Item 1. Business.
The business of Mayflower Group, Inc. ("Group") is conducted entirely through its two operating subsidiaries, Mayflower Contract Services, Inc. ("Contract Services"), and Mayflower Transit, Inc. ("Transit") and their respective subsidiaries (Group, with its respective subsidiaries, being referred to collectively herein as "the Company or "the Registrant").
Group, formerly known as MG Holdings, Inc., was formed in 1986 for the purpose of acquiring another company whose name was Mayflower Group, Inc. ("Old Mayflower"), a holding company that owned 100% of the stock of three operating subsidiaries: Mayflower Contract Services, Inc. ("Contract Services"), Mayflower Transit, Inc. ("Transit"), and Mayflower Consumer Products, Inc. ("Consumer Products"). The acquisition was completed in December 1986 in a two-step merger: a cash tender offer for all the 7.9 million outstanding common shares of Old Mayflower at $31.50 per share followed by a merger of Old Mayflower into a wholly-owned subsidiary of Group. To finance the acquisition, Group raised approximately $330 million of debt financing, including a $110 million senior secured credit facility and $160 million through private placement of 12 5/8% Senior Subordinated Debentures ("Debentures") with Warrants to purchase common stock of Group. The remaining debt financing consisted of a secured bank loan to a subsidiary of Contract Services. Group sold Consumer Products in 1987 and eventually refinanced the senior secured credit facility with secured credit facilities at Contract Services and Transit.
Group is a holding company that relies upon the cash flow of its two operating subsidiaries to satisfy its obligations, which through December 1990 consisted primarily of interest payments on the Debentures. Following Group's financial reorganization, discussed below, it had no significant obligations remaining. From 1987 through 1991, operating results and cash flow generated by Group and its operating subsidiaries were not sufficient to pay significant amounts of principal on Group's senior debt or allow Group to remain in compliance with all financial covenants contained in the secured credit facilities. As a result, beginning after December 1990, Contract Services and Transit were prohibited by terms of the secured credit facilities from making any further cash dividend payments to Group for the purposes of servicing interest payments on its Debentures. Consequently, the two scheduled semiannual interest payments on the Debentures of $10.1 million each were not made in 1991 resulting in a default under provisions of the related indenture. After various restructuring proposals were considered, Group's Debenture holders, along with Group's common stock and warrant holders, overwhelmingly approved a Prepackaged Plan of Reorganization ("Plan of Reorganization") in early 1992. The Plan of Reorganization was confirmed by the court and became effective March 1992. Under the Plan of Reorganization, the holders of the Debentures received shares of newly issued common stock equal to approximately 94% of the common stock of Group. The existing holders of the common stock and warrants of Group received shares of newly issued common stock equal to approximately 5% of the common stock of Group. Two other creditors received approximately 1% of the common stock as payment in lieu of cash for services in connection with the Plan of Reorganization. The Plan of Reorganization did not affect Contract Services or Transit.
Contract Services
Contract Services was created through the acquisition of R.W. Harmon & Sons, Inc. by Old Mayflower in October 1984. Since that date, Contract Services has purchased 17 additional passenger transportation companies. Contract Services provides service in 28 states.
Contract Services derives revenues from two distinct lines of business: student transportation and public transportation.
Student Transportation. Student transportation represents the largest source of revenue for Contract Services. Revenues from this segment were approximately $166.4 million in 1993, which represents approximately 71% of Contract Services' total revenues. Contract Services renders daily transportation services to more than 200 school districts in 20 states. While the nature and scope of services to school districts vary, the most typical arrangement encompasses a multi-year contract under which Contract Services operates owned or leased school buses driven by its own drivers. Services rendered to school districts include traditional daily home-to-school transportation for students, as well as after-hours or mid-day activity charters.
Contracts are typically priced in terms of a per-day charge for base services and a per-hour charter rate for extracurricular transportation. In most instances, billings are rendered monthly and remittances are collected immediately.
Public Transportation. The Federal Transit Administration (formerly the Urban Mass Transit Administration), the Department of Transportation, and certain legislation have, in recent years, established additional rules and guidelines governing participants in federally assisted transportation programs. These rules encourage private enterprise participation, prohibit discrimination and require programs to provide transit service to disabled individuals. Contract Services has capitalized on these trends by establishing public transportation operations in several major metropolitan markets beginning in 1988. In 1993, revenues from this segment were approximately $69.5 million, which represents approximately 29% of Contract Services' total revenues.
