209 8,293 12,172 17,957 17,335
Selling and administrative ... 3,123 3,629 5,204 6,015 7,421
Insurance and claims ......... 5,328 5,687 3,281 4,366 6,455
Taxes and licenses ........... 1,003 1,134 1,630 1,655 1,900
Communications & utilities ... 991 1,052 1,149 1,378 1,805
(Gain) loss on sale of
property and equipment ...... (44) (36) (150) 20 (36)
--------- --------- --------- --------- ---------
Total operating expenses ... 129,523 153,321 173,552 217,379 264,954
Operating income .............. 12,853 14,969 16,502 18,220 21,093
Other income (expense):
Interest expense, net ....... (5,722) (4,172) (3,468) (3,494) (3,175)
Other ....................... (94) (252) 175 214 (39)
--------- --------- --------- --------- ---------
Total other income
(expense) ................. (5,816) (4,424) (3,292) (3,280)
Income before taxes ........... 7,037 10,545 13,210 14,940 17,879
Provision for income taxes .... (2,653) (4,306) (5,408) (6,103) (7,396)
--------- --------- --------- --------- ---------
Net income ..................... 4,384 6,239 7,802 8,837 10,483
========= ========= ========= ========= =========
Per Share Data:
Net income
Basic................... $ 2.67 $ 1.96 $ 1.73 $ 1.95 $ 2.31
Diluted................. 1.44 1.61 1.72 1.92 2.23
13
(1) Amounts may not total due to rounding differences.
(2) See Note 1 of Notes to Consolidated Financial Statements for additional
information pertaining to per share data and calculation.
Year ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
Balance Sheet Data
(end of period):
Total Assets.................... $105,787 $126,219 $145,740 $173,604 $194,036
Long-term obligations,
including current portion...... 53,613 40,538 48,844 57,329 55,098
Convertible preferred stock
and warrants................... 11,008 -- -- -- --
Stockholders' equity............ 17,245 52,247 60,058 68,913 79,532
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's operating results are affected by the shipments of the
bulk chemical industry. Shipments of the bulk chemical industry are, in turn,
affected by many industries, including the consumer products, pulp and paper,
paint and coatings, and automotive industries. These industries have various
degrees of sensitivity to economic conditions. The Company also participates in
the shipment of bulk food products through its food-grade division. The volume
of food products and certain consumer and paper products tend to be subject to
fewer fluctuations due to swings in economic activity.
Results of Operations
The following table sets forth expenses as a percentage of operating
revenues for the periods indicated.
Year ended December 31,
1995 1996 1997
---- ---- ----
Total Operating revenues.................. 100.00% 100.00% 100.00%
Operating expenses:
Purchased transportation................. 63.2 61.9 62.3
Compensation............................. 10.6 11.1 11.0
Depreciation and amortization............ 5.3 5.9 7.1
Fuel, supplies and maintenance........... 6.4 7.6 6.1
Insurance and claims..................... 1.7 1.9 2.6
Taxes and licenses....................... 0.9 0.7 2.3
Selling and administrative............... 2.7 2.6 0.7
Communications and utilities............. 0.6 0.6 0.6
(gain) loss on sale of property and
equipment.............................. (0.1) 0.0 0.0
------ ------ ------
Operating ratio........................... 91.3% 92.3% 92.6%
====== ====== ======
14
Year ended December 31, 1997, compared to year ended December 31, 1996.
Operating Revenues
Operating revenues increased $50.4 million or 21.4% for 1997 compared
to 1996. The increases in transportation related revenue was $48.6 million or
22.3%. The increase in other revenue was a $1.9 million or 10.6%. The
transportation revenue increase is due to both the inclusion of a full year of
Levy's operating results and internal growth. There was a significant increase
in the number of loads hauled, 344,798 loads in 1997 compared to 267,045 loads
in 1996. There was a slight increase in the average revenue per mile from $1.58
in 1996 to $1.59 in 1997. Length of haul declined from 299 miles in 1996 to 284
miles in 1997, and average revenue per load declined from $816 in 1996 to $773
in 1997. This occurred because of increases in short-haul business connected
with the Levy operation, and a continued increased presence in the corrosives
business which tends to be short-haul. The increase in other income is due to
increased equipment being provided to both affiliates and customers.
Operating Expenses
Total operating expense levels increased modestly about 0.3% due
primarily to the inclusion of a full year of Levy which has a different expense
profile. Purchased transportation increased slightly, 0.4%, as a percentage of
revenue, due to an increase in the relative number of owner operators under
contract. This was offset by a decrease in the expenses associated with
operating company equipment. Compensation decreased 0.1% and fuel supplies and
maintenance decreased 1.5%. Insurance rose 0.7% due to increased premium levels
and claims volume.
Selling and administrative expenses rose slightly in dollars by $1.4
million, however, as a percentage of revenue selling and administrative expense
fell 1.9% due to continued attention to cost containment.
Interest and Other Expense
Interest and other expense decreased slightly to $3.2 million from
$3.3 million. This represents 1.1% and 1.4% of revenue respectively.
Income Taxes
The Company's effective tax rates were 41.4% for 1997 and 40.9% for
1996. Effective tax rates for these years differ from the statutory federal rate
primarily because of state taxes, nondeductible intangible asset amortization,
and the meals and entertainment disallowance.
Net Income
Income before provision for income taxes increased by approximately
$2.9 million or 19.7% from 1996 to 1997. Net income increased from $8.8 million
in 1996 to $10.5 million during 1997.
15
Year ended December 31, 1996, compared to year ended December 31, 1995.
Operating Revenues
Operating revenues increased $45.5 million or 24.0% for 1996 compared
to 1995. The increases in transportation related revenue was $44.8 million or
25.9%. The increase in other revenue was a $0.8 million or 4.7%. The
transportation revenue increase is due to both the acquisition of Levy and
internal growth. There was a significant increase in the number of loads hauled,
267,045 loads in 1996 compared to 184,479 loads in 1995. There was a decrease in
the average revenue per mile from $1.63 in 1995 to $1.58 in 1996. Length of haul
declined from 337 miles in 1995 to 299 miles in 1996, and average revenue per
load declined from $938 in 1995 to $816 in 1996. This occurred because of
increases in short-haul business connected with the Levy operation, and a
continued increased presence in the corrosives business which tends to be
short-haul. The modest increase in other income is due to increased equipment
being provided to both affiliates and customers.
Operating Expenses.
Total operating expense levels increased about 1% due primarily to the
addition of Levy which has a different expense profile. Some shifts in
individual operating expense levels also occurred. Most of these changes are due
to changes in the mix of revenue from 1995 to 1996 as the Company relied more
heavily on Company drivers and equipment in 1996. Purchased transportation cost
decreased by 1.3% while compensation increased by 0.5%, fuel, supplies and
maintenance costs increased by 1.2% as a percentage of revenue. These changes
are consistent with the move to more company drivers.
Interest and Other Expense
Interest and other expense remained constant at $3.3 million or 1.7% of
revenue in 1995 and 1.4% of revenue in 1996.
Income Taxes
The Company's effective tax rates were 40.9% for 1996 and 1995.
Effective tax rates for these years differ from the statutory federal rate
primarily because of state taxes, nondeductible intangible asset amortization,
and the meals and entertainment disallowance.
Net Income
Income before provision for income taxes increased by approximately
$1.7 million or 13.1% from 1995 to 1996. Net income increased from $7.8 million
in 1995 to $8.8 million during 1996.
Liquidity and Capital Resources
The Company's primary sources of liquidity are funds provided by
operations and borrowings under various credit arrangements with financial
institutions. Net cash provided by operating activities totaled $33.8 million
for the year ended December 31, 1997, versus $22.3 million for the same period
in 1996. Cash used in financing activities totaled $1.5 million for the year
ended December 31, 1997, compared to $0.1 million during the comparable period
in 1996. This difference was due to an increase in net principal payments in
1997 over 1996. The increase in principal payments was the result of the
increased cash provided by operations.
16
Capital was used primarily to acquire additional revenue equipment to
expand the Company's operations. Capital expenditures for the year ended
December 31, 1997, were $35.1 million compared to $20.6 million in 1996.
