1
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, 1996 Commission File No: 0-24180
MTL INC.
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(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, 1996, 4,523,739 shares of common stock were outstanding,
and the aggregate market value of the common stock of MTL Inc. held by
nonaffiliates (2,052,771 shares) was approximately $41,568,613 based on the
market price at that date.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement Regarding the 1997 Annual 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. 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.
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,
1996, 44 of the 70 terminals in the Company's network were operated by
Affiliates. In 1996, Affiliates were responsible for $124.5 million in
transportation revenue, or approximately 52.9% 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 27 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 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.
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Contracts with Affiliates typically carry a one year term, renewable on a
yearly basis unless terminated by either party. During the last four years,
the Company has terminated six 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 also 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 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,
1996, the Company had contracts with 788 owner-operators.
Marketing
The Company conducts its marketing activities at both the national and
local levels. The Company employs 21 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 concentrate on
developing dedicated logistics opportunities. The Company's senior management
is actively involved in the marketing process, especially in marketing to
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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 1996, no single customer accounted for more than 7.1% 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 charges from the weekly settlements paid to its
Affiliates. This program generated revenues of approximately $18 million in
1996. 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, 1996, the Company owned, or held directly under lease,
3,208 tank trailers and ISO containers, of which 1,978 were leased to
Affiliates and 425 were leased to other third parties. In addition, the
Company's fleet is supplemented by 489 trailers owned by Affiliates and 67
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 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 1996 were $10.5 million for the
purchase of approximately 240 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 9.6
years, well below the industry average. The useful life expectancy of these
high-quality tanks is approximately 20 years.
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As of December 31, 1996, the Company owned, or operated under capitalized
leases, 443 tractors, of which 143 were leased to Affiliates and owner-
operators. The Company primarily purchases high-end tractors manufactured by
Mack, Freightliner, and/or Peterbilt. In 1996, the Company purchased 51 new
tractors at an average cost of $63,000 to $78,000 per tractor and affiliates
and owner-operators purchased an additional 185. The Company generally
finances its tractors through secured borrowings or 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 proudly achieved ISO9002 certification in 1994. ISO9002 is an
internationally recognized quality standard, increasingly requested by
shippers. To date, only a few tank truck carriers have received this
certification.
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 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, 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 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 17 Company and
Affiliate tank wash facilities, as well as the services of other unrelated
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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, 1996, the Company and its Affiliates employed 1,648
persons, of whom 945 were drivers, 148 were mechanics, 79 were tankwashers and
the balance were support personnel, including clerical, administrative and
dispatcher personnel. In addition, the Company and its Affiliates utilized the
services of 788 owner-operators as of December 31, 1996. The Company dedicates
significant resources to driver recruiting and retention. The annual turnover
rate for the Company's drivers (including those employed by Affiliates and
owner-operators) was approximately 48% in 1996.
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 three 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
coverages. These same insurance programs are available to Affiliates and
owner-operators for a fee.
Fourteen employees of a subsidiary (one terminal) and 116 employees of
two Affiliates (three terminals) are members of the International Brotherhood
of Teamsters.
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
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$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 test 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 21 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.
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.
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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 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
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
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(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
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
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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
The Company operates through 70 trucking terminals located throughout the
United States and Canada. Each of the 26 Company and 44 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 Tuscaloosa, AL Los Angeles, CA
Oakley, CA New Castle, DE* Tampa, FL Atlanta, GA
Augusta, GA Savannah, GA Tucker, GA Mediapolis, IA
Chicago, IL Lansing, IL Meredosia, IL Summit, IL
Wilmington, IL Gary, IN* Lafayette, IN Calvert City, KY
Louisville, KY Owensboro, KY Baton Rouge, LA Lake Charles, LA
New Orleans, LA Baltimore, MD Elkridge, MD Detroit, MI
Austin, MN St. Louis, MO Omaha, NE Avenel, NJ
Concord, NC Mt. Holly, NC Salisbury, NC Albany, NY
Bergen, NY Barberton, OH Cincinnati, OH Columbus, OH
Dayton, OH Lima, OH South Point, OH Parker, PA
Philadelphia, PA Pittsburgh, PA Southampton, PA Pawtucket, RI
Leeds, SC Chattanooga, TN Memphis, TN Ft. Worth, TX
Freeport, TX Houston, TX Pasadena, TX Winnie, TX
Dumfries, VA Norfolk, VA Pearisburg, VA Roanoke, VA
Kelso, WA Inwood, WV St. Albans, WV Appleton, WI
Bristol, WI Oshkosh, WI Gary, IN *
Canadian Provinces: Mexican Locations:
Couteau Du Lac, Quebec Tulpetlac, Edo. De Mexico
Ville Becancour, Quebec Monterrey, N.L.
Murdochville, Quebec Jalisco, Mexico
Montreal, Quebec
North Bay, Ontario
Oakville, Ontario
(*) Two Affiliates operate from this location.
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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 21
terminals (15 of which are leased to Affiliates) and leases 20 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 during the fourth quarter of the
year covered by this report to a vote of its security holders.
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.