In this segment, Contract Services provides year-round local demand-responsive service and fixed route transit service for transportation authorities in ten major metropolitan markets. As in its student transportation segment, these contracts are performed through use of Contract Services-provided and/or managed vehicles.
Marketing. Traditionally, government agencies and municipalities have performed the bulk of student and public transportation services. While there has been a gradual trend toward privatizing such municipal/ government services, only about 30% of student transportation is provided by private sector companies today, and the figure in the public and para transit industries is considerably lower. In this market, the competitive challenge for Contract Services lies in persuading its potential public sector customers to convert to a private vendor.
Contract Services believes that the key to success in both the student and public transportation markets is demonstrated expertise. Contract Services competes on the basis of quality, efficiency and price. In both markets, Contract Services has determined that a reputation as a safe provider is essential. Complementing safety, a company must demonstrate sensitivity in the school market and expertise in the transit market. These attributes may induce a customer to renew or extend contracts, foregoing the bid process. Most transit authorities award contracts via an overall evaluation process that gives weight to operating qualifications as well as price.
Contract Services has operating or sales management assigned to certain geographical areas that are responsible for maintaining contact with active and prospective customers and for prospecting conversion leads, as well as staying alert to public bid opportunities in adjacent geographic markets.
Competition. The private, public and student transportation industries are highly fragmented and regionalized. Contract Services believes it is the nation's largest provider of paratransit services and has one of the three largest market shares of any private contractor in the United States student transportation industry.
Safety Program. Contract Services operates formal safety programs centering on employee selection and training, and bus maintenance. A prospective driver's record is screened for past criminal and motor vehicle violations through a search of public records (where such searches are permitted). The prospective driver must also pass certain tests that screen for traits that may affect the driver's performance. In addition, Contract Services has conducted pre-employment and random drug and alcohol tests since 1989.
Contract Services has a formal training program for its drivers that involves at least ten hours of one-on-one, behind the wheel instruction with a certified trainer. The driver also receives at least ten hours of classroom training, covering student discipline on the bus, safety rules and other bus procedures. On an ongoing basis, drivers attend at least nine hours per year of meetings to view films and review safety procedures. Field safety supervisors periodically perform road observations to assure drivers are complying with traffic laws and safety procedures. Motor vehicle and criminal records are also monitored on an ongoing basis for violations and accidents.
Environmental Laws. Compliance by Contract Services with federal, state and local environmental protection laws has not in the past had, and is not expected to have in the future, a material effect upon its capital expenditures, liquidity, earnings or competitive position.
Insurance. Contract Services' insurance program consists of three principal types of coverage: auto liability (for third party personal injury or property damage claims), general liability and workers' compensation. Workers' compensation is regulated by the individual states in which Contract Services operates.
With the rising cost of liability insurance in the mid-1980's, Contract Services moved to an "economic" self-insurance program in 1987 whereby Contract Services retains financial exposure for the first $2.0 million of each claim. Though Contract Services does not purchase insurance coverage for this exposure, Contract Services purchases a "fronted" policy from an insurance carrier. The insurance carrier's liability under this arrangement is to make any claim payments that are not made by Contract Services. Contract Services indemnifies the insurance company for any losses and collateralizes this indemnification obligation with letters of credit.
The amounts of letter of credit collateralization are calculated based upon expected losses for a given policy year. Because of the nature of this liability, it takes several years to settle fully all claims for a given policy period. As of December 31, 1993, Contract Services had $28.1 million in letters of credit outstanding under its primary credit facility as collateral for its insurance related obligations.
Contract Services also maintains excess liability insurance policies providing in total up to an additional $42 million in limits.
Fuel Costs. The impact of additional fuel taxes, which became effective in October 1993 following the enactment of the 1993 Omnibus Budget Reconciliation Act will not be significant as Contract Services' student transportation system is exempt from federal fuel taxes. Also Contract Services limits the effects of significant increases in fuel prices by including fuel escalator clauses in many of its contracts, a "fuel cap" which provides price protection against such increases, and arrangements with certain vendors to fix fuel costs within a predetermined range.