Since November 1994, the company has maintained a $50 million unsecured
revolving credit facility with a group of banks maturing in May 2000.
In February, 1996 the Company closed on a $25,000,000 10-year fixed
rate private placement of debt which was used to pay down its unsecured
revolving credit facility.
In June, 1997 the Company completed a CDN $23.5 million credit facility
on behalf of Levy.
The Company's management believes that the available borrowings under
the loan agreement together with available cash and internally generated funds
will be sufficient to fund the Company's growth and meet its working capital
requirements for the foreseeable future.
Seasonality
The business of the Company is subject to some seasonality with
revenues generally declining during winter months and over holidays. Highway
transportation can be adversely affected depending upon the severity of the
weather in the various sections of the country during the winter months. The
Company's operating expenses also have been historically higher in the winter
months, due primarily to decreased fuel efficiency and increased maintenance
costs of revenue equipment in colder months.
Item 8. Financial Statements and Supplementary Data
(a) Financial statements and exhibits filed under this item are listed
in the index appearing in Item 14 of this report.
(b) Quarterly financial information (in thousands except per share
amounts).
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
1997
Operating revenues.......... $67,384 $71,805 $73,944 $72,914
Operating income............ 4,687 5,516 5,734 5,156
Income before taxes......... 3,960 4,707 4,943 4,270
Net income.................. 2,334 2,755 2,928 2,466
Diluted net income per share. .50 .59 .62 .52
1996
Operating revenues.......... $51,020 $58,804 $62,987 $62,788
Operating income............ 4,162 4,719 5,102 4,237
Income before taxes......... 3,426 3,903 4,137 3,474
Net income.................. 2,036 2,288 2,445 2,068
Diluted Net income per share. .45 .50 .53 .45
1995
Operating revenues.......... $45,630 $48,671 $47,871 $47,882
Operating income............ 3,931 4,312 4,371 3,888
Income before taxes......... 3,114 3,420 3,496 3,180
Net income.................. 1,840 2,036 2,048 1,878
Diluted Net income per share. .41 .45 .45 .41
17
Item 9. Disagreements on Accounting and Financial Disclosures
None
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information regarding the directors and
executive officers of the Company:
Name Age Position with the Company
Charles J. O'Brien, Jr. 60 Director, President and
Chief Executive Officer
Elton E. "Buzz" Babbitt 66 Chairman of the Board of
Directors
Richard J. Brandewie 43 Sr. Vice President,
Treasurer, and Chief
Financial Officer
Donald W. Burton (1)(2) 54 Director
John B. Bowron (1)(2) 61 Director
Gerald McCullough (1)(2) 55 Director
- --------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
The directors hold office until the next annual meeting of shareholders or until
their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors.
CHARLES J. O'BRIEN, JR. joined the Company in 1989 in connection with
the acquisition of Quality at which time he was appointed as the Chief Operating
Officer and elected to the Board of Directors. Since 1991 he has served as the
Company's Chief Executive Officer. He was President, CEO and controlling
shareholder of Quality Carriers, Inc. from January 1977 to February 1989. Prior
to his association with Quality Carriers, Inc., he held various positions with
Matlack, Inc. from April 1962 through December 1976. He served as Matlack's
Chief Executive Officer from 1969 to 1976 and served as a director of Rollins
International, Inc., Matlack's parent company.
ELTON E. BABBITT has served as Chairman of the Board of Directors of
the Company since June 1987. From 1967 until 1987, he served as a director and
as President and Chief Executive Officer of the Company. Prior to his
association with the Company, he served as General Manager of MILK Transport, a
Minnesota-based tank truck carrier.
RICHARD J. BRANDEWIE has been employed by the Company since June 1992
as Vice President of Finance, Treasurer and Chief Financial Officer. He served
as a director of the Company from 1988 to 1992. Prior to joining the Company, he
served as a General Partner of South Atlantic Venture Fund I & II, Limited
Partnerships where he was employed from November 1985 through June 1992. From
June 1980 through November 1985, he served concurrently as Vice President of
Doan Resources Venture Fund and as General Partner of Michigan Investment Fund
and MBW Venture Partners. Prior to his venture capital experience, he served as
an accountant and financial analyst for the Ford Motor Company from 1977 to
1979.
DONALD W. BURTON is President of South Atlantic Capital Corporation and
18
Managing General Partner of the General partner of South Atlantic Venture Fund,
Limited Partnership, South Atlantic Venture Fund II, Limited Partnership and
South Atlantic Venture Fund III, Limited Partnership. Mr. Burton is also a
director of The Heritage Group of Mutual Funds. He has been a director of the
Company since 1992.
GERALD L. MCCULLOUGH has been President of GLM Financial Group since
1978. GLM is a provider of tax, accounting and planning services for individuals
and companies engaged in the trucking industry.
JOHN B. BOWRON has been Senior Vice President of Landstar Systems, Inc.
("Landstar"), a trucking company, since 1993 and is currently a director of such
company. From 1988 to 1993 he served in various executive capacities with
subsidiaries of Landstar. From 1987-1988 he was group Vice President of
Truckload Transportation for I.U. International Corporation.
The members of the Compensation Committee are Donald W. Burton, Gerald
L. McCullough and John B. Bowron. The Compensation Committee approves standards
for setting compensation levels for Company executives and grants the specific
awards made under the Company's executive incentive compensation plans. It also
reviews senior management performance and development programs.
The members of the Audit Committee are Donald W. Burton, Gerald L.
McCullough, and John B. Bowron. The Audit Committee represents the Board in
discharging its responsibilities relating to the accounting, reporting and
financial control practices of the company and its subsidiaries. The Committee
has general responsibility for surveillance of financial controls, as well as
for accounting and audit activities of the Company and its subsidiaries. The
Committee annually reviews the qualifications of the independent certified
public accountants, makes recommendations to the Board as to their selection,
reviews the scope, fees and results of their audit and approves their non-audit
services and related fees.
Item 11. Management Remuneration and Transactions
Executive Compensation
The following table sets forth the total compensation paid or accrued
by the Company for services rendered during the years ended December 31, 1997,
1996, 1995, by the Chief Executive Officer of the Company and each of the other
most highly compensated executive officers of the Company whose total cash
compensation for the year ended December 31, 1997 exceeded $100,000.
Summary Compensation Table
Long-Term
Compensation
Securities
Name and Principal Annual Compensation All Other Underlying
Position Year Salary Bonus Comp. (1) Options
- ------------------ ---- ------ ----- --------- ------------
Charles J. O'Brien, Jr. 1997 193,937 74,446 8,696 --
President 1996 188,262 71,362 9,913 --
1995 183,074 64,214 11,136 --
Elton E. Babbitt 1997 188,353 71,335 3,946 --
Chairman of the Board 1996 182,885 71,093 4,112 --
1995 177,749 64,184 5,180 --
Richard J. Brandewie 1997 145,402 55,332 8,696 --
Senior Vice-President 1996 122,489 44,187 9,913 100,000
1995 112,846 40,755 11,146 --
19
(1) Amount shown represents contributions by the Company to the Company's
Profit Sharing Plan on behalf of such officers. See "Profit Sharing
Plan."
On February 23, 1989, the Company entered into a five year employment
agreement with Mr. O'Brien, subject to automatic one year renewals
unless otherwise terminated. The agreement provides for an initial base
salary of $150,000 per year plus a bonus or bonuses as determined by
the Board of Directors. The agreement further provides Mr. O'Brien with
fringe benefits including a split-dollar life insurance policy in the
face amount of $500,000, long term disability coverage, health, life
and accident insurance and an automobile expense allowance. The
agreement had been automatically extended.
Director's Compensation
Directors who are not employees of the Company receive a $1,000
attendance fee for each meeting plus reimbursement for out-of-pocket expenses.
In addition, the Company has authorized the issuance to each non-employee board
member annually, shares of Common Stock having a market value of $10,000.
Option Grants in Last Fiscal Year
No options were granted in 1997.
