Exhibit (g)
MTL INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996,
TOGETHER WITH REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
MTL Inc.:
We have audited the accompanying consolidated balance sheets of MTL Inc. (a
Florida corporation) and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MTL Inc. and subsidiaries as of
December 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Tampa, Florida,
February 27, 1998 /s/ ARTHUR ANDERSEN LLP
MTL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
ASSETS 1996 1997
------------ --------------
CURRENT ASSETS:
Cash and cash equivalents 694,851 $ 1,377,228
Accounts receivable, net 32,495,711 38,171,957
Current maturities of other receivables 1,061,941 1,163,357
Notes receivable 500,646 547,213
Inventories 877,682 957,824
Prepaid expenses 3,399,914 2,822,343
Prepaid tires 3,888,284 4,323,783
Deferred tax assets 2,748,163 2,685,597
Other 121,057 126,560
------------ --------------
Total current assets 45,788,249 52,175,862
------------ --------------
PROPERTY AND EQUIPMENT:
Land and improvements 4,734,133 4,808,938
Buildings and improvements 12,284,784 12,457,662
Revenue equipment 152,883,747 182,407,304
Terminal equipment 5,992,691 5,874,647
Furniture and fixtures 3,609,241 4,607,966
Other equipment 1,697,725 1,373,406
------------ --------------
181,202,321 211,529,923
Less- Accumulated depreciation and amortization (60,299,204) (75,019,546)
------------ --------------
Property and equipment, net 120,903,117 136,510,377
OTHER RECEIVABLES, less current maturities 3,284,918 1,986,908
GOODWILL 2,433,751 2,003,473
OTHER ASSETS 1,194,235 1,359,761
------------ --------------
$173,604,270 $194,036,381
============ ==============
MTL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
December 31
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
----------- -------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 10,656,972 $ 15,201,239
Affiliates and independent owner-operators payable 4,547,431 6,431,565
Current maturities of long-term debt 1,611,249 1,805,775
Current maturities of obligations under capital leases 2,612,793 501,086
Accrued loss and damage claims 3,798,808 4,906,049
Income taxes payable 151,958 798,292
----------- -------------
Total current liabilities 23,379,211 29,644,006
LONG-TERM DEBT, less current maturities 51,700,591 52,433,465
OBLIGATIONS UNDER CAPITAL LEASES, less current maturities 1,404,489 357,732
ACCRUED LOSS AND DAMAGE CLAIMS 4,528,354 5,064,843
DEFERRED INCOME TAXES 23,678,302 27,004,040
----------- -------------
Total liabilities 104,690,947 114,504,086
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6) ----------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, $.01 par value; 15,000,000 shares authorized, 4,523,739 and
4,549,824 shares issued and outstanding in 1996 and 1997,
respectively 45,237 45,498
Additional paid-in capital 30,139,529 30,459,139
Retained earnings 38,757,270 49,240,633
Cumulative translation adjustment (28,713) (212,975)
----------- -------------
Total stockholders' equity 68,913,323 79,532,295
----------- -------------
$173,604,270 $194,036,381
============ =============
The accompanying notes are an integral part of these consolidated balance
sheets.
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
-----------------------------------------------
1995 1996 1997
------------- ------------- -------------
OPERATING REVENUES:
Transportation $173,059,635 $217,811,945 $266,369,170
Other 16,994,611 17,787,254 19,677,955
------------- ------------- -------------
Total operating revenues 190,054,246 235,599,199 286,047,125
------------- ------------- -------------
OPERATING EXPENSES:
Purchased transportation 120,011,387 145,895,456 178,116,479
Compensation 20,099,486 26,200,723 31,566,260
Fuel, supplies and maintenance 12,171,649 17,956,982 20,391,935
Depreciation and amortization 10,155,676 13,892,344 17,335,121
Selling and administrative 5,203,918 6,014,696 7,421,177
Insurance and claims 3,280,962 4,365,953 6,455,248
Taxes and licenses 1,629,642 1,655,274 1,899,734
Communication and utilities 1,149,114 1,378,103 1,805,324
(Gain) loss on sale of property and equipment (149,507) 19,703 (37,047)
------------- ------------- -------------
Total operating expenses 173,552,327 217,379,234 264,954,231
------------- ------------- -------------
Net operating income 16,501,919 18,219,965 21,092,894
INTEREST EXPENSE, net (3,467,594) (3,494,476) (3,174,826)
OTHER INCOME (EXPENSE) 175,463 214,820 (38,482)
------------- ------------- -------------
Income before provision for income taxes 13,209,788 14,940,309 17,879,586
PROVISION FOR INCOME TAXES (5,408,130) (6,103,602) (7,396,223)
------------- ------------- -------------
NET INCOME $ 7,801,658 $ 8,836,707 $ 10,483,363
============= ============= =============
PER SHARE DATA:
Net income - basic $ 1.73 $ 1.95 $ 2.31
Net income - diluted $ 1.72 $ 1.92 $ 2.23
Weighted average number of common shares - basic 4,516,153 4,520,917 4,536,097
Weighted average number of common and common equivalent
shares - diluted 4,542,709 4,600,267 4,711,301
The accompanying notes are an integral part of these consolidated statements.