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
1994................................ HIGH LOW
Quarter ended ----- ------
Second.............................. $16-1/4 $14-1/2
Third.............................. $18-3/8 $14
Fourth............................. $15-7/8 $10-1/2
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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 March 17, 1997, there were approximately 1,528 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,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
Income Statement Data (1):
Operating revenues........ $138,232 $142,376 $168,290 $190,054 $235,599
Operating expenses:
Purchased transportation.. 94,604 96,392 112,288 120,011 145,895
Compensation.............. 7,337 9,186 13,061 20,099 26,201
Fuel, supplies, maintenance. 4,544 6,209 8,293 12,172 17,957
Depreciation & amortization 7,495 7,335 8,213 10,156 13,892
Selling and administrative.. 3,454 3,123 3,629 5,204 6,015
Insurance and claims........ 5,458 5,328 5,687 3,281 4,366
Taxes and licenses.......... 1,071 1,003 1,134 1,630 1,655
Communications & utilities. 792 991 1,052 1,149 1,378
(Gain) loss on sale of p&e. 690 (44) (36) (150) 20
------- ------- ------- ------- -------
Total operating expenses. 125,445 129,523 153,321 173,552 217,379
Operating income............ 12,787 12,853 14,969 16,502 18,220
Other income (expense):
Interest expense, net...... (7,287) (5,722) (4,172) (3,468) (3,494)
Other...................... (517) (94) (252) 175 214
------- ------- ------- ------- -------
Total other income (Expense) (7,804) (5,816) (4,424) (3,292) (3,280)
Income before taxes......... 4,983 7,037 10,545 13,210 14,940
Provision for income taxes.. (2,065) (2,653) (4,306) (5,408) (6,103)
------- ------- ------- ------- -------
Income From continuing opr. 2,918 4,384 6,239 7,802 8,837
Extraordinary item (net).. (602) - - - -
------- ------- ------- ------- -------
Net income.............. . 2,316 4,384 6,239 7,802 8,837
====== ===== ===== ===== ======
13
1992 1993 1994 1995 1996
---- ---- ---- ---- -----
Per Share Data (2):
Net income.............. $ .72 $ 1.44 $ 1.61 $ 1.72 $1.92
(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,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
Balance Sheet Data
(end of period):
Total Assets................ $112,088 $105,787 $126,219 $145,740 $173,604
Long-term obligations,
including current portion.. 64,522 53,613 40,538 48,844 57,329
convertible preferred stock
and warrants............... 10,724 11,008 - - -
Stockholders equity......... 12,627 17,245 52,247 60,058 68,913
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.
14
Year ended December 31,
----------------------------
1994 1995 1996
---- ---- ----
Total Operating revenues.................. 100.00% 100.00% 100.00%
Operating expenses:
Purchased transportation................. 66.7 63.2 61.9
Compensation............................. 7.8 10.6 11.1
Fuel, supplies and maintenance........... 4.9 6.4 7.6
Depreciation and amortization............ 4.9 5.3 5.9
Selling and administrative .............. 2.2 2.7 2.6
Insurance and claims..................... 3.4 1.7 1.9
Taxes and licenses....................... 0.7 0.9 0.7
Communications and utilities............. 0.6 0.6 0.6
(gain) loss on sale of property and
equipment.............................. 0.0 (0.1) 0.0
------ ------ ------
Operating ratio........................... 91.1% 91.3% 92.27%
====== ====== ======
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 increase in transportation related revenue was $44.8 million or
25.9%. The increase in other revenue was $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 revenue 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 while compensation, fuel, supplies and
maintenance costs increased 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.
15
Income Taxes
The Company's effective tax rate was 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.
Year ended December 31, 1995, compared to year ended December 31, 1994.
Operating Revenues
Operating revenues increased $21.8 million or 12.9% for 1995 compared to
1994. The increase in transportation-related revenue of $22.2 million or 14.7%
were partially offset by a $0.4 million or 2% decrease in other revenues. The
transportation revenue increase is due to an increase in the number of loads
hauled: 184,479 loads in 1995 compared to 152,900 loads in 1994. The average
revenue per mile declined slightly from $1.64 in 1994 to $1.63 in 1995.
Length of haul declined from 361 miles in 1994 to 337 miles in 1995 and
average revenue per load declined from $987 in 1994 to $938 in 1995 primarily
because of increases in short-haul business and an increased presence in the
corrosives business which tends to be short-haul. The decrease in other
revenue is due to a de-emphasis of tractor leasing business.
Operating Expenses.
Total operating expense levels remained relatively constant as a
percentage of sales from 1994 to 1995 with some shifts in individual operating
expense levels. Most of these changes are due to changes in the mix of revenue
from 1994 to 1995 as the Company relied more heavily on Company drivers and
equipment in 1995. Purchased transportation cost, which consists primarily of
amounts paid to affiliates, decreased while compensation and fuel, supplies
and maintenance costs all relating to Company operations increased as a
percentage of revenue. These changes are consistent with the move to more
company drivers. Insurance cost decreased as a percentage of sales due to the
favorable casualty insurance environment and continued satisfactory loss
experience.
Interest and Other
Interest and other decreased from $4.4 million or 2.6% of revenue in 1994
to $3.3 million or 1.7% of revenue in 1995. This decrease resulted primarily
from a reduction in interest rate levels for 1995 compared to 1994.