Employees. Contract Services employs approximately 11,000 people, approximately 9,000 of whom are employed as drivers and driver aides. Most drivers are part-time employees, 60% working fewer than 1,000 hours per year. Approximately 20% of Contract Services' drivers belong to collective bargaining units. These unions represent employees in major metropolitan markets or in school districts where drivers and mechanics were formerly employed by the school corporation. Relations with employees are satisfactory.
Transit
Transit is involved in a number of transportation service businesses. It provides household goods moving services and transportation services for goods that require special handling, such as electronic products and trade show exhibits. It also provides warehousing services such as storage and distribution, freight forwarding for domestic and international shipments, and flatbed hauling of containerized shipments. In these operations, Transit uses its network of approximately 550 independent agents in the United States and Canada as well as more than 800 independent owner-operators who are skilled in providing transportation services. Transit also currently owns and operates 25 moving and storage agencies located throughout the United States. Other Transit operations sell and finance transportation equipment to Transit's agents and owner-operators, and sell and underwrite commercial lines of insurance coverage.
Transit operates through two lines of business: domestic household goods moving services and special transportation services.
Domestic Household Goods Moving Services
-- Household Goods. The Household Goods division ("Household Goods") is the largest single operating division of Transit, generating line haul revenue in 1993 equal to 42% of Transit's total revenue. Total revenue generated by Household Goods in 1993, including both line haul and accessorial revenue, accounted for approximately 60% of Transit's total revenue.
-- The Household Goods division serves individual residential customers, governmental entities and national accounts. The national account business, which consists of providing household goods moving services to corporations transferring their employees, is generally the most profitable segment of the business, due to the larger shipment sizes and the accessorial services such as packing and storage that are normally provided in connection with these moves. Transit's agent/owner-operator system is used to transport household goods shipments. See "Agent/ Owner- Operator System."
-- Moving and Storage Division ("M&S"). This division consists of 25 agencies owned and operated by Transit. These agents function and provide the same services as the independent agents included in the Transit agent/ owner-operator system. See "Agent/ Owner-Operator System."
Special Transportation Services
-- Electronic and Trade Show ("E&TS"). This division, which generated line haul revenue in 1993 equal to approximately 19% of Transit's total revenue, is engaged primarily in the transportation of electronic products and trade show exhibits for corporate customers. These items typically require special handling and other services. The E&TS division began commercial operations in the early 1970's and has experienced significant growth since then. Operating revenues have increased from $71.9 million in 1991 to $92.7 million in 1993. Transit's agent/owner- operator system is used to transport E&TS shipments.
-- International ("International"). This division operates four business segments: commercialhousehold goods, its largest business segment; a motor van/ sea van operation that provides trailer service between the continental United States and Alaska or Hawaii; international commodities and tradeshows; and a consolidating service for household goods being shipped to foreign locations. While Transit has provided international services for over 25 years, it has seen its most significant growth in the past few years. In 1993, this division generated $29.7 million in revenues, or 6.7% of Transit's total revenue.
-- Other Transportation Operations ("Other"). Several smaller subsidiaries and divisions of Transit engage in sales of products and services to serve the needs of Transit's owner- operators and agents, including: (i) sales of tractors, trailers and other equipment, and the administration of the financing of such equipment by independent lending institutions for Transit owner-operators and agents; (ii) the operation of a full service road equipment maintenance facility to service vehicles for agents, owner-operators and nonaffiliated customers as well as Transit's own fleet; (iii) the operation of a full service insurance agency and captive insurance company that sell and underwrite property, casualty and other insurance coverages, primarily to agents and owner-operators; and (iv) sales of moving supplies, equipment and uniforms to agents and owner-operators.
Revenues and Expenses. Transit derives its revenues primarily from three sources. Line haul revenues consist of revenues obtained from transporting goods. These revenues are generally based upon the weight of the shipment, distance traveled, type of goods transported and points of origin and destination. The Household Goods and E&TS divisions generate substantially all of Transit's line haul revenues. Accessorial revenues are fees received for other services such as packing, unpacking, storage and other related services. The majority of accessorial revenues are related to household goods line haul activities. The balance of Transit's revenues are generated by the M&S, International and Other divisions.