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common Additional Cumulative Total
Stock Stock Paid-in Retained Translation Stockholders'
(Shares) (Amount) Capital Earnings Adjustment Equity
---------- ---------- ------------ ------------ ----------- -------------
BALANCE, December 31, 1994 4,515,733 $45,157 $30,082,520 $22,118,905 $ $52,246,582
-
Issuance of common stock 1,500 15 9,360 - - 9,375
Net income - - - 7,801,658 - 7,801,658
---------- ---------- ------------ ------------ ----------- -------------
BALANCE, December 31, 1995 4,517,233 45,172 30,091,880 29,920,563 - 60,057,615
Issuance of common stock 6,506 65 47,649 - - 47,714
Net income - - - 8,836,707 - 8,836,707
Translation adjustment - - - - (28,713) (28,713)
---------- ---------- ------------ ------------ ----------- -------------
BALANCE, December 31, 1996 4,523,739 45,237 30,139,529 38,757,270 (28,713) 68,913,323
Issuance of common stock 26,085 261 319,610 - - 319,871
Net income - - - 10,483,363 - 10,483,363
Translation adjustment - - - - (184,262) (184,262)
---------- ---------- ------------ ------------ ----------- -------------
BALANCE, December 31, 1997 4,549,824 $45,498 $30,459,139 $49,240,633 $(212,975) $79,532,295
========== ========== ============ ============= =========== =============
The accompanying notes are an integral part of these consolidated statements.
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
-------------------------------------------------
1995 1996 1997
------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,801,658 $ 8,836,707 $10,483,363
Adjustments to reconcile to net cash and cash
equivalents provided by operating activities-
Deferred income taxes 2,889,448 3,322,268 3,388,304
Depreciation and amortization 10,155,676 13,892,344 17,335,121
Equity in income from investments (144,534) (138,355) (49,386)
(Gain) loss on sale of property and equipment (149,507) 19,703 (37,047)
Changes in assets and liabilities-
Increase in accounts and notes receivable (3,096,169) (4,629,023) (6,037,660)
Increase in inventories (61,907) (211,249) (92,562)
Decrease (increase) in prepaid expenses 985,552 (1,385,551) 550,293
Decrease (increase) decrease in prepaid tires 15,766 (249,851) (376,581)
(Increase) decrease in other assets (238,572) (399,210) 310,581
Increase in accounts payable and accrued expenses 1,005,952 313,873 4,798,875
Increase in affiliates and independent
owner-operators payable 533,827 1,500,020 1,330,506
(Decrease) increase in accrued loss and damage claims (815,797) 844,803 1,643,730
(Decrease) increase in current income taxes (791,148) 587,516 584,671
Net cash and cash equivalents provided ------------- ------------- ------------
by operating activities 18,090,245 22,303,995 33,832,208
------------- ------------- ------------
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31,
-------------------------------------------------
1995 1996 1997
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (32,099,300) (20,576,543) (35,120,876)
Investment in Levy Transport, Ltd., net of cash received - (4,725,502) -
Payments received on other receivables - 1,025,614 1,196,594
Repayment of loan to barge tank operation 209,240 262,930 93,263
Proceeds from sales of property and equipment 1,801,219 2,233,213 2,140,861
------------- ------------ ------------
Net cash and cash equivalents used in investing activities (30,088,841) (21,780,288) (31,690,158)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of lease receivables 3,282,030 1,181,245 -
Proceeds from issuance of long-term debt, less prepayments 19,243,370 35,043,936 3,975,841
Principal payments on long-term debt, less borrowings (5,549,645) (30,722,218) (2,713,897)
Principal payments on obligations under capital leases (5,387,921) (5,685,264) (3,453,557)
Issuance of common stock 9,375 47,714 319,871
Borrowings under capital lease - - 368,793
------------- ------------ ------------
Net cash and cash equivalents provided by (used in)
financing activities 11,597,209 (134,587) (1,502,949)
------------- ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (401,387) 389,120 639,101
TRANSLATION ADJUSTMENT - (16,377) 43,390