Income Taxes
The Company's effective tax rates were 40.9% and 40.8% for 1995 and 1994,
respectively. Effective tax rates for these years differ from the statutory
federal rate primarily because of state taxes, non-deductible intangible asset
amortization, and meals and entertainment disallowance.
16
Net Income
Income before provision for income taxes increased by approximately $2.7
million or 25.3% from 1994 to 1995. Net income increased from $6.2 million in
1994 to $7.8 million during 1995.
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 $22.3 million
for the year ended December 31, 1996, versus $18.1 million for the same period
in 1995. Cash used in financing activities totaled $0.1 million for the year
ended December 31, 1996, compared to $11.6 million provided during the
comparable period in 1995. This difference was due to an increase in
principal payments of $25.4 million in 1996 over 1995.
Capital was used primarily to acquire additional revenue equipment to
expand the Company's operations and to purchase Levy. Capital expenditures
for the year ended December 31, 1996, were $20.6 million compared to $32.1
million in 1995.
Since November 1994, the company has maintained a $50 million unsecured
revolving credit facility with a group of banks maturing in May 1999.
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 September, 1996 the Company completed a CDN $13.5 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 of this report.
(b) Quarterly financial information (in thousands except per share
amounts).
17
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- --------
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
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
Net income per share..... .41 .45 .45 .41
1994
Operating revenues........ $38,677 $42,296 $43,561 $43,756
Operating income.......... 3,167 3,764 4,027 4,011
Income before taxes....... 1,877 2,595 3,136 2,937
Net income................ 1,126 1,546 1,890 1,677
Net income per share...... .38 .44 .42 .37
Item 9. Disagreements on Accounting and Financial Disclosures
None
Part III
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. 59 Director, President and
Chief Executive Officer
Elton E. "Buzz" Babbitt 65 Chairman of the Board
of Directors
Richard J. Brandewie 42 Sr. Vice President,
Treasurer, and Chief
Financial Officer
Donald W. Burton (1)(2) 53 Director
John B. Bowron (1)(2) 60 Director
Gerald McCullough (1)(2) 54 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.
18
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, and was 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
Sr. Vice President of Finance. 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
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 a director of such company
since 1991. 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 accounts, 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.
19
Item 11. Management Remuneration and Transactions
Executive Compensation
Information required by this Item 11 is hereby incorporated by reference
to the Company's definitive proxy statement to be 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, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item 11 is hereby incorporated by reference
to the Company's definitive proxy statement to be 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, 1996.
Item 13. Certain Relationships and Related Transactions
Information required by this Item 11 is hereby incorporated by reference
to the Company's definitive proxy statement to be 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, 1996.
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements
(b) Financial Statements Schedules
None
(c) Exhibits
10(a) Copy of Levy Share Purchase Agreement
Reference is made to Form 10-K dated March 20, 1996
10(b) Note Purchase Agreement
Reference is made to Form 10-K dated March 20, 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 19, 1996
Reference is made to Form 8-K dated June 11, 1996
20
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 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below 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 28, 1997
- ---------------------------
Charles J. O'Brien, Jr.
/s/ Elton E. Babbitt
- ---------------------------
Elton E. Babbitt Director March 28, 1997
- ---------------------------
Donald W. Burton Director March 28, 1997
- ---------------------------
John B. Bowron Director March 28, 1997
/s/ Gerald L. McCullough
- ---------------------------
Gerald L. McCullough Director March 28, 1997
21
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, 1995 and 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996.
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, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Tampa, Florida,
February 27, 1997
22
MTL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
ASSETS 1995 1996
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 322,108 $ 694,851
Accounts receivable, net 23,559,452 32,495,711
Current maturities of other receivables 970,478 1,061,941
Notes receivable 202,010 500,646
Inventories 457,007 877,682
Prepaid expenses 1,615,161 3,399,914
Prepaid tires 3,257,733 3,888,284
Income taxes receivable 492,274 -
Deferred tax assets 2,737,281 2,748,163
Other 193,292 121,057
-------------- --------------
Total current assets 33,806,796 45,788,249
-------------- --------------
PROPERTY AND EQUIPMENT, at cost:
Land and improvements 4,426,338 4,734,133
Buildings and improvements 11,792,677 12,284,784
Revenue equipment 131,852,770 152,883,747
Terminal equipment 5,485,654 5,992,691
Furniture and fixtures 2,669,599 3,609,241
Other equipment 558,459 1,697,725
-------------- --------------
156,785,497 181,202,321
Less- Accumulated depreciation
and amortization (48,885,331) (60,299,204)
-------------- ---------------
Property and equipment, net 107,900,166 120,903,117
OTHER RECEIVABLES, less
current maturities 2,230,244 3,284,918
GOODWILL 803,364 2,433,751
OTHER ASSETS 999,712 1,194,235
-------------- --------------