Year-End Option Values
Value of Unexercised
Number of Unexercised In-the-Money Option
Option at Year-End at Year-End
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Charles J. O'Brien, Jr. 17,244 11,496 $ 176,751 $117,834
Richard J. Brandewie 78,619 85,746 $1,178,345 $618,897
The Company has an incentive compensation plan for all full time
employees. Each year the Company establishes certain goals which include
revenues, operating ratio, profit before taxes and other financial goals.
Additionally, three (3) to five (5) specific goals are mutually agreed upon
by each individual employee and executive management. A maximum bonus amount is
established for each employee based on a percentage of such employee's base
salary. If both the Company's goals and the employee goals are achieved, the
maximum percent amount is paid to the employee as incentive compensation. If all
goals are not attained, the pay out is reduced accordingly. If the Company fails
to achieve its overall goals, likewise, incentive compensation is reduced.
During 1997 bonuses of approximately $1,200,000 were earned by employees, but
not paid to them until 1998. The Plan is administered by the Compensation
Committee.
Stock Option Plan
In 1996 the Board of Directors amended the Company's Stock Option Plan
(the "Plan") to increase the number of shares covered thereby from 300,000 to
700,000. Such amendment was subject to shareholder approval. See "Amendment to
1994 Incentive and Non-Statutory Stock Option Plan." The Plan is designed as a
means to retain and motivate key employees. The outside Directors administer and
interpret the Plan. Options may be granted to all eligible employees of
20
the Company, including officers and non-employee directors, and others who
perform services for the Company. As of December 31, 1997, there were 537,178
shares underlying unexercised options granted under the Plan, 34,191 options
have been exercised, leaving 128,631 shares available for future grant.
The Plan provides for the granting of both incentive stock options (as
defined in Section 422 of the Internal Revenue Code) and nonqualified stock
options. Options are granted under the Plan on such terms and at such prices as
determined by the Board of Directors, except that the per share exercise price
of incentive stock options cannot be less than the fair market value of the
Common Stock on the date of grant. Each option is exercisable after the period
or periods specified in the option agreement, but no option may be exercisable
after the expiration of ten years from the date of the grant. Options granted
under the Plan are not transferable other than by will or by the laws of descent
and distribution.
Profit Sharing Plan
The Company maintains a Profit Sharing Plan which is intended to be a
tax-qualified defined contribution plan under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). The Profit Sharing Plan includes
a "401(k)" arrangement pursuant to which participants may contribute, subject to
certain Code limitations, a percentage of their salary on a pre-tax basis.
Subject to certain Code limitations, the Company may make a contribution
matching contributions of participants at a rate determined by the Board of
Directors of the Company each year. The Company may also make an additional
contribution to the Profit Sharing Plan each year at the discretion of the Board
of Directors. The Board of Directors approved the contribution by the Company of
$300,000 to the Profit Sharing Plan and $218,226 to the 401(k) Plan for 1997. In
general, all full-time employees of the Company who have completed one year of
service and have attained age 21 are eligible to participate.
A separate account is maintained for each participant in the Profit
Sharing Plan. The portion of a participant's account attributable to his own
contributions is always 100% vested. The portion of the account attributable to
Company contributions vests at a rate of 20% per year commencing with the second
year of service. Distributions from the Profit Sharing Plan are generally
payable to a participant following his termination of employment.
Compensation Committee Report on Executive Compensation
Introduction
Under rules of the Commission, the Company is required to provide
certain information concerning compensation provided to the Company's Chairman
and Chief Executive Officer and certain other executive officers. The disclosure
requirements for the executive officers include the use of tables and a report
of the Committee responsible for compensation decisions for the named executive
officers, explaining the rationale and considerations that led to those
compensation decisions. Therefore, the Compensation Committee of the Board of
Directors has prepared the following report for inclusion in this filing.
Compensation Committee Role
The Compensation Committee of the Board of Directors is responsible for
making recommendations to the Board of Directors concerning the salaries of
Executive Officers. The Committee is also responsible for overseeing other forms
of compensation and benefits to other senior officers. The Committee's
responsibilities include the review of salaries, benefits and other compensation
of senior officers and making recommendations to the full Board of Directors
with respect to these matters.
21
Compensation Philosophy
The compensation philosophy for Executive Officers conforms to the
compensation philosophy of the Company generally for all employees. The
Company's compensation is designed to:
- - provide compensation comparable to that offered by companies with
similar businesses, allowing the Company to successfully attract and
retain the employees necessary to its long-term success;
- - provide compensation which relates to the performance of the individual
and differentiates based upon individual performance;
- - provide incentive compensation that varies directly with both Company
performance and individual contribution to that performance; and
- - provide an appropriate linkage between compensation and the creation of
shareholder value through awards tied to the Company's performance and
through facilitating employee stock ownership.
Executive Officers' Compensation Program
The Company's Executive Officers' compensation program is comprised of
base salary, annual incentive bonus plan compensation and long-term incentive
compensation in the form of stock options. In addition, the Company's Executive
Officers receive various other benefits, including medical benefits,
participation in an employee stock ownership plan and a retirement savings plan,
which are all generally available to all employees of the Company.
Base Salary
The Compensation Committee reviewed the salaries of the Executive
Officers of the Company November 20, 1997. The Committee made salary
decisions about the Executive Officers based upon a variety of considerations in
conformance with the compensation philosophy stated above. First, salaries are
competitively set relative to companies in the trucking industry. Second, the
Committee considered the performance of the individual Executive Officer with
respect to the areas under his or her responsibility, including an assessment of
the value of each to the Company. Third, internal equity among employees was
factored into the decision. Finally, the Compensation Committee considered the
Company's financial performance and its ability to absorb any increases in
salaries.
Based upon the overall success of the Company and his significant
contributions to its success, the Committee set the base salary of its Chief
Executive Officer, Charles J. O'Brien, Jr., within the middle range of published
data available from American Trucking Association. The Compensation Committee
established targets for the annual base salary and cash bonus awards for Mr.
O'Brien based upon his responsibilities with consideration to the revenue size,
profitability level, and other factors compared to chief executive officers of
companies within the tank truck segment of the trucking industry. The Committee
split such targeted annual earnings between base salary and cash bonus awards
with Mr. O'Brien having the opportunity to earn up to 42% of his base salary
based on achieving certain quantitative objectives, primarily revenue growth,
operating profit levels and earnings per share. The other four of the highest
compensated officers of the Company were compensated in a similar manner, with
the proportion of total compensation based on a cash bonus award varying with
the individual.
Incentive Bonus Plan
Each executive officer, including the Chief Executive Officer, is
eligible
22
to receive an annual cash bonus award. These cash bonuses generally are paid
pursuant to a Goal Oriented Compensation Achievement Plan established during the
year. Each year the Company establishes certain goals which include revenues,
operating ratio, profit before taxes and other financial goals. Additionally,
three to five (3-5) specific goals are mutually agreed upon by each executive
and the Company. A maximum bonus is established for each executive based on a
percentage of the executive's base salary. If both the Company's goals and the
executive's goals are achieved, the maximum percent amount is paid to the
executive as incentive compensation. If all goals are not met, the payout is
reduced accordingly. If the Company fails to achieve its overall goals,
likewise, incentive compensation is reduced.
Stock Option Awards
The Company maintains Stock Option Plans which are designed to align
Executive Officers' and shareholders' interests in the enhancement of
shareholder value. Stock options are granted under these plans by the
disinterested members of the Board. Executive Officers are eligible to receive
options under these plans. The Compensation Committee strongly believes that the
interests of shareholders and executives become more closely aligned when such
executives are provided an opportunity to acquire a proprietary interest in the
Company through ownership of the Company's Common Stock. Accordingly, key
employees of the Company, including Executive Officers, as part of their overall
compensation package, are eligible for participation in the Company's Stock
Option Plans, whereby they are granted at no less than fair market value on the
date of grant. Because no benefit is received unless the Company's stock price
performs favorably, awards under Stock Option Plans are intended to provide
incentives for Executive Officers to enhance long-term Company performance, as
reflected in stock price appreciation, thereby increasing shareholder value. The
amount of the grants are principally based on overall consolidated results of
the Company, achievement of Company objectives, individual performance,
including managerial effectiveness, initiative and team work, and are in such
amounts that reflect what the Committee believes are necessary to attract,
retain and motivate senior management and other key employees. The Compensation
Committee believes that stock option awards are rewards for past growth and the
incentive for continued growth.