CASH AND CASH EQUIVALENTS, beginning of year 723,495 322,108 694,851
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 322,108 $ 694,851 $ 1,377,342
============= ============ ============
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31,
-----------------------------------------------------
1995 1996 1997
------------- ------------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 3,305,606 $ 3,912,421 $ 4,042,866
Income taxes $ 3,309,830 $ 2,308,061 $ 3,248,839
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Note payable issued for purchase of Levy Transport, Ltd. $ - $ 365,898 $ -
Receivable from revenue equipment leased under a capital lease $ 6,482,752 $ 1,806,921 $ -
Revenue equipment acquired by capital lease $ - $ - $ 368,793
The accompanying notes are an integral part of these consolidated statements.
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
MTL Inc. and subsidiaries (the Company) is engaged primarily in truckload
transportation of bulk liquids in North America. The Company conducts a large
portion of its business through a network of affiliates and independent
owner-operators. Affiliates are independent corporations, which enter into
renewable one-year contracts with the Company. Affiliates are responsible for
paying for their own equipment (including debt service), fuel and other
operating costs. Independent owner-operators are independent contractors, which,
through a contract with the Company, supply one or more tractors and drivers for
the Company's use. Contracts with independent owner-operators may be terminated
by either party on short notice. The Company also charges affiliates and third
parties for the use of revenue equipment as necessary. In exchange for the
services rendered, affiliates and independent owner-operators are generally paid
85 percent and 63 percent, respectively, of the revenues generated for each load
hauled.
Purchase of Levy Transport, Ltd.
On June 11, 1996, the Company acquired all the outstanding stock of Levy
Transport, Ltd. (Levy), a Quebec-based tank truck carrier servicing the
chemical, petroleum and glass industries, from Les Placements Marlin, Ltd for
$5,148,745. The purchase price was determined based upon the fair market value
of the net assets acquired. The transaction was accounted for as a purchase
effective May 1, 1996, the date when control of Levy was transferred to the
Company. Goodwill in the amount of $1,616,000 was recorded as a result of the
acquisition. The Company is amortizing the goodwill over 15 years on a
straight-line basis.
Principles of Consolidation and Preparation
The consolidated financial statements include the accounts of MTL Inc. and its
wholly-owned subsidiaries, Montgomery, Quality Carriers, Inc., Lakeshore
Leasing, Inc., MTL de Mexico and, beginning May 1, 1996, Levy . All significant
intercompany accounts and transactions have been eliminated in consolidation.
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of tires, parts, materials and supplies for
servicing the Company's revenue equipment.
Prepaid Tires
The cost of tires purchased with new equipment, as well as replacement tires,
are accounted for as prepaid tires and amortized on a straight-line basis over
their estimated useful lives, which approximate one year.
Property and Equipment
Property and equipment are stated at cost. Revenue equipment under capital
leases is stated at the present value of the minimum lease payments at the
inception of the lease. Depreciation, including amortization of revenue
equipment under capital leases, is computed on a straight-line basis over the
estimated useful lives of the assets or the lease terms, whichever is shorter.
The estimated useful lives are 10-25 years for buildings and improvements, 5-15
years for revenue equipment, 7 years for terminal equipment, 3-5 years for
furniture and fixtures, and 5-10 years for other equipment. Maintenance and
repairs are charged to operating expense when incurred. Major improvements,
which extend the lives of the assets, are capitalized. When assets are disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and any gains or losses are reflected in operating expenses.