$145,740,282 $173,604,270
============== ==============
23
MTL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
December 31, December 31
1995 1996
------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,609,248 $ 10,656,972
Affiliates and independent
owner-operators payable 2,896,908 4,547,431
Current maturities of long-term debt 1,224,261 1,611,249
Current maturities of obligations under
capital leases 5,148,932 2,612,793
Accrued loss and damage claims 3,859,877 3,798,808
Income taxes payable - 151,958
------------ ------------
Total current liabilities 20,739,226 23,379,211
LONG-TERM DEBT, less current maturities 40,235,683 51,700,591
OBLIGATIONS UNDER CAPITAL LEASES,
less current maturities 2,235,418 1,404,489
ACCRUED LOSS AND DAMAGE CLAIMS 3,622,482 4,528,354
DEFERRED INCOME TAXES 18,849,858 23,678,302
------------ ------------
Total liabilities 85,682,667 104,690,947
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 5, 6 and 8)
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; 4,517,233 and
4,523,739 shares issued in 1995
and 1996, respectively 45,172 45,237
Additional paid-in capital 30,091,880 30,139,529
Retained earnings 29,920,563 38,757,270
Cumulative translation adjustment - (28,713)
------------ ------------
Total stockholders' equity 60,057,615 68,913,323
------------ ------------
$145,740,282 $173,604,270
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
24
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
-------------------------------------------
1994 1995 1996
----------- ------------ -------------
OPERATING REVENUES:
Transportation $150,909,126 $173,059,635 $217,811,945
Other 17,380,742 16,994,611 17,787,254
------------ ------------ ------------
Total operating revenues 168,289,868 190,054,246 235,599,199
------------ ------------ ------------
OPERATING EXPENSES:
Purchased transportation 112,288,185 120,011,387 145,895,456
Compensation 13,060,977 20,099,486 26,200,723
Fuel, supplies and maintenance 8,292,763 12,171,649 17,956,982
Depreciation and amortization 8,212,935 10,155,676 13,892,344
Selling and administrative 3,628,764 5,203,918 6,014,696
Insurance and claims 5,686,759 3,280,962 4,365,953
Taxes and licenses 1,134,544 1,629,642 1,655,274
Communication and utilities 1,051,824 1,149,114 1,378,103
(Gain) loss on sale of property
and equipment (36,250) (149,507) 19,703
----------- ----------- -----------
Total operating expenses 153,320,501 173,552,327 217,379,234
----------- ----------- -----------
Net operating income 14,969,367 16,501,919 18,219,965
INTEREST EXPENSE, net (4,171,657) (3,467,594) (3,494,476)
OTHER (EXPENSE) INCOME (252,226) 175,463 214,820
Income before provision ----------- ----------- -----------
for income taxes 10,545,484 13,209,788 14,940,309
PROVISION FOR INCOME TAXES (4,306,264) (5,408,130) (6,103,602)
----------- ----------- -----------
NET INCOME 6,239,220 7,801,658 8,836,707
ACCRETION AND DIVIDENDS ON
CONVERTIBLE PREFERRED STOCK
AND WARRANTS (257,080) - -
----------- ----------- -----------
NET INCOME ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ 5,982,140 $ 7,801,658 $ 8,836,707
----------- ----------- -----------
----------- ----------- -----------
PER SHARE DATA:
Net income $ 1.61 $ 1.72 $ 1.92
Weighted average number of common
and common equivalent shares 4,033,674 4,542,709 4,600,267
The accompanying notes are an integral part of these consolidated statements.
25
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common Aditional
Stock Stock Paid-in
(Shares) (Amount) Capital
--------- -------- ------------
BALANCE, December 31, 1993 1,890,396 $18,904 $ 1,102,379
Contributed capital - - 15,399
Accretion of Series A convertible
preferred stock - - -
Series B convertible preferred
stock dividends - - -
Accretion of warrants - - -
Conversion of Series A convertible
preferred stock 306,561 3,065 3,487,460
Conversion of Series B convertible
preferred stock 641,662 6,417 5,867,556
Exercise of warrants 188,120 1,881 1,861,650
Conversion of 7% convertible
subordinated debentures 718,861 7,189 4,378,317
Retirement of treasury stock (229,967) (2,300) (10,865)
Issuance of common stock 1,000,100 10,001 13,380,624
Net income - - -
--------- -------- ----------
BALANCE, December 31, 1994 4,515,733 45,157 30,082,520
Issuance of common stock 1,500 15 9,360
Net income - - -
--------- -------- ----------
BALANCE, December 31, 1995 4,517,233 45,172 30,091,880
Issuance of common stock 6,506 65 47,649
Net income - - -
Translation adjustment - - -
--------- -------- ----------
BALANCE, December 31, 1996 4,523,739 $45,237 $30,139,529
========= ======== ============
26
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(continued)
Cumulative Total
Retained Translation Treasury Stockholders
Earnings Adjustment Stock Equity
-------- ----------- ----------- ------------
BALANCE, December
31, 1993 $17,733,366 - $(1,609,766) $17,244,883
Contributed capital - - - 15,399
Accretion of Series A
Convertible
preferred stock (22,437) - - (22,437)
Series B convertible
preferred stock
dividends (193,117) - - (193,117)
Accretion of warrants (41,526) - - (41,526)
Conversion of Series A
convertible preferred
stock - - - 3,490,525
Conversion of Series B
convertible preferred
stock - - - 5,873,973
Exercise of warrants - - - 1,863,531
Conversion of 7%
convertible sub-
ordinated debentures - - - 4,385,506
Retirement of treasury
stock (1,596,601) - 1,609,766 -
Issuance of common
stock - - - 13,390,625
Net income 6,239,220 - - 6,239,220
---------- ---------- ---------- -----------
BALANCE, December
31, 1994 22,118,905 - - 52,246,582
Issuance of common
stock - - - 9,375
Net Income 7,801,658 - - 7,801,658
---------- ---------- ---------- -----------
BALANCE, December
31, 1995 29,920,563 - - 60,057,615
Issuance of common
stock - - - 47,714
Net income 8,836,707 - - 8,836,707
Translation adjustment - (28,713) - (28,713)
---------- ---------- ---------- ------------
BALANCE, December
31, 1996 $38,757,270 $(28,713) - $68,913,323
=========== ========= ========== ============
The accompanying notes are an integral part of these consolidated statements.
