1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 3, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- -------------- Commission File No. 0-14810 MARK VII, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 43-1074964 - ---------------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 965 Ridge Lake Boulevard, Suite 103 Memphis, Tennessee 38120 - ---------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (901) 767-4455 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 ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 3, 1999 - ---------------------------- -------------------------- Common stock, $.05 par value 8,958,970 Shares 2 MARK VII, INC. AND SUBSIDIARIES FORM 10-Q - FOR THE THREE MONTHS ENDED APRIL 3, 1999 INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements a) Condensed Consolidated Statements of Income - Three Months Ended April 3, 1999 and April 4, 1998......................................................... 3 b) Consolidated Balance Sheets - April 3, 1999 and January 2, 1999........................... 4 c) Condensed Consolidated Statements of Cash Flows - Three Months Ended April 3, 1999 and April 4, 1998......................................................... 5 e) Notes to Condensed Consolidated Financial Statements...................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................... 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 9 Part II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................... 9 Item 2. Changes in Securities........................................................................... 9 Item 3. Defaults Upon Senior Securities................................................................. 9 Item 4. Submission of Matters to a Vote of Security Holders............................................. 9 Item 5. Other Information............................................................................... 9 Item 6. Exhibits and Reports on Form 8-K................................................................ 9 Signature.......................................................................................10 2 3 PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS. MARK VII, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) FOR THE THREE MONTHS ENDED -------------------------- APR. 3, 1999 APR. 4, 1998 ------------ ------------ Operating Revenues ............................... $ 183,784 $ 171,800 Transportation Costs ............................. 162,334 151,242 --------- --------- Net Revenues ..................................... 21,450 20,558 --------- --------- Operating Expenses: Salaries and related costs ................... 5,099 4,468 Selling, general and administrative .......... 12,925 13,340 --------- --------- Total operating expenses .................. 18,024 17,808 --------- --------- Operating Income ................................. 3,426 2,750 Interest and Other (Income)/Expense, Net ......... (385) (55) --------- --------- Income Before Provision for Income Taxes ......... 3,811 2,805 Provision for Income Taxes ....................... 1,543 1,178 --------- --------- Net Income ....................................... $ 2,268 $ 1,627 ========= ========= Net Income Per Common Share ...................... $ .25 $ .18 ========= ========= Net Income Per Common Share, Assuming Dilution ... $ .24 $ .17 ========= ========= Average Common Shares and Equivalents Outstanding: Basic ........................................ 8,955 8,939 Diluted ...................................... 9,411 9,467 Dividends Paid ................................... -- -- See "Notes to Condensed Consolidated Financial Statements." 3 4 MARK VII, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) APR. 3, 1999 JAN. 2, 1999 ------------ ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents ...................................... $ 14,869 $ 3,758 Accounts receivable, net of allowance of $4,137 and $4,289 ..... 83,062 97,879 Notes and other receivables, net of allowance of $396 and $301 . 3,449 4,406 Other current assets ........................................... 476 451 --------- --------- Total current assets ........................................ 101,856 106,494 Deferred Income Taxes .............................................. 439 519 Net Property and Equipment ......................................... 9,251 9,273 Intangible and Other Assets ........................................ 5,967 6,782 --------- --------- $ 117,513 $ 123,068 ========= ========= LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Accrued transportation charges ................................. $ 61,744 $ 70,340 Deferred income taxes .......................................... 4,042 4,166 Other current and accrued liabilities .......................... 7,499 6,607 --------- --------- Total current liabilities ................................... 73,285 81,113 --------- --------- Long-Term Obligations .............................................. 651 712 --------- --------- Contingencies and Commitments Shareholders' Investment: Common stock, $.05 par value, authorized 20,000,000 shares, issued 10,082,720 and 10,035,020 shares ............. 504 502 Paid-in capital ................................................ 30,105 29,938 Retained earnings .............................................. 25,944 23,676 --------- --------- 56,553 54,116 Less: 1,123,750 and 1,115,850 shares of treasury stock, at cost (12,976) (12,873) --------- --------- Total shareholders' investment .............................. 43,577 41,243 --------- --------- $ 117,513 $ 123,068 ========= ========= See "Notes to Condensed Consolidated Financial Statements." 4 5 MARK VII, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) FOR THE THREE MONTHS ENDED -------------------------- APR. 3, 1999 APR. 4, 1998 ------------ ------------ OPERATING ACTIVITIES: Net cash provided by (used for) operating activities $ 11,658 $ (753) -------- ------- INVESTING ACTIVITIES: Additions to property and equipment ................ (537) (1,177) Retirements of property and equipment .............. 7 101 -------- ------- Net cash used for investing activities ............. (530) (1,076) -------- ------- FINANCING ACTIVITIES: Repayments of debt and capital lease obligations ... (61) (68) Exercise of stock options .......................... 147 -- Purchase of treasury stock ......................... (103) -- -------- ------- Net cash used for financing activities ............. (17) (68) -------- ------- Net increase (decrease) in cash and cash equivalents .. 11,111 (1,897) Cash and cash equivalents: Beginning of period ............................... 3,758 3,732 -------- ------- End of period ..................................... $ 14,869 $ 1,835 ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest ......................................... $ 7 $ 7 Income taxes, net of refunds received ............ 1,127 889 See "Notes to Condensed Consolidated Financial Statements." 5 6 MARK VII, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) GENERAL: The consolidated financial statements include Mark VII, Inc., a Delaware corporation, and its wholly owned subsidiaries, collectively referred to herein as "the Company". The Company is a sales, marketing and service organization that acts as a transportation services provider and a transportation logistics manager. The Company has a network of transportation sales personnel that provides services throughout the United States, as well as Mexico and Canada. The principal operations of the Company are conducted by its transportation services subsidiary, Mark VII Transportation Company, Inc. ("Mark VII Transportation"). The condensed, consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In management's opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented. Pursuant to SEC rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements unless significant changes have taken place since the end of the most recent fiscal year. For this reason, the condensed, consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the Company's 1998 Annual Report on Form 10-K. The results for the three months ended April 3, 1999 are not necessarily indicative of the results for the entire year. EARNINGS PER SHARE: A reconciliation between basic earnings per share and diluted earnings per share follows: THREE MONTHS ENDED --------------------- APR. 3, APR. 4, 1999 1998 ------ ------ (in thousands, except per share amounts) Net income ....................................... $2,268 $1,627 ====== ====== Average common shares and equivalents outstanding: Basic .......................................... 8,955 8,939 Effect of dilutive options ..................... 456 528 ------ ------ Diluted ........................................ 9,411 9,467 ====== ====== Per share amounts: Net income per common share .................... $ .25 $ .18 ====== ====== Net income per common share, assuming dilution . $ .24 $ .17 ====== ====== 6 7 MARK VII, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Three months ended April 3, 1999 vs. three months ended April 4, 1998. The following table sets forth the percentage relationship of the Company's revenues and expense items to operating revenues for the periods indicated: THREE MONTHS ----------------------- 1999 1998 ------ ------ Operating Revenues ..................... 100.0% 100.0% Transportation Costs ................... 88.3 88.0 ------ ------ Net Revenues ........................... 11.7 12.0 Operating Expenses: Salaries and related costs ......... 2.8 2.6 Selling, general and administrative 7.0 7.8 ------ ------ Total operating expenses ...... 9.8 10.4 ------ ------ Operating Income ....................... 1.9 1.6 Interest and Other (Income)/Expense, Net (.2) .0 ------ ------ Income Before Provision for Income Taxes 2.1% 1.6% ====== ====== General - The transportation services operation engages carriers for the transportation of freight by rail, truck, ocean or air for shippers. Operating revenues include the carriers' charges for carrying shipments plus commissions and fees. The carriers with whom the Company contracts provide transportation equipment, the charge for which is included in transportation costs. As a result, the primary operating costs incurred by the transportation services operations and logistics projects are for purchased transportation. Net revenues include only the commissions and fees. Several of the Company's newer logistics management projects are performed on a management fee basis whereby the Company collects only a management fee. Selling, general and administrative expenses primarily consist of the percentage of net revenue paid to agencies and independent sales contractors as consideration for providing sales and marketing, arranging for movement of shipments, entering billing and accounts payable information on shipments and maintaining customer relations, as well as other company operating expenses. Certain costs incurred by the Company's dedicated trucking fleets are also reported in salaries and related costs and selling, general and administrative expenses. Operating Revenues - The Company's total number of shipments increased from 170,000 in 1998 to 184,000 in 1999. Increases in shipments and operating revenues are lower than the Company's historical growth rates due to the following factors: the continued elimination of dedicated trucking operations; the fourth quarter sale of a business unit engaged in a management fee based logistics program; and unusual winter weather patterns that affected demand for temperature controlled services which adversely impacted rates for the Company's TemStar division. Net Revenues - The Company's net revenues as a percentage of operating revenues were 11.7% in 1999 versus 12.0% in 1998. Net revenues as a percentage of operating revenues declined during the first quarter of 1999 7 8 due to factors discussed above in Operating Revenues. This decrease in net revenues as a percentage of operating revenues has been offset by proportionate decreases in operating expenses as a percentage of operating revenues