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired and is being amortized on a straight-line basis over its estimated
useful life which ranges from 15 to 40 years. Accumulated amortization was
$313,949 and $419,589 at December 31, 1996 and 1997, respectively. At each
balance sheet date, the Company evaluates the realizability of goodwill based
upon expectations of non-discounted cash flows and operating income. Based on
the most recent analysis, the Company believes no material impairment exists at
December 31, 1997.
Other Assets
Other assets consist primarily of an investment in a barge tank operation and
deferred loan costs. The Company is a one-third partner in the barge tank
operation, and one of the other partners is a shareholder of the Company. The
partnership was organized to transport bulk liquids by barge tank from Florida
to Puerto Rico. The Company's investment in the partnership is accounted for
using the equity method. The Company's investment, including loans made (net of
loan repayments) to the partnership, was $447,198 and $475,323 as of December
31, 1996 and 1997, respectively.
Deferred loan costs are being amortized over two to five years, the estimated
lives of the related long-term debt.
Accrued Loss and Damage Claims
The Company retains liability up to $75,000 per health claim and is self-insured
for cargo claims. For automotive liability, the Company has deductibles ranging
from $150,000 to $500,000 per occurrence. Prior to September 1994, the Company
retained liability for workers' compensation of up to $250,000 per occurrence.
Subsequent to this date, all workers' compensation claims are fully insured. The
Company has accrued for the estimated cost of open claims based upon losses and
claims reported and an estimate of losses incurred but not reported.
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company transports chemicals and hazardous materials and operates tank wash
facilities. As such, the Company's operations are subject to various
environmental laws and regulations. The Company has been involved in various
litigation and environmental matters arising from these operations. The Company
is currently designated a potentially responsible party (PRP) at six
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA) sites. The involved activities occurred in prior years and resulted
primarily from the transportation of waste or the cleaning of tank trailers at
third-party facilities. Although CERCLA liability is joint and several, in the
opinion of management, the Company has reviewed the financial stability of the
other PRPs and does not believe that its ultimate liability will be materially
affected by any financial uncertainties with respect thereto. In addition, at
five of the CERCLA sites, the Company is one of many (in most instances, one of
several hundred) PRP's named. Accordingly, based on the Company's historical
experience and available facts, in the opinion of management, a material
liability with respect to remediation of disposal sites to which the Company may
have delivered hazardous materials is not expected. Reserves have been
recognized for probable losses which can be estimated. There have been no
material changes in the recognized reserves, nor are material changes expected
in the future, based on the Company's activities at each of the locations. It is
the opinion of management that the ultimate disposition of these matters will
not have a material effect on the Company's financial position or results of
operations.
Fair Value of Financial Instruments
The book value of all financial instruments approximates their fair value. The
fair value of the Company based on the above is not a market valuation of the
Company as a whole.
Revenue Recognition
Transportation revenues and related costs are recognized on the date freight is
delivered. Other operating revenues, consisting primarily of lease revenues from
affiliates, independent owner-operators and third parties, are recognized as
earned.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Foreign Currency Translation
The functional currency for Levy is Canadian dollars. The translation from
Canadian dollars to U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate in effect during the
period. The gains or losses, net of income taxes, resulting from such
translation are included in stockholders' equity. Gains or losses from foreign
currency transactions are included in other income (expense).
New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) released Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130) and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131).
SFAS 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in the financial statements and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the stockholders' equity section of
the consolidated balance sheets.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments.
SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997. The Company has not considered the effects of
SFAS 130 and SFAS 131 on the consolidated financial statements.
Earning Per Share
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earning per Share" (SFAS 128). SFAS 128 establishes new standards for
computing and presenting earnings per share (EPS). Specifically, SFAS 128
replaces the presentation of primary EPS with a presentation of basic EPS,
requires dual presentation of basic and diluted EPS on the face of the income
statement and requires a reconciliation of the basic EPS computation to the
diluted EPS computation.
Basic EPS is calculated as net income divided by the weighted average number of
shares of common stock outstanding.
Diluted EPS is calculated using the treasury stock method under which net income
is divided by the weighted average number of common and common equivalent shares
outstanding during the year. Common stock equivalents consist of options.