27
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
------------------------------------
1994 1995 1996
---------- ----------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 6,239,220 $ 7,801,658 $ 8,836,707
Adjustments to reconcile to
net cash and cash equivalents
provided by operating activities-
Deferred income taxes 2,439,952 2,889,448 3,322,268
Write-off of intrastate rights 96,707 - -
Depreciation and amortization 8,212,935 10,155,676 13,892,344
Equity in income from investments (66,096) (144,534) (138,355)
(Gain) loss on sale of property
and equipment (36,250) (149,507) 19,703
Accretion of convertible
subordinated debentures 105,138 - -
Changes in assets and liabilities-
Increase in accounts and
notes receivable (5,079,288) (3,096,169) (4,629,023)
Decrease (increase) in
inventories 274,490 (61,907) (211,249)
(Increase) decrease in
prepaid expenses (1,030,727) 985,552 (1,385,551)
(Increase) decrease in
prepaid tires (78,187) 15,766 (249,851)
Decrease (increase) in
other assets 108,643 (238,572) (399,210)
Increase in accounts payable
and accrued expenses 2,595,527 1,005,952 313,873
Increase in affiliates and
independent owner-
operators payable 310,177 533,827 1,500,020
Increase (decrease) in
accrued loss and damage
claims 3,251,312 (815,797) 844,803
(Decrease) increase in
current income taxes (35,504) (791,148) 587,516
---------- ---------- ----------
Net cash and cash
equivalents provided
by operating activities 17,308,049 18,090,245 22,303,995
---------- ---------- ----------
28
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31,
---------------------------------------
1994 1995 1996
-------- ---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment in Levy
Transport, Ltd., net
of cash received - - (4,725,502)
Payments received on
other receivables - - 1,025,614
Return of principal on
investment in insurance
company 122,189 - -
(Loan) repayment of
loan to barge tank
operation (135,605) 209,240 262,930
Capital expenditures (24,340,646) (32,099,300) (20,576,543)
Proceeds from sales of
property and equipment 2,958,838 1,801,219 2,233,213
---------- ---------- ----------
Net cash and cash
equivalents used in
investing activities (21,395,224) (30,088,841) (21,780,288)
---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sale of
lease receivables - 3,282,030 1,181,245
Proceeds from issuance
of long-term debt,
net of prepayments 23,348,567 19,243,370 35,043,936
Principal payments on
long-term debt (25,442,261) (5,549,645) (30,722,218)
Principal payments on
obligations under
capital leases (6,700,400) (5,387,921) (5,685,264)
Issuance of common stock 13,390,625 9,375 47,714
Proceeds from exercise of
warrants 155,575 - -
Payment of dividends (401,503) - -
Contributed capital 15,399 - -
---------- ---------- -----------
Net cash and cash
equivalents provided
by (used in) financing
activities 4,366,002 11,597,209 (134,587)
---------- ---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 278,827 (401,387) 389,120
29
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31,
-------------------------------------------
1994 1995 1996
--------- --------- --------
TRANSLATION ADJUSTMENT - - (16,377)
CASH AND CASH EQUIVALENTS,
beginning of year 444,668 723,495 322,108
--------- ---------- ---------
CASH AND CASH EQUIVALENTS,
end of year $ 723,495 $ 322,108 $ 694,851
========== =========== =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 4,404,046 $ 3,305,606 $ 3,912,421
Income taxes $ 1,901,816 $ 3,309,830 $ 2,308,061
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
Property and equipment charged
to accrued loss and damage
claims $ 11,317 $ - $ -
Conversion of Series A
convertible preferred stock
to common stock $ 3,490,525 $ - $ -
Conversion of Series B
convertible preferred stock
to common stock $ 5,873,973 $ - $ -
Conversion of 7% convertible
subordinated debentures to
common stock $ 4,385,506 $ - $ -
Exercise of warrants to
common stock $ 1,863,531 $ - $ -
Retirement of treasury stock $ 1,609,766 $ - $ -
Exchange of property and
equipment for related-party
note receivable $ 184,778 $ - $ -
The accompanying notes are an integral part of these consolidated statements.
<PAGE) 30
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
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.
Business Organization and Initial Public Offering
In June 1994, MTL Inc. completed an initial public offering (the Offering) of
2,000,000 shares of common stock at an Offering price of $15 per share.
Concurrent with the Offering, MTL Inc. consummated a reorganization
(the Reorganization) in which all common shares of Montgomery Tank Lines, Inc.
(Montgomery) were exchanged on a one-for-one basis for MTL Inc. common
shares. The net proceeds of the Offering of $13,390,625 were used to retire
debt and capital leases and to fund capital expenditures.