Compensation Committee
Donald W. Burton
John B. Bowron
Gerald McCullough
Date: March 12, 1998
The report of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
this statement into filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934 (together, the "Acts"), except to the extent
that the Company specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such Acts.
Stock Price Performance Graph
The following graph presents a comparison of the cumulative total
shareholders' return on the Company's Common Stock with the Nasdaq Stock Market
(U.S.) Index and the CRSP Trucking and Transportation Index since the Company's
initial public offering which was consummated on June 17, 1994. This graph
assumes that $100 was invested on June 17, 1994, the date of the Company's
23
initial public offering, in the Company's Common Stock and in the other indices,
and that all dividends were reinvested. The stock price performance shown below
is not necessarily indicative of future price performance.
06/17/94 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- --------
MTL INC. $100.00 $ 75.00 $ 93.29 $134.96 $168.29
Nasdaq Stock Market (U.S.) Index $100.00 105.05 148.57 182.73 224.24
CRSP Trucking and Trans. Index $100.00 96.10 112.06 123.84 158.41
The stock price performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this statement
into any filing under the Acts, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under the Acts.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item 12 is hereby incorporated by
reference to page 43 of the Company's definitive proxy statement regarding the
1998 Special Shareholder's Meeting filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which proxy statement is anticipated to be filed within
120 days after the end of the Company's fiscal year ended December 31, 1997.
Item 13. Certain Relationships and Related Transactions
A company owned by the children of Elton Babbitt, the Company's
Chairman of the Board (the "Related Corporation") entered into service agreement
with the Company, pursuant to which the related Corporation agreed to supply
design, engineering, transloading, intermodal and other services to the Company
for a monthly fee of $11,670 per month. Because of their specialized nature,
these are services the Company would be unable to provide to its customers on
its own. The agreement expires on April 1, 1998, and is automatically renewable
for one year terms unless canceled by either party. Management believes that the
terms of this service agreement are no less favorable than could be obtained
from unaffiliated parties.
During 1997, the Company purchased $6.6 million worth of trailer
equipment from the Related Corporation. The Related Corporation performed repair
and maintenance services for the Company totaling $347,000 during 1997.
Management believes that the purchase price for the trailers and cost of the
repair services are no greater than those charged by the Related Parties to
non-affiliated purchasers and users.
In addition to the purchase of trailers and repair work, the Company
and the Related Corporation have engaged in various transactions involving (1)
tire purchases and (2) facility rentals. Because of its ability to buy tires in
volume, the Company included in its purchase orders tires on behalf of the
Related Corporation. The Related Corporation leases a manufacturing and repair
facility from the Company for a monthly rental of $5,000. The lease expires
April 1, 1999. As a result of these transactions, during the year ended December
31, 1997, the amount owned to the Company by the Related Corporation ranged from
high of $82,540 in February to a low of $0 in December. At December 31, 1997,
there were no amounts owed to the Company by the Related Corporation.
In March 1994, the Company entered into a Limited Partnership with Mr.
Gordon Babbitt and two unaffiliated corporations. The purpose of the Limited
Partnership is to provide transportation services for bulk liquid commodities
between Florida and Puerto Rico. The Company, Mr. Gordon Babbitt and an
unaffiliated corporation have each contributed $4,950 to the Limited
24
Partnership for a 33% partnership interest. Another corporation owned by an
individual employed by the Related Corporation holds the remaining 1%
partnership interest and acts as the general partner. The three limited partners
financed, on a loan basis, $ 1,675,000 of the initial operations of the Limited
Partnership. The Company financed up to $800,000 of the $1,675,000 with cash or
equipment. Such amount financed by the Company, in excess of the amounts
financed by the other limited partners, was secured by the equipment owned by
the Limited Partnership and guaranteed by the other limited partners.
Distributions to the partners are made in accordance with their ownership
interest in the Limited Partnership once all loans have been repaid to the
limited partners. As of December 31, 1997 all debt was repaid to the Company by
the Limited partnership.
A corporation owned by Mr. Charles J. O'Brien, III, son of Charles J.
O'Brien, Jr., President and Chief Executive Officer of the Company is an
Affiliate operating terminals. The terms of the agreement with this corporation
are the same as those entered into with other Affiliates. Additionally, Mr.
O'Brien, III, owns a company which provided administrative services to the
Company. The total paid for such administrative services in 1997 was $113,820.
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements
(b) Financial Statements Schedules
None
(c) Exhibits
2 Agreement and Plan of Merger filed as Annex A with
Preliminary Proxy Statement dated March 3, 1998
3(a) Articles of Incorporation incorporated herein by
reference to Exhibit 4.10, Annex A to the Company's Registration Statement filed
with the Securities and Exchange Commission on June 16, 1994, Registration
Statement No. 33-78636.
3(b) By Laws of the Corporation incorporated herein by
reference to Exhibit 4.10, Annex B to the Company's Registration Statement filed
with the Securities and Exchange Commission on June 16, 1994, Registration
Statement No. 33-78636.
10(a) Line of Credit with Sun Bank is incorporated herein by
reference to Exhibit 10(b) to the Company's form 10(K) dated March 20, 1996.
10(b) Amendment to Line of Credit with Sun Bank is
incorporated herein by reference to Exhibit 10(a) to the Company's form 10(K)
dated March 20, 1996.
10(c) Note Purchase Agreement is incorporated herein by
reference to Exhibit 10(c) to the Company's form 10(K) dated March 20, 1996.
10(d) Copy of Levy Share Purchase Agreement is incorporated
herein by reference to Exhibits 2 through 2.4 to the Company's Form 8-K dated
June 11, 1996.
11 Statement Regarding Computation of Per Share Earnings
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule (for SEC use only)
(d) Reports on Form 8-K
Reference is made to Form 8-K dated February 25, 1998
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
/s/ Charles J. O'Brien, Jr.
---------------------------------------
Charles J. O'Brien, Jr.
Principal Executive Officer
/s/ Richard J. Brandewie
---------------------------------------
Richard J. Brandewie, Principal
Financial and Accounting Officer
Date: March 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Charles J. O'Brien, Jr. Director March 18, 1998
- ------------------------------
Charles J. O'Brien, Jr.