The reconciliation of basic EPS and diluted EPS is as follows:
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Years Ended December 31,
----------------------------------------------
1995 1996 1997
Basic weighted average number of common shares
4,516,153 4,520,917 4,536,097
Diluted effect of options outstanding 26,556 79,350 175,204
---------- --------- ---------
Diluted weighted average number of common and
common equivalent shares 4,542,709 4,600,267 4,711,301
2. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following at December 31:
1996 1997
------------ ------------
Trade accounts receivable $29,807,861 $35,538,018
Affiliate and independent owner-operator receivables
3,157,212 2,963,221
Employee receivables 102,317 127,454
Other receivables 825,586 1,523,185
----------- -----------
Total receivables 33,892,976 40,151,878
Less- Allowance for doubtful accounts (1,397,265) (1,979,921)
----------- -----------
Accounts receivable, net $32,495,711 $38,171,957
=========== ===========
The activity in the allowance for doubtful accounts for each of the three years
in the period ended December 31, 1997, is as follows:
1995 1996 1997
----------- ----------- ----------
BALANCE, beginning of period $ 923,055 $1,019,302 $1,397,265
Additions charged to operating expenses
431,769 474,736 1,146,193
Write-off of bad debts (335,522) (96,773) (563,537)
----------- ----------- ----------
BALANCE, end of period $1,019,302 $1,397,265 $1,979,921
=========== ========== ==========
As of December 31, 1997, approximately 85 percent and 15 percent of trade
accounts receivable were due from companies in the chemical and bulk food
products industries, respectively. No single customer accounted for over 8
percent of the Company's operating revenues. Included in accounts and notes
receivable are $58,807 and $39,680 of receivables as of December 31, 1996 and
1997, respectively, which are due from other companies owned by related parties.
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 Capital
December 31, Leases
------------- ------------
1998 $1,419,453
1999 1,419,453
2000 741,134
------------
Total minimum lease payments 3,580,040
Less- Unearned financing income (429,775)
------------
Present value of minimum capital lease payments 3,150,265
Less- Current maturities of other receivables (1,163,357)
-------------
Other receivables, less current maturities $1,986,908
=============
4. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
1996 1997
----------- -----------
Private Placement of Notes Payable
Unsecured private placement of notes payable with a fixed interest rate
of 6.97%. Interest is payable semi-annually and seven equal
principal payments are to be made annually beginning January 2000.
$25,000,000 $25,000,000
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1996 1997
----------- -----------
Lines of Credit
Unsecured notes payable under a $50,000,000 revolving line of credit with
interest rates of LIBOR plus an incremental percentage based on the
ratio of funded debt to earnings before interest, income taxes,
depreciation and amortization (6.56% at December 31, 1997) and U.S.
prime less .25% (8.25% at December 31, 1997). Interest is payable at
varying dates, and all outstanding principal is due May 31, 2000,
subject to renewal. Letters of credit of $325,224 were issued as of
December 31, 1997, and reduce the borrowings available. Additional
advances of $33,694,106 were available and unused at December 31, 1997
17,076,535 15,980,670
Unsecured notes payable under a $16,428,971 revolving line of credit
with interest rates based on the ratio of funded debt to earnings
before interest, income taxes, depreciation and amortization (4.75%
at December 31, 1997) and Canadian lender's prime (6% at December
31, 1997). Interest is payable at varying dates, and all
outstanding principal is due May 31, 2000, subject to renewal.
Additional advances of $5,942,394 were available and unused at
December 31, 1997
6,795,292 10,486,577
Notes Secured by Revenue Equipment
6.5% to 11.65% fixed rate notes payable,
due in varying monthly installments with maturity
dates through 1999
4,075,183 2,492,351
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1996 1997
-------------- --------------
Other Notes
5% unsecured note payable to employee, due in annual
installments of $69,911 through 2001 364,830 279,642
-------------- --------------
53,311,840 54,239,240
Less- Current maturities of long-term debt (1,611,249) (1,805,775)
-------------- --------------
Long-term debt, less current maturities $51,700,591 $52,433,465
============== ==============
Under the terms of the Company's debt agreements, the Company is required to
maintain, among other restrictions, minimum net worth levels, debt to net worth
ratios and debt service coverage ratios. In addition, the agreements contain
restrictions on asset dispositions and the payment of dividends. At December 31,
1997, the Company was in compliance with the terms and covenants of its debt
agreements.