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 with a fleet of over 400 trucks and
tank trailers, from Les Placements Marlin, Ltd.
31
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
The purchase price of $5,148,745 was financed with borrowings from the
Company's unsecured, revolving line of credit. The terms of the purchase
agreement stipulated $4,416,949 be paid in cash at the time of the closing and
a promissory note in the amount of $365,898 be executed. Additionally,
$365,898 is held in escrow as security for the Company in the event any
unanticipated claim is asserted. 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.
The Company granted an option to purchase 100,000 shares of the Company's
common stock to the president of Levy in connection with an employment
agreement executed at the Levy closing.
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. and beginning May 1, 1996, Levy Transport, Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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.
32
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
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.
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
$193,808 and $313,949 at December 31, 1995 and 1996, respectively.
Other Assets
Other assets consist primarily of an investment in a barge tank operation, an
investment in a captive insurance company 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 $571,773 and $447,198 as of December 31,
1995 and 1996, respectively.
The Company acquired the investment in a captive insurance company when it
purchased another company and does not obtain its insurance coverage through
this entity. The investment is accounted for using the equity method and had
a balance of $107,810 and $30,977 at December 31, 1995 and 1996.
Deferred loan costs are being amortized over two to five years, the estimated
lives of the related long-term debt.
33
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Accounting for the Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121),
which addresses when and how impairments to the value of long-lived assets
should be recognized. SFAS 121 is effective for fiscal years beginning after
December 31, 1995, and was implemented by the Company in 1996. The
implementation of SFAS 121 did not have a material effect on the financial
statements.
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.
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 PRP's 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.
34
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Fair Value of Financial Instruments
The book value of all financial instruments approximates the 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.
Earnings Per Share
Earnings per common share (EPS) is calculated using the treasury stock and if-
converted methods under which net income (as adjusted for interest, net of
taxes, accretion and dividends) is divided by the weighted average number of
common and common stock equivalents outstanding during the year. Common stock
equivalents include the Series A and B convertible preferred stock, the 7%
convertible subordinated debentures, warrants and options. Differences between
primary and fully diluted EPS were not significant.
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 applicable deferred income taxes,
resulting from such translation are included in stockholders' equity. Gains or
losses from foreign currency transactions are included in other income.
35
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
2. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following at December 31:
1995 1996
---------- ----------
Trade accounts receivable $22,386,375 $29,807,861
Affiliate and independent
owner-operator receivables 1,814,898 3,157,212
Employee receivables 44,567 102,317
Other receivables 332,914 825,586
----------- -----------
Total receivables 24,578,754 33,892,976
Less- Allowance for doubtful accounts (1,019,302) (1,397,265)
----------- -----------
Accounts receivable, net $23,559,452 $32,495,711
=========== ===========
The activity in the allowance for doubtful accounts for each of the
three years in the period ended December 31, 1996 is as follows:
1994 1995 1996
--------- ---------- ----------
BALANCE, beginning of period $ 612,965 $ 923,055 $1,019,302
Additions charged to costs
and expenses 512,378 431,769 474,736
Write-off of bad debts (202,288) (335,522) (96,773)
--------- ---------- -----------
BALANCE, end of period $923,055 $1,019,302 $1,397,265
========= ========== ===========
As of December 31, 1996, 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 7.1
percent of the Company's operating revenues. Included in accounts and notes
receivable are $62,578 and $58,807 of receivables as of December 31, 1995 and
1996, respectively, which are due from other companies owned by related
parties.
36
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
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 December 31, Capital Leases
- ------------------------ --------------
1997 $1,419,453
1998 1,419,453
1999 1,419,453
2000 878,619
-----------
Total minimum lease payments 5,136,978
Less- Unearned financing income (790,119)
-----------
Present value of minimum capital lease payments 4,346,859
Less- Current maturities of other receivables (1,061,941)
----------
Other receivables, less current maturities $3,284,918
==========
4. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
1995 1996
--------- ---------
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
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
(6.26% at December 31, 1996) and U.S.prime
less .25% (8% at December 31, 1996).
Interest is payable at varying dates, and
all outstanding principal is due May 31,
1999, subject to renewal. Letters of credit
of $592,740 were issued as of December 31,
1996, and reduce the borrowings available.
Additional advances of $32,330,725 were
available and unused at December 31, 1996. 36,952,737 17,076,535
37
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1995 1996
------- -------
Unsecured notes payable under a $9,850,420
revolving line of credit with interest rates
based on the ratio of funded debt to earnings
before interest, income taxes, depreciation
and amortization (3.93% at December 31, 1996)
and Canadian lender's prime (4.75% at December
31, 1996). Interest is payable at varying
dates, and all outstanding principal is due
May 31, 1999, subject to renewal. Letters
of credit of $11,841 were issued as of
December 31, 1996, and reduce the borrowings
available. Additional advances of $3,043,287
were available and unused at December 31, 1996. - 6,795,292
Notes Secured by Revenue Equipment
5.75% to 11.65% fixed rate notes payable,
due in varying monthly installments with
maturity dates through 1999 4,381,627 4,075,183
Other Notes
8% to 9% subordinated notes payable,
due in quarterly installments through 1996 125,580 -
5% unsecured note payable to employee, due
in annual installments of $72,966 through 2001 - 364,830
---------- ----------
41,459,944 53,311,840
Less- Current maturities of long-term debt (1,224,261) (1,611,249)
---------- ----------
Long-term debt, less current maturities $40,235,683 $51,700,591
=========== ===========
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, 1996, the Company was in compliance with the terms and covenants of its
debt agreements.