/s/ Elton E. Babbitt
- ------------------------------
Elton E. Babbitt Director March 18, 1998
- ------------------------------
Donald W. Burton Director March 18, 1998
- ------------------------------
John B. Bowron Director March 18, 1998
/s/ Gerald L. McCullough
- ------------------------------
Gerald L. McCullough Director March 18, 1998
26
Exhibit (a)
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of MTL Inc.:
We have audited the accompanying consolidated balance sheets of MTL Inc. (a
Florida corporation) and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MTL Inc. and subsidiaries as of
December 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida,
February 27, 1998
27
MTL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
ASSETS 1996 1997
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 694,851 $ 1,377,228
Accounts receivable, net 32,495,711 38,171,957
Current maturities of other receivables 1,061,941 1,163,357
Notes receivable 500,646 547,213
Inventories 877,682 957,824
Prepaid expenses 3,399,914 2,822,343
Prepaid tires 3,888,284 4,323,783
Deferred tax assets 2,748,163 2,685,597
Other 121,057 126,560
------------- -------------
Total current assets 45,788,249 52,175,862
------------- -------------
PROPERTY AND EQUIPMENT:
Land and improvements 4,734,133 4,808,938
Buildings and improvements 12,284,784 12,457,662
Revenue equipment 152,883,747 182,407,304
Terminal equipment 5,992,691 5,874,647
Furniture and fixtures 3,609,241 4,607,966
Other equipment 1,697,725 1,373,406
------------- -------------
181,202,321 211,529,923
Less- Accumulated depreciation and amortization (60,299,204) (75,019,546)
------------- -------------
Property and equipment, net 120,903,117 136,510,377
OTHER RECEIVABLES, less current maturities 3,284,918 1,986,908
GOODWILL 2,433,751 2,003,473
OTHER ASSETS 1,194,235 1,359,761
------------- -------------
$ 173,604,270 $ 194,036,381
============= =============
28
MTL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
December 31
---------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
------------- -------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 10,656,972 $ 15,201,239
Affiliates and independent owner-operators payable 4,547,431 6,431,565
Current maturities of long-term debt 1,611,249 1,805,775
Current maturities of obligations under capital leases 2,612,793 501,086
Accrued loss and damage claims 3,798,808 4,906,049
Income taxes payable 151,958 798,292
------------- -------------
Total current liabilities 23,379,211 29,644,006
LONG-TERM DEBT, less current maturities 51,700,591 52,433,465
OBLIGATIONS UNDER CAPITAL LEASES, less current maturities 1,404,489 357,732
ACCRUED LOSS AND DAMAGE CLAIMS 4,528,354 5,064,843
DEFERRED INCOME TAXES 23,678,302 27,004,040
------------- -------------
Total liabilities 104,690,947 114,504,086
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $.01 par value; 15,000,000 shares authorized, 4,523,739 and
4,549,824 shares issued and outstanding in 1996 and 1997,
respectively 45,237 45,498
Additional paid-in capital 30,139,529 30,459,139
Retained earnings 38,757,270 49,240,633
Cumulative translation adjustment (28,713) (212,975)
------------- -------------
Total stockholders' equity 68,913,323 79,532,295
------------- -------------
$ 173,604,270 $ 194,036,381
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
29
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
-----------------------------------------------------
1995 1996 1997
------------- ------------- -------------
OPERATING REVENUES:
Transportation $ 173,059,635 $ 217,811,945 $ 266,369,170
Other 16,994,611 17,787,254 19,677,955
------------- ------------- -------------
Total operating revenues 190,054,246 235,599,199 286,047,125
------------- ------------- -------------
OPERATING EXPENSES:
Purchased transportation 120,011,387 145,895,456 178,116,479
Compensation 20,099,486 26,200,723 31,566,260
Fuel, supplies and maintenance 12,171,649 17,956,982 20,391,935
Depreciation and amortization 10,155,676 13,892,344 17,335,121
Selling and administrative 5,203,918 6,014,696 7,421,177
Insurance and claims 3,280,962 4,365,953 6,455,248
Taxes and licenses 1,629,642 1,655,274 1,899,734
Communication and utilities 1,149,114 1,378,103 1,805,324
(Gain) loss on sale of property and equipment (149,507) 19,703 (37,047)
------------- ------------- -------------
Total operating expenses 173,552,327 217,379,234 264,954,231
------------- ------------- -------------
Net operating income 16,501,919 18,219,965 21,092,894
INTEREST EXPENSE, net (3,467,594) (3,494,476) (3,174,826)
OTHER INCOME (EXPENSE) 175,463 214,820 (38,482)
------------- ------------- -------------
Income before provision for income taxes 13,209,788 14,940,309 17,879,586
PROVISION FOR INCOME TAXES (5,408,130) (6,103,602) (7,396,223)
------------- ------------- -------------
NET INCOME $ 7,801,658 $ 8,836,707 $ 10,483,363
============= ============= =============
PER SHARE DATA:
Net income - basic $ 1.73 $ 1.95 $ 2.31
Net income - diluted $ 1.72 $ 1.92 $ 2.23
Weighted average number of common shares - basic 4,516,153 4,520,917 4,536,097
Weighted average number of common and common
equivalent shares - diluted 4,542,709 4,600,267 4,711,301
The accompanying notes are an integral part of these consolidated statements.
30
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common Additional Cumulative Total
Stock Stock Paid-in Retained Translation Stockholders'
(Shares) (Amount) Capital Earnings Adjustment Equity
------------ ------------ ------------ ------------ ------------ -------------
BALANCE, December 31, 1994 4,515,733 $ 45,157 $ 30,082,520 $ 22,118,905 $ -- $ 52,246,582
Issuance of common stock 1,500 15 9,360 -- -- 9,375
Net income -- -- -- 7,801,658 -- 7,801,658
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 4,517,233 45,172 30,091,880 29,920,563 -- 60,057,615
Issuance of common stock 6,506 65 47,649 -- -- 47,714
Net income -- -- -- 8,836,707 -- 8,836,707
Translation adjustment -- -- -- -- (28,713) (28,713)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 4,523,739 45,237 30,139,529 38,757,270 (28,713) 68,913,323
Issuance of common stock 26,085 261 319,610 -- -- 319,871
Net income -- -- -- 10,483,363 -- 10,483,363
Translation adjustment -- -- -- -- (184,262) (184,262)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 4,549,824 $ 45,498 $ 30,459,139 $ 49,240,633 $ (212,975) $ 79,532,295
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
31
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------------------
1995 1996 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,801,658 $ 8,836,707 $ 10,483,363
Adjustments to reconcile to net cash and cash
equivalents provided by operating activities-
Deferred income taxes 2,889,448 3,322,268 3,388,304
Depreciation and amortization 10,155,676 13,892,344 17,335,121
Equity in income from investments (144,534) (138,355) (49,386)
(Gain) loss on sale of property and equipment (149,507) 19,703 (37,047)
Changes in assets and liabilities-
Increase in accounts and notes receivable (3,096,169) (4,629,023) (6,037,660)
Increase in inventories (61,907) (211,249) (92,562)
Decrease (increase) in prepaid expenses 985,552 (1,385,551) 550,293
Decrease (increase) decrease in prepaid tires 15,766 (249,851) (376,581)
(Increase) decrease in other assets (238,572) (399,210) 310,581
Increase in accounts payable and accrued expenses 1,005,952 313,873 4,798,875
Increase in affiliates and independent
owner-operators payable 533,827 1,500,020 1,330,506
(Decrease) increase in accrued loss and damage claims (815,797) 844,803 1,643,730
(Decrease) increase in current income taxes (791,148) 587,516 584,671
------------ ------------ ------------
Net cash and cash equivalents provided by
operating activities 18,090,245 22,303,995 33,832,208
------------ ------------ ------------
32
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31,
--------------------------------------------------
1995 1996 1997
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (32,099,300) (20,576,543) (35,120,876)
Investment in Levy Transport, Ltd., net of cash received -- (4,725,502) --
Payments received on other receivables -- 1,025,614 1,196,594
Repayment of loan to barge tank operation 209,240 262,930 93,263
Proceeds from sales of property and equipment 1,801,219 2,233,213 2,140,861
------------ ------------ ------------
Net cash and cash equivalents used in
investing activities (30,088,841) (21,780,288) (31,690,158)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of lease receivables 3,282,030 1,181,245 --
Proceeds from issuance of long-term debt, less prepayments 19,243,370 35,043,936 3,975,841
Principal payments on long-term debt, less borrowings (5,549,645) (30,722,218) (2,713,897)
Principal payments on obligations under capital leases (5,387,921) (5,685,264) (3,453,557)
Issuance of common stock 9,375 47,714 319,871
Borrowings under capital lease -- -- 368,793
------------ ------------ ------------
Net cash and cash equivalents provided by (used in)
financing activities 11,597,209 (134,587) (1,502,949)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (401,387) 389,120 639,101
TRANSLATION ADJUSTMENT -- (16,377) 43,390
CASH AND CASH EQUIVALENTS, beginning of year 723,495 322,108 694,851
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 322,108 $ 694,851 $ 1,377,342
============ ============ ============
33
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31,
--------------------------------------------
1995 1996 1997
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $3,305,606 $3,912,421 $4,042,866
Income taxes $3,309,830 $2,308,061 $3,248,839
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Note payable issued for purchase of Levy Transport, Ltd. $ -- $ 365,898 $ --
Receivable from revenue equipment leased under a capital lease $6,482,752 $1,806,921 $ --
Revenue equipment acquired by capital lease $ -- $ -- $ 368,793
The accompanying notes are an integral part of these consolidated statements.