Scheduled maturities of long-term debt for the next five years and thereafter
are as follows:
Year Ending
December 31, Amount
-------------- --------------
1998 $ 1,805,775
1999 812,300
2000 30,122,683
2001 3,641,340
2002 3,571,429
Thereafter 14,285,713
--------------
$54,239,240
==============
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. LEASE COMMITMENTS:
The Company leases revenue and other equipment under operating and capital
leases.
Future minimum lease payments under non-cancelable operating leases and capital
leases at December 31, 1997, are as follows:
Year Ending Capital Operating
December 31, Leases Leases
------------- ---------- -------------
1998 $539,502 $1,394,394
1999 157,456 185,142
2000 233,422 123,935
2001 - 49,560
-------------
Total minimum lease payments 930,380 $1,753,031
---------- =============
Less- Amount representing interest
(at rates ranging from 6.75% to 11.65%) (71,562)
----------
Present value of minimum capital lease payments 858,818
Less- Current maturities of obligations under capital
leases (501,086)
----------
Obligations under capital leases,
less current maturities $357,732
==========
The capitalized cost of equipment under capital leases, which is included in
revenue equipment in the accompanying consolidated balance sheets, was as
follows at December 31:
1996 1997
------------ ------------
Revenue equipment $6,499,900 $1,673,599
Less- Accumulated amortization (2,317,947) (656,816)
------------ -------------
$4,181,953 $1,016,783
============ =============
Rent expense under operating leases was $958,162, $2,209,532 and $2,821,179 for
the years ended December 31, 1995, 1996 and 1997, respectively.
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. GUARANTOR OF CERTAIN LEASE OBLIGATIONS:
In 1995 and 1996, the Company entered into capital leases for revenue equipment
with certain affiliates and owner-operators. The Company then sold to a third
party the lease receivables for which it received $2,529,244 and $979,104 in
1995 and 1996, respectively. There were no additional sales during 1997. The
Company is contingently liable as the guarantor for the remaining balance of the
receivables sold of $2,769,801 at December 31, 1997. These leases are
collateralized by the equipment related to these leases. Management estimated
the fair value of this equipment to be $2,384,453 at December 31, 1997, which
was based upon an average dealer-estimated repurchase price.
Also, in 1995 and 1996, the Company entered into capital leases for revenue
equipment with other affiliates. The Company then sold to a third party the
lease receivables for which it received $3,282,030 and $202,141 in 1995 and
1996, respectively. There were no additional sales during 1997. The Company is
contingently liable as the guarantor for the remaining balance of the
receivables sold of $2,321,552 at December 31, 1997. These leases are
collateralized by the equipment related to these leases. Management estimated
the fair value of this equipment to be $1,938,665 at December 31, 1997, which
was based upon an average dealer-estimated repurchase price.
Reserves have been recognized by the Company for its estimated exposure under
the above guarantees. There have been no material changes in the recognized
reserves, nor are material changes expected in the future. It is possible that
the estimates used in determining these reserves and the fair value may change.
However, it is the opinion of management that the ultimate difference in the
estimates will not have a material effect on the Company's financial position or
results of operations.
7. OTHER TRANSACTIONS WITH RELATED PARTIES:
Tank trailer manufacturing facilities are located on property leased to a
stockholder by the Company. The property is under a lease for $5,000 per month
expiring April 1, 1999. The Company purchased tank trailers for $11,675,000,
$5,138,000 and $6,587,000 in 1995, 1996 and 1997, respectively, from the company
and has commitments to purchase additional tank trailers costing approximately
$2,467,000 at of December 31, 1997. Also, the related company provided repair,
maintenance, design, engineering, transloading, intermodal and other services to
the Company totaling $410,000, $572,000 and $347,000 during the years ended
December 31, 1995, 1996 and 1997, respectively.