38
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Scheduled maturities of long-term debt for the next five years and thereafter,
are as follows:
Year Ending December 31, Amount
- ------------------------ -------------
1997 $ 1,611,249
1998 1,832,228
1999 24,707,713
2000 3,659,108
2001 3,644,395
Thereafter 17,857,147
------------
$53,311,840
===========
5. LEASE COMMITMENTS:
The Company leases revenue and other equipment under operating and capital
leases.
Future minimum lease payments under noncancelable operating leases and capital
leases as of December 31, 1996, are as follows:
Capital Operating
Year Ending December 31, Leases Leases
- ----------------------- ---------- ------------
1997 $2,850,654 $ 3,253,286
1998 915,852 3,085,719
1999 377,033 3,664,045
2000 105,294 2,030,656
2001 124,266 2,293,785
----------- ------------
Total minimum lease payments 4,373,099 $14,327,491
===========
Less- Amount representing interest
(at rates ranging from 6% to 11%) 355,817
-----------
Present value of minimum capital
lease payments 4,017,282
Less- Current maturities of obligations
under capital leases 2,612,793
-----------
Obligations under capital leases,
less current maturities $1,404,489
==========
39
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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:
1995 1996
----------- ------------
Revenue equipment $22,004,263 $6,499,900
Less- Accumulated amortization (7,036,726) (2,317,947)
----------- ----------
$14,967,537 $4,181,953
----------- ----------
Rent expense under operating leases was $1,332,306, $958,162 and $2,209,532
for the years ended December 31, 1994, 1995 and 1996, respectively.
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. The Company is contingently liable as the
guarantor for the remaining balance of the receivables sold of $3,341,833 as
of December 31, 1996. These leases are collateralized by the equipment
related to these leases. Management estimated the fair value of this
equipment to be $3,000,000 at December 31, 1996, which was based upon
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. The Company is contingently liable as the guarantor for
the remaining balance of the receivables sold of $2,912,198 as of December 31,
1996. These leases are collateralized by the equipment related to these
leases. Management estimated the fair value of this equipment to be
$2,300,000 at December 31, 1996, 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.
40
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. 7% CONVERTIBLE SUBORDINATED DEBENTURES:
The Company's 7% convertible subordinated debentures were converted into
718,861 shares of MTL Inc. common stock concurrent with the Offering and
Reorganization. Prior to conversion, the holders of the debentures (certain
Series B convertible preferred stockholders,including certain directors of the
Company) had the option to redeem the debentures at a future date at an amount
which exceeded the par redemption amount. Therefore, accretion of $105,138 was
recognized as interest expense in the 1994 consolidated statements of income.
8. OTHER TRANSACTIONS WITH RELATED PARTIES:
Tank trailer manufacturing facilities are located on properties leased to a
stockholder by the Company. One property is under a lease for $5,000 per
month expiring April 1, 1999. The other property was leased for $5,000 per
month through June 1994, at which time the manufacturing facility was leased
to a third party. The Company purchased tank trailers for $3,886,000,
$11,675,000, $5,138,000 in 1994, 1995, and 1996, respectively, from these
companies and has commitments to purchase additional tank trailers costing
approximatley $675,000 as of December 31, 1996. Also, these related companies
provided repair, maintenance, design, engineering, transloading, intermodal
and other services to the Company totaling $356,000, $410,000 and $572,000
during the years ended December 31, 1994, 1995 and 1996, respectively.
9. INCOME TAXES:
The provision for income taxes consisted of the following for the years ended
December 31:
1994 1995 1996
---- ---- ----
Currently payable:
Federal $1,349,060 $1,800,607 $2,006,948
State 517,252 718,075 773,975
---------- ---------- ----------
1,866,312 2,518,682 2,780,923
---------- ---------- ----------
Deferred taxes:
Federal 2,201,057 2,018,798 2,911,903
State 238,895 870,650 410,776
---------- ---------- ----------
2,439,952 2,889,448 3,322,679
---------- ---------- ----------
Provision for income taxes $4,306,264 $5,408,130 $6,103,602
========== ========== ===========
41
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The net deferred tax liability, which includes no valuation allowances,
consisted of the following at December 31:
1995 1996
---------- -----------
Deferred tax assets:
Reserves for guarantee of lease obligations $ 149,684 $ 291,631
Capital leases treated as operating leases
for tax purposes as lessee 1,022,752 769,004
Tax credit carryforwards 1,466,402 1,273,755
Self-insurance reserves 2,607,536 3,144,885
Allowance for doubtful accounts 346,562 475,070
Investment in captive insurance company basis
difference 180,200 206,323
Accrued vacation pay 137,624 144,220
Other 330,658 119,191
---------- ----------
6,241,418 6,424,079
---------- ----------
Deferred tax liabilities:
Property and equipment basis difference (17,550,339) (21,819,799)
State taxes (3,345,492) (3,756,268)
Capital leases treated as operating leases
for tax purposes as lessor (1,267,901) (1,493,368)
Other (190,263) (284,783)
---------- ----------
(22,353,995) (27,354,218)
---------- ----------
Net deferred tax liability $(16,112,577) $(20,930,139)
============= =============
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:
1994 1995 1996
---------- ---------- -----------
Tax expense at the statutory rate $3,585,465 $4,491,328 $5,079,705
State income taxes, net of federal
Benefit 499,057 1,048,559 781,936
Other 221,742 (131,757) 241,961
---------- ---------- ----------
Provision for income taxes $4,306,264 $5,408,130 $6,103,602
========== ========== ==========
42
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At December 31, 1996, the Company had alternative minimum tax credit
carryforwards of $1,273,755 (no expiration).