34
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
MTL Inc. and subsidiaries (the Company) is engaged primarily in truckload
transportation of bulk liquids in North America. The Company conducts a large
portion of its business through a network of affiliates and independent
owner-operators. Affiliates are independent corporations, which enter into
renewable one-year contracts with the Company. Affiliates are responsible for
paying for their own equipment (including debt service), fuel and other
operating costs. Independent owner-operators are independent contractors, which,
through a contract with the Company, supply one or more tractors and drivers for
the Company's use. Contracts with independent owner-operators may be terminated
by either party on short notice. The Company also charges affiliates and third
parties for the use of revenue equipment as necessary. In exchange for the
services rendered, affiliates and independent owner-operators are generally paid
85 percent and 63 percent, respectively, of the revenues generated for each load
hauled.
PURCHASE OF LEVY TRANSPORT, LTD.
On June 11, 1996, the Company acquired all the outstanding stock of Levy
Transport, Ltd. (Levy), a Quebec-based tank truck carrier servicing the
chemical, petroleum and glass industries, from Les Placements Marlin, Ltd for
$5,148,745. The purchase price was determined based upon the fair market value
of the net assets acquired. The transaction was accounted for as a purchase
effective May 1, 1996, the date when control of Levy was transferred to the
Company. Goodwill in the amount of $1,616,000 was recorded as a result of the
acquisition. The Company is amortizing the goodwill over 15 years on a
straight-line basis.
PRINCIPLES OF CONSOLIDATION AND PREPARATION
The consolidated financial statements include the accounts of MTL Inc. and its
wholly-owned subsidiaries, Montgomery, Quality Carriers, Inc., Lakeshore
Leasing, Inc., MTL de Mexico and, beginning May 1, 1996, Levy. All significant
intercompany accounts and transactions have been eliminated in consolidation.
35
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of tires, parts, materials and supplies for
servicing the Company's revenue equipment.
PREPAID TIRES
The cost of tires purchased with new equipment, as well as replacement tires,
are accounted for as prepaid tires and amortized on a straight-line basis over
their estimated useful lives, which approximate one year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Revenue equipment under capital
leases is stated at the present value of the minimum lease payments at the
inception of the lease. Depreciation, including amortization of revenue
equipment under capital leases, is computed on a straight-line basis over the
estimated useful lives of the assets or the lease terms, whichever is shorter.
The estimated useful lives are 10-25 years for buildings and improvements, 5-15
years for revenue equipment, 7 years for terminal equipment, 3-5 years for
furniture and fixtures, and 5-10 years for other equipment. Maintenance and
repairs are charged to operating expense when incurred. Major improvements,
which extend the lives of the assets, are capitalized. When assets are disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and any gains or losses are reflected in operating expenses.
-2-
36
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets
acquired and is being amortized on a straight-line basis over its estimated
useful life which ranges from 15 to 40 years. Accumulated amortization was
$313,949 and $419,589 at December 31, 1996 and 1997, respectively. At each
balance sheet date, the Company evaluates the realizability of goodwill based
upon expectations of non-discounted cash flows and operating income. Based on
the most recent analysis, the Company believes no material impairment exists at
December 31, 1997.
OTHER ASSETS
Other assets consist primarily of an investment in a barge tank operation and
deferred loan costs. The Company is a one-third partner in the barge tank
operation, and one of the other partners is a shareholder of the Company. The
partnership was organized to transport bulk liquids by barge tank from Florida
to Puerto Rico. The Company's investment in the partnership is accounted for
using the equity method. The Company's investment, including loans made (net of
loan repayments) to the partnership, was $447,198 and $475,323 as of December
31, 1996 and 1997, respectively.
Deferred loan costs are being amortized over two to five years, the estimated
lives of the related long-term debt.
ACCRUED LOSS AND DAMAGE CLAIMS
The Company retains liability up to $75,000 per health claim and is self-insured
for cargo claims. For automotive liability, the Company has deductibles ranging
from $150,000 to $500,000 per occurrence. Prior to September 1994, the Company
retained liability for workers' compensation of up to $250,000 per occurrence.
Subsequent to this date, all workers' compensation claims are fully insured. The
Company has accrued for the estimated cost of open claims based upon losses and
claims reported and an estimate of losses incurred but not reported.
-3-
37
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The Company transports chemicals and hazardous materials and operates tank wash
facilities. As such, the Company's operations are subject to various
environmental laws and regulations. The Company has been involved in various
litigation and environmental matters arising from these operations. The Company
is currently designated a potentially responsible party (PRP) at six
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA) sites. The involved activities occurred in prior years and resulted
primarily from the transportation of waste or the cleaning of tank trailers at
third-party facilities. Although CERCLA liability is joint and several, in the
opinion of management, the Company has reviewed the financial stability of the
other PRPs and does not believe that its ultimate liability will be materially
affected by any financial uncertainties with respect thereto. In addition, at
five of the CERCLA sites, the Company is one of many (in most instances, one of
several hundred) PRP's named. Accordingly, based on the Company's historical
experience and available facts, in the opinion of management, a material
liability with respect to remediation of disposal sites to which the Company may
have delivered hazardous materials is not expected. Reserves have been
recognized for probable losses which can be estimated. There have been no
material changes in the recognized reserves, nor are material changes expected
in the future, based on the Company's activities at each of the locations. It is
the opinion of management that the ultimate disposition of these matters will
not have a material effect on the Company's financial position or results of
operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book value of all financial instruments approximates their fair value. The
fair value of the Company based on the above is not a market valuation of the
Company as a whole.
REVENUE RECOGNITION
Transportation revenues and related costs are recognized on the date freight is
delivered. Other operating revenues, consisting primarily of lease revenues from
affiliates, independent owner-operators and third parties, are recognized as
earned.
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 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.
-4-
38
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency for Levy is Canadian dollars. The translation from
Canadian dollars to U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate in effect during the
period. The gains or losses, net of income taxes, resulting from such
translation are included in stockholders' equity. Gains or losses from foreign
currency transactions are included in other income (expense).
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) released Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130) and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131).
SFAS 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in the financial statements and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the stockholders' equity section of
the consolidated balance sheets.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments.
SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997. The Company has not considered the effects of
SFAS 130 and SFAS 131 on the consolidated financial statements.
EARNING PER SHARE
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earning per Share" (SFAS 128). SFAS 128 establishes new standards for
computing and presenting earnings per share (EPS). Specifically, SFAS 128
replaces the presentation of primary EPS with a presentation of basic EPS,
requires dual presentation of basic and diluted EPS on the face of the income
statement and requires a reconciliation of the basic EPS computation to the
diluted EPS computation.
Basic EPS is calculated as net income divided by the weighted average number of
shares of common stock outstanding.
-5-
39
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Diluted EPS is calculated using the treasury stock method under which net income
is divided by the weighted average number of common and common equivalent shares
outstanding during the year. Common stock equivalents consist of options.
The reconciliation of basic EPS and diluted EPS is as follows:
For the Years Ended December 31,
--------------------------------------------
1995 1996 1997
---------- --------- ---------
Basic weighted average number of common shares
4,516,153 4,520,917 4,536,097
Diluted effect of options outstanding 26,556 79,350 175,204
---------- --------- ---------
Diluted weighted average number of common and
common equivalent shares 4,542,709 4,600,267 4,711,301
2. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following at December 31:
1996 1997
----------- -----------
Trade accounts receivable $29,807,861 $35,538,018
Affiliate and independent owner-operator receivables
3,157,212 2,963,221
Employee receivables 102,317 127,454
Other receivables 825,586 1,523,185
----------- -----------
Total receivables 33,892,976 40,151,878
Less- Allowance for doubtful accounts (1,397,265) (1,979,921)
----------- -----------
Accounts receivable, net $32,495,711 $38,171,957
=========== ===========
The activity in the allowance for doubtful accounts for each of the three years
in the period ended December 31, 1997, is as follows:
1995 1996 1997
---------- ---------- ----------
BALANCE, beginning of period $ 923,055 $1,019,302 $1,397,265
Additions charged to operating expenses 431,769 474,736 1,146,193
Write-off of bad debts (335,522) (96,773) (563,537)
---------- ---------- ----------
BALANCE, end of period $1,019,302 $1,397,265 $1,979,921
========== ========== ==========
-6-
40
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
As of December 31, 1997, approximately 85 percent and 15 percent of trade
accounts receivable were due from companies in the chemical and bulk food
products industries, respectively. No single customer accounted for over 8
percent of the Company's operating revenues. Included in accounts and notes
receivable are $58,807 and $39,680 of receivables as of December 31, 1996 and
1997, respectively, which are due from other companies owned by related parties.