8. INCOME TAXES:
The provision for income taxes consisted of the following for the years ended
December 31:
1995 1996 1997
--------------- --------------- --------------
Currently payable:
Federal $1,800,607 $2,006,948 $2,945,692
State 718,075 773,975 1,062,227
2,518,682 2,780,923 4,007,919
--------------- --------------- --------------
Deferred taxes:
Federal 2,018,798 2,911,903 2,447,101
State 870,650 410,776 941,203
--------------- --------------- --------------
2,889,448 3,322,679 3,388,304
--------------- --------------- --------------
Provision for income taxes $5,408,130 $6,103,602 $7,396,223
=============== =============== ==============
The net deferred tax liability, which includes no valuation allowances,
consisted of the following at December 31:
1996 1997
------------------ -----------------
Deferred tax assets:
Reserves for guarantee of lease obligations $ 291,631 $ 245,646
Capital leases treated as operating leases for tax purposes as lessee
769,004 220,840
Tax credit carryforwards 1,273,755 113,149
Self-insurance reserves 3,144,885 3,865,424
Allowance for doubtful accounts 475,070 618,977
Investment basis difference 206,323 216,855
Accrued vacation pay 144,220 162,395
Other 119,191 174,530
------------------ -----------------
6,424,079 5,617,816
------------------ -----------------
Deferred tax liabilities:
Property and equipment basis difference (21,819,799) (23,798,672)
State taxes (3,756,268) (4,562,246)
Capital leases treated as operating leases for tax purposes as lessor
(1,493,368) (1,132,308)
Other (284,783) (443,033)
------------------ -----------------
(27,354,218) (29,936,259)
------------------ -----------------
Net deferred tax liability $(20,930,139) $(24,318,443)
================== =================
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company's effective tax rates differ from the federal statutory rate of 34
percent. The reasons for those differences are as follows for the years ended
December 31:
1995 1996 1997
-------------- -------------- -------------
Tax expense at the statutory rate $4,491,328 $5,079,705 $6,079,059
State income taxes, net of federal benefit 1,048,559 781,936 1,322,264
Other (131,757) 241,961 (5,100)
-------------- -------------- -------------
Provision for income taxes $5,408,130 $6,103,602 $7,396,223
============== ============== =============
At December 31, 1997, the Company had alternative minimum tax credit
carryforwards of $113,149 (no expiration).
The Company has not provided a valuation allowance for deferred tax assets based
upon the assumption that the Company will achieve sufficient taxable income from
operations in the future.
9. INCENTIVE STOCK OPTION PLAN:
In 1992, an incentive stock option plan (the Old Plan) was adopted which allowed
for 100,000 options to be granted to eligible employees. During 1994, the
Company's Board of Directors elected to adopt a new incentive stock option plan
(the Plan). The Plan absorbed the options granted under the Old Plan, and an
additional 200,000 options were approved for granting at an exercise price not
to be less than the market price of the common stock at the date of grant.
During 1996, an additional 400,000 shares were approved for granting under the
Plan. Options are granted at the discretion of the Board of Directors and are
exercisable for shares of unissued common stock or treasury stock. Options vest
20 percent each year, other than 11,490 options granted in 1994 and 100,000
options granted in 1996, which vested immediately. Substantially all employees,
officers and directors are eligible for participation in the Plan.
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company uses Accounting Principles Board Opinion No. 25, "Accounting for
Stock-Based Compensation," and the related interpretations to account for the
Plan. No compensation cost has been recognized under the Plan as the option
price has been greater than or equal to the market price of the common stock on
the applicable measurement date for all options issued. The Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), for disclosure
purposes in 1996. For SFAS 123 purposes, the fair value of each option grant has
been estimated as of the grant date using the Black-Scholes option pricing model
with the following weighted average assumptions: risk free interest rate of 6.18
percent for options with an expected life of four years and 6.39 percent for
options with an expected life of six years, expected option life of four or six
years, expected dividend rate of 0 percent, and expected volatility of 30.05
percent. Using these assumptions, the fair value of stock options granted in
1995 and 1996 are $222,110 and $2,054,875, respectively, which would be
amortized as compensation over the vesting period of the options. No options
were granted during 1997.
Had compensation cost relating to the Plan been determined based upon the fair
value at the grant date for awards under the Plan consistent with the method
described in SFAS 123, the Company's net income and earnings per share would
have been as follows for the years ended December 31,:
1995 1996 1997
------- ------- ---------
Net income: As reported (in thousands) $7,802 $8,837 $10,483
Pro forma (in thousands) 7,725 8,010 10,217
Earnings per share: As reported $1.72 $1.92 $2.23
Pro forma 1.70 1.74 2.17
Because the method of accounting described in SFAS 123 has not been applied to
options granted prior to January 1, 1995, the above may not be representative of
that in future years.