Transit's expenses consist primarily of commissions paid to agents and owner-operators for their services. Sales and origin commissions are paid to agents for obtaining orders and providing support services at point of origin. Hauler commissions are paid primarily to agents and owner-operators for hauling the goods from the point of origin to their destination. The total of these line haul related expenses is historically between 82% and 83% of line haul revenues. Additional operating expenses not related to the services of the agent and owner-operator systems are also incurred in connection with Transit's line haul activities and the activities of other divisions within Transit. Overhead expenses incurred by Transit include overhead costs directly related to Transit operations.
Customers. The Household Goods market is made up of three basic customer groups: individual residential customers, national account customers and various agencies of the United States Government. Individual residential customers arrange and pay for their own moves and are required to pay for shipping services upon delivery. National account customers are generally corporate customers, or their representatives, which are billed for moves they arrange for employees. United States Government moves are arranged by various departments of the United States Government, including the Military Traffic Management Command, which coordinates the movement of household goods for military personnel of all branches of the service.
Most individual shippers choose a mover from Yellow Pages advertising and discuss their move, services and prices with a local agent. National account business is generally solicited by agent sales personnel and, to a lesser extent, by sales personnel employed by Transit. United States Government business is generally awarded on a shared basis among qualified carriers meeting the lowest rate for the particular installation.
The E&TS business is solicited by agents and, to a lesser extent, by the employees of Transit. This business is formed almost entirely by national account customers, which include major computer and other high technology companies, hospitals and trade show exhibitors.
Transit provides marketing support for its agents through field sales representatives, advertising, incentive programs and promotional materials and services.
Agent/ Owner-Operator System. Transit has approximately 550 agents in the United States and Canada, of which 25 are owned by Transit, with the remainder being independent business entities. Agents operate full service moving and storage businesses in their geographic areas. They solicit business, pack, unpack and store goods and provide labor to assist haulers in loading and unloading goods. Agents also provide tractor/ trailer units and drivers for the transportation of household goods and E&TS products.
In a typical interstate move of household goods or E&TS products, the agent at the point of origin provides packing and preparation services. From its Indianapolis headquarters, Transit arranges and coordinates the transportation of the goods, which about half of the time are hauled by one of Transit's agents with the balance by independent owner-operators. The agent at the destination of the shipment provides unpacking and other support services.
In addition to arranging for and coordinating the interstate transportation of goods, pursuant to orders booked by its agents, Transit provides national advertising and other marketing support, administers the settlement of damage claims, provides certain data processing services to agents and collects and distributes the revenues among Transit, its agents and its owner- operators.
All United States agents enter agreements with Transit that generally provide that the agent will represent Transit exclusively. Agents are compensated according to commission schedules for services rendered. Agents receive substantially all the revenue from the packing, unpacking and storage services, a portion of the line haul revenue for booking and origination services and a majority of the line haul revenue if the agent provides the equipment and driver for hauling the goods. Some agents have their own interstate operating authority (which is generally limited to states surrounding their locations).
Transit's operations outside the United States and Canada are conducted through approximately 125 independent representatives whose arrangements with Transit permit them to represent other carriers.
For the year ended December 31, 1993, orders booked by agents owned by Transit accounted for approximately 11% of Transit's revenues. No other agent or group of agents under common control accounted for as much as 5% of such revenues. Approximately 30% of Transit's revenues were generated by the 20 largest agents or group of agents under common control, excluding the agents owned by Transit.
Approximately 35% of Transit's agents have been with Transit for 25 years or more; approximately 50% have been agents of Transit for 15 years or more.
Transit does not employ drivers except for local, intrastate and, during the peak season, interstate hauling services in agencies owned by Transit. Transit typically uses approximately 800 independent owner-operators to haul and, generally with the assistance of local agents, to load and unload shipments. During the peak summer season, however, Transit may use up to 1,200 owner-operators. Each owner-operator is engaged pursuant to an agreement with Transit that requires the owner-operator to furnish a tractor and to pay maintenance, insurance, fuel and other expenses incurred in hauling goods. Transit trains the owner-operators and, for the majority of owner-operators, provides a trailer. Owner-operators in the Household Goods division are generally compensated by Transit through a base commission which has traditionally averaged 56% of the line haul revenues. While the majority of owner-operators in the E&TS division are also compensated through a base commission that has averaged 56% of line haul revenues, an increasing portion of these owner-operators are being compensated on a mileage basis.