3. OTHER RECEIVABLES:
Other receivables include the minimum lease payments due to the Company from
third parties for revenue equipment leased under capital leases.
Future minimum lease payments are as follows:
YEAR ENDING CAPITAL
DECEMBER 31, LEASES
------------ -----------
1998 $ 1,419,453
1999 1,419,453
2000 741,134
-----------
Total minimum lease payments 3,580,040
Less- Unearned financing income (429,775)
-----------
Present value of minimum capital lease payments 3,150,265
Less- Current maturities of other receivables (1,163,357)
-----------
Other receivables, less current maturities $ 1,986,908
===========
4. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
1996 1997
----------- -----------
Private Placement of Notes Payable
Unsecured private placement of notes payable with a
fixed interest rate of 6.97%. Interest is payable
semi-annually and seven equal principal
payments are to be made annually beginning
January 2000. $25,000,000 $25,000,000
-7-
41
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
1996 1997
------------ ------------
LINES OF CREDIT
Unsecured notes payable under a $50,000,000
revolving line of credit with interest rates of
LIBOR plus an incremental percentage based on
the ratio of funded debt to earnings before
interest, income taxes, depreciation and
amortization (6.56% at December 31, 1997) and
U.S. prime less .25% (8.25% at December 31, 1997).
Interest is payable at varying dates, and all
outstanding principal is due May 31, 2000,
subject to renewal. Letters of credit of $325,224
were issued as of December 31, 1997, and reduce
the borrowings available. Additional advances of
$33,694,106 were available and unused at
December 31, 1997 17,076,535 15,980,670
Unsecured notes payable under a $16,428,971
revolving line of credit with interest rates based
on the ratio of funded debt to earnings before
interest, income taxes, depreciation and
amortization (4.75% at December 31, 1997) and
Canadian lender's prime (6% at December 31, 1997)
Interest is payable at varying dates, and all
outstanding principal is due May 31, 2000,
subject to renewal. Additional advances of
$5,942,394 were available and unused at
December 31, 1997 6,795,292 10,486,577
NOTES SECURED BY REVENUE EQUIPMENT
6.5% to 11.65% fixed rate notes payable,
due in varying monthly installments with
maturity dates through 1999 4,075,183 2,492,351
-8-
42
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
1996 1997
------------ ------------
OTHER NOTES
5% unsecured note payable to employee, due in
annual installments of $69,911 through 2001 364,830 279,642
------------ ------------
53,311,840 54,239,240
Less - Current maturities of long-term debt (1,611,249) (1,805,775)
------------ ------------
Long-term debt, less current maturities $ 51,700,591 $ 52,433,465
============ ============
Under the terms of the Company's debt agreements, the Company is required to
maintain, among other restrictions, minimum net worth levels, debt to net worth
ratios and debt service coverage ratios. In addition, the agreements contain
restrictions on asset dispositions and the payment of dividends. At December 31,
1997, the Company was in compliance with the terms and covenants of its debt
agreements.
Scheduled maturities of long-term debt for the next five years and thereafter
are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -----------
1998 $ 1,805,775
1999 812,300
2000 30,122,683
2001 3,641,340
2002 3,571,429
Thereafter 14,285,713
-----------
$54,239,240
===========
-9-
43
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
5. LEASE COMMITMENTS:
The Company leases revenue and other equipment under operating and capital
leases.
Future minimum lease payments under non-cancelable operating leases and capital
leases at December 31, 1997, are as follows:
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ -------- ----------
1998 $ 539,502 $1,394,394
1999 157,456 185,142
2000 233,422 123,935
2001 -- 49,560
--------- ----------
Total minimum lease payments 930,380 $1,753,031
--------- ==========
Less-Amount representing interest
(at rates ranging from 6.75% to 11.65%) (71,562)
---------
Present value of minimum capital lease payments 858,818
Less-Current maturities of obligations under capital
leases (501,086)
---------
Obligations under capital leases,
less current maturities $ 357,732
=========
The capitalized cost of equipment under capital leases, which is included in
revenue equipment in the accompanying consolidated balance sheets, was as
follows at December 31:
1996 1997
----------- -----------
Revenue equipment $ 6,499,900 $ 1,673,599
Less - Accumulated amortization (2,317,947) (656,816)
----------- -----------
$ 4,181,953 $ 1,016,783
=========== ===========
Rent expense under operating leases was $958,162, $2,209,532 and $2,821,179 for
the years ended December 31, 1995, 1996 and 1997, respectively.
-10-
44
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
6. GUARANTOR OF CERTAIN LEASE OBLIGATIONS:
In 1995 and 1996, the Company entered into capital leases for revenue equipment
with certain affiliates and owner-operators. The Company then sold to a third
party the lease receivables for which it received $2,529,244 and $979,104 in
1995 and 1996, respectively. There were no additional sales during 1997. The
Company is contingently liable as the guarantor for the remaining balance of the
receivables sold of $2,769,801 at December 31, 1997. These leases are
collateralized by the equipment related to these leases. Management estimated
the fair value of this equipment to be $2,384,453 at December 31, 1997, which
was based upon an average dealer-estimated repurchase price.
Also, in 1995 and 1996, the Company entered into capital leases for revenue
equipment with other affiliates. The Company then sold to a third party the
lease receivables for which it received $3,282,030 and $202,141 in 1995 and
1996, respectively. There were no additional sales during 1997. The Company is
contingently liable as the guarantor for the remaining balance of the
receivables sold of $2,321,552 at December 31, 1997. These leases are
collateralized by the equipment related to these leases. Management estimated
the fair value of this equipment to be $1,938,665 at December 31, 1997, which
was based upon an average dealer-estimated repurchase price.
Reserves have been recognized by the Company for its estimated exposure under
the above guarantees. There have been no material changes in the recognized
reserves, nor are material changes expected in the future. It is possible that
the estimates used in determining these reserves and the fair value may change.
However, it is the opinion of management that the ultimate difference in the
estimates will not have a material effect on the Company's financial position or
results of operations.
7. OTHER TRANSACTIONS WITH RELATED PARTIES:
Tank trailer manufacturing facilities are located on property leased to a
stockholder by the Company. The property is under a lease for $5,000 per month
expiring April 1, 1999. The Company purchased tank trailers for $11,675,000,
$5,138,000 and $6,587,000 in 1995, 1996 and 1997, respectively, from the company
and has commitments to purchase additional tank trailers costing approximately
$2,467,000 at of December 31, 1997. Also, the related company provided repair,
maintenance, design, engineering, transloading, intermodal and other services to
the Company totaling $410,000, $572,000 and $347,000 during the years ended
December 31, 1995, 1996 and 1997, respectively.