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Combined stock option activity for the Plan for the years ended December 31,
1995, through December 31, 1997, is as follows:
Weighted
Number Range of Average
of Option Exercise Shares Expiration
Shares Prices Price Vested Date
---------- ------------ ---------- ---------- ------------
Options outstanding at
December 31, 1994 255,378 $6.25-15.00 $ 11.89 49,740 2002-2004
1995 option activity:
Vesting of prior-year options
- 6.25-15.00 47,628 2002-2004
Granted 43,461 15.00-15.50 15.17 - 2005
Exercised (1,500) 6.25 6.25 (1,500) 2002
Canceled (19,916) 6.25-15.50 14.34 (1,894) 2002-2005
---------- ----------
Options outstanding at
December 31, 1995 277,423 6.25-15.50 12.26 93,974 2002-2005
1996 option activity:
Vesting of prior-year options
- 6.25-15.50 59,073 2002-2005
Granted 320,014 15.00-18.25 17.68 100,000 2006
Exercised (6,506) 6.25-15.00 7.33 (6,506) 2002-2004
Canceled (13,869) 6.25-16.00 15.07 (1,791) 2002-2006
---------- ----------
Options outstanding at
December 31, 1996 577,062 6.25-18.25 15.24 244,750 2002-2006
1997 option activity:
Vesting of prior-year options
- 6.25-18.25 82,576 2002-2006
Exercised (26,085) 6.25-15.50 11.95 (26,085) 2002-2006
Canceled (13,799) 6.25-15.50 14.60 (1,266) 2002-2006
---------- ----------
Options outstanding at
December 31, 1997 537,178 6.25-18.25 15.42 299,975 2002-2006
========== ==========
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The 537,178 options outstanding at December 31, 1997, are summarized as follows:
Weighted Weighted
Average Average
Weighted Remaining Exercise Price
Price Range Number of Average Contractual Shares of Vested
------------ Shares Exercise Price Life (in years) Vested Shares
------------- --------------- ---------------- -------- ----------------
$ 6.25 72,250 $ 6.25 4.48 72,250 $ 6.25
15.00-18.25 464,928 16.61 8.01 227,725 16.61
The Company expects that approximately 10 percent of the outstanding awards at
December 31, 1997, will eventually be forfeited. At December 31, 1997, a total
of 128,631 authorized shares remain available for granting.
10. PROFIT SHARING PLAN:
The Company has a profit sharing plan for substantially all employees.
Contributions are made at the discretion of the Board of Directors. A $300,000
contribution was made for 1995 and 1996. A $300,000 contribution was approved
for 1997.
11. GEOGRAPHIC SEGMENTS:
The Company's operations are located primarily in the United States and Canada.
Inter-area sales are not significant to the total revenue of any geographic
area. Information about the Company's operations in different geographic areas
for the year ended December 31, 1997, is as follows:
U.S. Canada Mexico Eliminations Consolidated
-------------- -------------- ------------- --------------- --------------
Operating Revenues $252,942,603 $33,818,166 $ 356,065 $ (1,069,709) $286,047,125
Net operating income 19,977,129 913,745 202,020 - 21,092,894
Identifiable assets 178,347,163 26,340,103 4,574,919 (15,225,804) 194,036,381
Depreciation and
amortization 14,707,920 2,483,677 143,524 - 17,335,121
Capital expenditures 23,042,573 8,332,387 3,745,916 - 35,120,876
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
12. SUBSEQUENT EVENTS:
On February 10, 1998, the Company entered into an agreement with Sombrero
Acquisition Corporation (Sombrero), an affiliate of Apollo Management LP
(Apollo), pursuant to which Sombrero will merge with the Company. According to
the terms of the merger agreement, stockholders of the Company will receive $40
per share in cash. The total transaction value is approximately $250 million,
including outstanding stock options, fees and approximately $54 million of net
debt.
The transaction will be subject to the customary conditions, including the
affirmative vote of the holders of a majority of the outstanding stock of the
Company.
The Company will be funded by an equity investment of approximately $70 million
from Apollo and members of the Company's existing management. Approximately $200
million of senior subordinated and bank debt will be used to finance the
acquisition. Additionally, a $100 million revolving credit facility will be
available to the Company for working capital and acquisition purposes.