particularly relating to the closure of dedicated trucking operations. Operating Expenses - As discussed above under Net Revenues, the closing of certain dedicated trucking fleets has resulted in fluctuations in operating expenses as a percentage of operating revenues. In general, the Company's dedicated trucking fleets have relatively higher fixed costs as a percentage of operating revenues than the Company's transportation services and logistics management operations. Interest and Other (Income)/Expense, Net - Cash flow from operations has been adequate to cover the Company's operating needs and capital requirements in recent years, resulting in decreased interest expense and increased interest income in 1999 and 1998. Provision for Income Taxes - The Company's effective tax rate was 40.5% in 1999 and 42% in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company has available a $25,000,000 unsecured revolving credit facility (the "Facility"). In recent years, the Company's cash flows from operations have exceeded its working capital needs and the Company has made no borrowings under this Facility since its inception in July 1997. On April 3, 1999, letters of credit totaling $2,705,000 had been issued on the Company's behalf to secure insurance deductibles and purchases of operating services, resulting in unused borrowing capacity of $22,295,000. The interest rate for borrowings under the Facility is a variable rate based upon the 30 day LIBOR Funding Rate, as defined, plus 50 to 125 basis points. The Company pays a varying fee of .35% to 1.00% on outstanding letters of credit and a varying commitment fee of .15% to .30% on the unused portion of the Facility, as defined. At April 3, 1999, the interest rate was 5.44% and the letter of credit fee and commitment fee were .35% and .15%, respectively. The line of credit expires on July 1, 2000, but may be extended by mutual agreement of the lender and the Company, for subsequent periods of one year each. Among the covenants contained in the Facility are maintenance of certain financial ratios, including debt to net worth, cash plus accounts receivable to current liabilities plus debt and debt to earnings before income taxes, interest, depreciation and amortization (all as defined). Other covenants include the level of capital and lease expenditures, acquisitions and mergers, dividends and redemptions of stock. At April 3, 1999, the Company had a ratio of current assets to current liabilities of approximately 1.39 to 1. Management believes that the Company will have sufficient cash flow from operations and borrowing capacity to cover its operating needs and capital requirements for the foreseeable future. YEAR 2000 In 1996, the Company conducted an extensive review of its financial and administrative information system. The review evaluated the Company's computer systems in terms of Year 2000 compliance, capacity, general efficiency, compatibility and competitive advantage. As a result of the review, the Company has designed and implemented a new financial and administrative system which is Year 2000 compliant to replace the previous system, which was over ten years old. Since October 1996, the Company has spent approximately $2,500,000 on the design and implementation of this system. Additionally, during this same period, the Company performed extensive reviews of all other peripheral systems not included in the above system. The Company has spent approximately $100,000 in order to ensure that its peripheral systems are Year 2000 compliant. The Company expects to spend no more than an additional $100,000 on its Year 2000 compliance efforts. All funds for Year 2000 projects have been derived from operating cash flows. The Company has sent a survey to its significant third party suppliers and customers inquiring into their Year 2000 compliance status and gathering information to assess the effect of any noncompliance on the Company's operations. The Company has had no indication that these third parties will not be Year 2000 compliant. Although no one can accurately predict how many Year 2000 related failures will occur or the severity, duration or financial consequences of such failures, the Company believes its most reasonably likely worst case scenario is that it could sustain what are expected to be nonmaterial operational 8 9 inconveniences and inefficiencies and be involved in nonmaterial business disputes related to the Company or one of its vendor's or customer's inability to carry out certain contractual obligations. Therefore, the Company has determined that the need for a major contingency plan is not appropriate at this time. OTHER INFORMATION As the Company continues its expansion into more comprehensive logistics management programs, the credit risk exposure on a limited number of major customers increases. While the Company takes measures to continually evaluate, monitor and, if necessary, reserve for these and other credit risks, it is possible, although unlikely, that circumstances could develop on a particular major customer which could have a material effect on the Company's short-term results. Results of operations in the transportation industry generally show a seasonal pattern, as customers reduce shipments during and after the winter holiday season. In recent years, the Company's operating income and earnings have been higher in the second, third and fourth quarters than in the first quarter. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is not materially exposed to market risk. PART II. OTHER INFORMATION. Item 1. Legal Proceedings. None Item 2. Changes in Securities. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description ----------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K. None 9 10 SIGNATURES Pursuant to the requirements 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. Mark VII, Inc. (Registrant) May 12, 1999 /s/ Philip L. Dunavant - ------------- ---------------------------------------- (Date) Philip L. Dunavant, Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 10