-11-
45
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
8. INCOME TAXES:
The provision for income taxes consisted of the following for the years ended
December 31:
1995 1996 1997
---------- ---------- ----------
Currently payable:
Federal $1,800,607 $2,006,948 $2,945,692
State 718,075 773,975 1,062,227
2,518,682 2,780,923 4,007,919
---------- ---------- ----------
Deferred taxes:
Federal 2,018,798 2,911,903 2,447,101
State 870,650 410,776 941,203
---------- ---------- ----------
2,889,448 3,322,679 3,388,304
---------- ---------- ----------
Provision for income taxes $5,408,130 $6,103,602 $7,396,223
========== ========== ==========
The net deferred tax liability, which includes no valuation allowances,
consisted of the following at December 31:
1996 1997
------------ ------------
Deferred tax assets:
Reserves for guarantee of lease obligations $ 291,631 $ 245,646
Capital leases treated as operating leases for
tax purposes as lessee 769,004 220,840
Tax credit carryforwards 1,273,755 113,149
Self-insurance reserves 3,144,885 3,865,424
Allowance for doubtful accounts 475,070 618,977
Investment basis difference 206,323 216,855
Accrued vacation pay 144,220 162,395
Other 119,191 174,530
------------ ------------
6,424,079 5,617,816
------------ ------------
Deferred tax liabilities:
Property and equipment basis difference (21,819,799) (23,798,672)
State taxes (3,756,268) (4,562,246)
Capital leases treated as operating leases for
tax purposes as lessor (1,493,368) (1,132,308)
Other (284,783) (443,033)
------------ ------------
(27,354,218) (29,936,259)
------------ ------------
Net deferred tax liability $(20,930,139) $(24,318,443)
============ ============
-12-
46
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The Company's effective tax rates differ from the federal statutory rate of 34
percent. The reasons for those differences are as follows for the years ended
December 31:
1995 1996 1997
----------- ----------- -----------
Tax expense at the statutory rate $ 4,491,328 $ 5,079,705 $ 6,079,059
State income taxes, net of federal benefit 1,048,559 781,936 1,322,264
Other (131,757) 241,961 (5,100)
----------- ----------- -----------
Provision for income taxes $ 5,408,130 $ 6,103,602 $ 7,396,223
=========== =========== ===========
At December 31, 1997, the Company had alternative minimum tax credit
carryforwards of $113,149 (no expiration).
The Company has not provided a valuation allowance for deferred tax assets based
upon the assumption that the Company will achieve sufficient taxable income from
operations in the future.
9. INCENTIVE STOCK OPTION PLAN:
In 1992, an incentive stock option plan (the Old Plan) was adopted which allowed
for 100,000 options to be granted to eligible employees. During 1994, the
Company's Board of Directors elected to adopt a new incentive stock option plan
(the Plan). The Plan absorbed the options granted under the Old Plan, and an
additional 200,000 options were approved for granting at an exercise price not
to be less than the market price of the common stock at the date of grant.
During 1996, an additional 400,000 shares were approved for granting under the
Plan. Options are granted at the discretion of the Board of Directors and are
exercisable for shares of unissued common stock or treasury stock. Options vest
20 percent each year, other than 11,490 options granted in 1994 and 100,000
options granted in 1996, which vested immediately. Substantially all employees,
officers and directors are eligible for participation in the Plan.
-13-
47
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The Company uses Accounting Principles Board Opinion No. 25, "Accounting for
Stock-Based Compensation," and the related interpretations to account for the
Plan. No compensation cost has been recognized under the Plan as the option
price has been greater than or equal to the market price of the common stock on
the applicable measurement date for all options issued. The Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), for disclosure
purposes in 1996. For SFAS 123 purposes, the fair value of each option grant has
been estimated as of the grant date using the Black-Scholes option pricing model
with the following weighted average assumptions: risk free interest rate of 6.18
percent for options with an expected life of four years and 6.39 percent for
options with an expected life of six years, expected option life of four or six
years, expected dividend rate of 0 percent, and expected volatility of 30.05
percent. Using these assumptions, the fair value of stock options granted in
1995 and 1996 are $222,110 and $2,054,875, respectively, which would be
amortized as compensation over the vesting period of the options. No options
were granted during 1997.
Had compensation cost relating to the Plan been determined based upon the fair
value at the grant date for awards under the Plan consistent with the method
described in SFAS 123, the Company's net income and earnings per share would
have been as follows for the years ended December 31,:
1995 1996 1997
------- ------- -------
Net income: As reported (in thousands) $ 7,802 $ 8,837 $10,483
Pro forma (in thousands) 7,725 8,010 10,217
Earnings per share: As reported $ 1.72 $ 1.92 $ 2.23
Pro forma 1.70 1.74 2.17
Because the method of accounting described in SFAS 123 has not been applied to
options granted prior to January 1, 1995, the above may not be representative of
that in future years.
-14-
48
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Combined stock option activity for the Plan for the years ended December 31,
1995, through December 31, 1997, is as follows:
WEIGHTED
NUMBER RANGE OF AVERAGE
OF OPTION EXERCISE SHARES EXPIRATION
SHARES PRICES PRICE VESTED DATE
------- ------------ -------- ------- ----------
Options outstanding at
December 31, 1994 255,378 $ 6.25-15.00 $11.89 49,740 2002-2004
1995 option activity:
Vesting of prior-year
options -- 6.25-15.00 47,628 2002-2004
Granted 43,461 15.00-15.50 15.17 -- 2005
Exercised (1,500) 6.25 6.25 (1,500) 2002
Canceled (19,916) 6.25-15.50 14.34 (1,894) 2002-2005
------- -------
Options outstanding at
December 31, 1995 277,423 6.25-15.50 12.26 93,974 2002-2005
1996 option activity:
Vesting of prior-year options -- 6.25-15.50 59,073 2002-2005
Granted 320,014 15.00-18.25 17.68 100,000 2006
Exercised (6,506) 6.25-15.00 7.33 (6,506) 2002-2004
Canceled (13,869) 6.25-16.00 15.07 (1,791) 2002-2006
------- -------
Options outstanding at
December 31, 1996 577,062 6.25-18.25 15.24 244,750 2002-2006
1997 option activity:
Vesting of prior-year options -- 6.25-18.25 82,576 2002-2006
Exercised (26,085) 6.25-15.50 11.95 (26,085) 2002-2006
Canceled (13,799) 6.25-15.50 14.60 (1,266) 2002-2006
------- -------
Options outstanding at
December 31, 1997 537,178 6.25-18.25 15.42 299,975 2002-2006
======= =======
-15-
49
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The 537,178 options outstanding at December 31, 1997, are summarized as follows:
WEIGHTED
AVERAGE WEIGHTED
WEIGHTED REMAINING AVERAGE
AVERAGE CONTRACTUAL EXERCISE PRICE
PRICE NUMBER OF EXERCISE LIFE (IN SHARES OF VESTED
RANGE SHARES PRICE YEARS) VESTED SHARES
------------ --------- -------- ----------- ------- --------------
$ 6.25 72,250 $ 6.25 4.48 72,250 $ 6.25
15.00-18.25 464,928 16.61 8.01 227,725 16.61
The Company expects that approximately 10 percent of the outstanding awards at
December 31, 1997, will eventually be forfeited. At December 31, 1997, a total
of 128,631 authorized shares remain available for granting.
10. PROFIT SHARING PLAN:
The Company has a profit sharing plan for substantially all employees.
Contributions are made at the discretion of the Board of Directors. A $300,000
contribution was made for 1995 and 1996. A $300,000 contribution was approved
for 1997.
11. GEOGRAPHIC SEGMENTS:
The Company's operations are located primarily in the United States and Canada.
Inter-area sales are not significant to the total revenue of any geographic
area. Information about the Company's operations in different geographic areas
for the year ended December 31, 1997, is as follows:
U.S. CANADA MEXICO ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Operating Revenues $252,942,603 $ 33,818,166 $ 356,065 $ (1,069,709) $286,047,125
Net operating income 19,977,129 913,745 202,020 -- 21,092,894
Identifiable assets 178,347,163 26,340,103 4,574,919 (15,225,804) 194,036,381
Depreciation and
amortization 14,707,920 2,483,677 143,524 -- 17,335,121
Capital expenditures 23,042,573 8,332,387 3,745,916 -- 35,120,876
-16-
50
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
12. SUBSEQUENT EVENTS:
On February 10, 1998, the Company entered into an agreement with Sombrero
Acquisition Corporation (Sombrero), an affiliate of Apollo Management LP
(Apollo), pursuant to which Sombrero will merge with the Company. According to
the terms of the merger agreement, stockholders of the Company will receive $40
per share in cash. The total transaction value is approximately $250 million,
including outstanding stock options, fees and approximately $54 million of net
debt.
The transaction will be subject to the customary conditions, including the
affirmative vote of the holders of a majority of the outstanding stock of the
Company.
The Company will be funded by an equity investment of approximately $70 million
from Apollo and members of the Company's existing management. Approximately $200
million of senior subordinated and bank debt will be used to finance the
acquisition. Additionally, a $100 million revolving credit facility will be
available to the Company for working capital and acquisition purposes.
-17-