The Company has not provided for a valuation allowance for deferred tax assets
based upon the assumption that the Company will achieve sufficient taxable
income from operations in the future.
10. REDEEMABLE PREFERRED STOCK AND WARRANTS:
Series A Convertible Preferred Stock
The Series A convertible preferred stock was redeemable for cash at $13.04 per
share and had an annual dividend of $.01 per share, which was not cumulative.
In 1992, the holders agreed to accept an approximate 7 percent return in
exchange for delaying their redemption rights. The preferred stock was
converted at the rate of 1 share to 1.11655 shares of common stock concurrent
with the Offering and Reorganization. Prior to conversion, the stock was being
accreted to the redemption price because the redemption price exceeded the par
value of the stock.
Series B Convertible Preferred Stock
The Series B convertible preferred stock was redeemable for cash at $10.50 per
share and had a $.74 per share cumulative dividend. The preferred stock was
converted at the rate of 1 share to 1.147 shares of common stock concurrent
with the Offering and Reorganization. Because the highest redemption price
equaled the par value of the stock, no accretion had been recorded.
Warrants
In conjunction with issuing subordinated debentures which were extinguished in
1992,detachable stock warrants were issued for 225,000 shares of the Company's
common stock. The warrants were assigned a value of $930,000 upon issuance.
The warrants were exercisable at $.827 per share and could be redeemed for
cash at a future date for $10.50 per share. In 1992, the Company repurchased
36,880 warrants for cash and a note totaling $200,000. In conjunction with
the Offering and Reorganization, the warrants were exercised for common
stock. Because the highest redemption price was greater than the carrying
value of the warrants, the warrants were being accreted to the redemption
price prior to exercise.
11. 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.
43
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.
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:
1995 1996
------ -------
Net income: As reported (in thousands) $7,802 $8,837
Pro forma (in thousands) 7,725 8,010
Earnings per share: As reported $1.72 $1.92
Pro forma 1.70 1.74
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.
Combined stock option activity for the Plan for the years ended December 31,
1994, through December 31, 1996, is as follows:
44
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Weighted
Number Range of Average
Of Option Exercise Shares Expiration
Shares Prices Price Vested Date
------ -------- -------- ------ ----------
Options outstanding at
December 31,1993 92,750 6.25 6.25 20,550 2002
1994 option activity:
Vesting of prior-year
options - 6.25 18,200 2002
Granted 172,289 15.00 15.00 11,490 2004
Exercised (100) 6.25 6.25 (100) 2002
Canceled (9,561) 6.25-15.00 14.82 (400) 2002-2004
------- -------
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
======== =======
The 577,062 options outstanding as of December 31, 1996 are summarized as
follows:
Weighted
Weighted Average
Average Exercise
Weighted Remaining Price
Number of Average Contractural Shares of Vested
Price Range Shares Exercise Price Life(in years) Vested Shares
- ----------- --------- -------------- -------------- ------ ---------
$ 6.25 82,300 $ 6.25 5.50 66,340 $ 6.25
15.00-18.25 494,762 16.74 8.94 178,410 16.74
45
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
The Company expects that approximately 10 percent of the outstanding awards at
December 31, 1996, will eventually be forfeited. As of December 31, 1996, a
total of 114,832 authorized shares remain available for granting. The weighted
average fair value of options granted in 1996 was $6.42.
12. 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 $295,000
and a $300,000 contribution was made for 1994 and 1995, respectively. A
$300,000 contribution was approved for 1996.
13. UNAUDITED PRO FORMA INFORMATION:
The following disclosure shows the retrospective effect of the share purchase
agreement between the Company and Levy as if the acquisition of Levy took
place on January 1, 1995. Revenues for the years ended December 31, 1995 and
1996, would have been approximately $215,977,000 and $245,291,000,
respectively.
Net income for the years ended December 31, 1995 and 1996, would have been
approximately $7,812,000 and $8,844,000, respectively. Earnings per share for
the years December 31, 1995 and 1996, would have been $1.72 and $1.92 per
share, respectively.
14. 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, 1996, is as follows:
U.S. Canada Eliminations Consolidated
---- ------ ------------ ------------
Revenues $212,507,777 $23,091,422 $ - $235,599,199
Operating income 17,426,252 793,713 - 18,219,965
Identifiable assets 159,976,020 23,283,660 (9,655,410) 173,604,270
Depreciation and
Amortization 12,530,449 1,361,895 - 13,892,344
Capital expenditures 20,243,835 332,708 - 20,576,543