As discussed above, Transit's independent owner-operators and independent agent drivers agree to pay for fuel costs incurred in providing their services. Higher fuel costs hurt the profitability of Transit's independent owner-operators, and result in higher costs for Transit associated with driver turnover. The impact of the additional taxes on fuel prices, which became effective in October 1993 following the enactment of the 1993 Omnibus Budget Reconciliation Act, is not expected to be significant to Transit. Further, Transit does not expect changes in fuel prices will materially affect its financial condition or its results of operations in the foreseeable future.
Employees. Transit employs approximately 1,400 full time employees, approximately 500 of whom are salaried employees and the remainder of whom are hourly employees. Transit has not experienced any material strikes or work stoppages during the past five years and believes that its relations with employees are satisfactory.
Insurance. Transit's insurance program consists of three principal types of coverage: auto liability (for third party personal injury or property damage claims), general liability and workers' compensation. Auto liability coverage is regulated by the Interstate Commerce Commission ("ICC") and workers' compensation is regulated by the individual states in which Transit operates. In order to comply with ICC regulations, evidence of insurance must be provided to the ICC.
With the rising cost of liability insurance in the mid-1980's, Transit moved to an "economic" self-insurance program in 1987 whereby Transit retains financial exposure for the first $2.0 million of each claim. Though Transit does not purchase insurance coverage for this exposure, due to ICC regulations the ICC must be provided evidence of insurance. This is accomplished by Transit purchasing a "fronted" policy from an insurance carrier. The insurance carrier's liability under this arrangement is to make any claim payments that are not made by Transit. Transit indemnifies the insurance company for any losses and collateralizes this indemnification obligation with letters of credit.
The amounts of letter of credit collateralization are calculated based upon expected losses for a given policy year. Because of the nature of this liability, it takes several years to settle fully all claims for a given policy period. As of December 31, 1993, Transit had $26.2 million in letters of credit outstanding under its primary credit facility as collateral for its insurance related obligations.
Transit management has received approval from the ICC to self-insure the first $1.0 million of each auto liability claim effective April 1, 1994, eliminating the need for Transit to purchase a "fronted" policy from an insurance carrier for these claims. The Company will benefit by reducing its fronting costs and its letter of credit requirements in the future, as the ICC only requires a $1.0 million letter of credit related to this self-insurance liability.
Transit also maintains excess liability insurance policies providing in total up to an additional $42 million in limits.
Competition. Transit is in direct competition in the United States with approximately 2,000 motor common carriers having ICC authority for the interstate transportation of household goods and E&TS products. Based upon financial data filed with the ICC, Transit is the fourth largest mover in the United States in terms of intercity revenues. According to reports filed with the ICC, 1993 intercity revenues aggregated approximately $2.5 billion for the 20 largest motor carriers of which Transit accounted for 11.1% and the six largest carriers, including Transit accounted for 82.0% of this amount.
Carriers compete on the basis of the number and location of agents, perceived quality of service, price and carrier name recognition. Transit's name recognition and its reputation for quality service, together with Transit's agency network, are important factors in its competitive position.
As a result of reduced government regulation, increased price competition, principally in the form of binding estimates and discounts, has become more significant.
Rates, Pricing and Regulation. Since 1980, a significant reduction in statutory and administrative restrictions on entry into surface transportation and the moving industry has increased competition. Traditionally, in Transit's industry, pricing has been based upon tariffs approved by the ICC for each class of goods hauled by an interstate carrier. These tariffs are a function of the weight of the shipment, the distance the shipment is moved and accessorial services rendered. Most moves are now priced below tariffs through individual discount programs filed by each carrier with the ICC, binding estimates negotiated between Transit and, primarily, individual residential customers or on the basis of a contract entered between Transit and a corporate customer.
Household goods carriers participate in rate bureaus through which competitors jointly establish and publish tariffs and rates. Transit is currently a member of the Household Goods Carriers' Committee of the American Movers Conference, along with approximately 2,000 other common carriers of household goods, including the ten largest carriers in the industry. The Interstate Commerce Act permits certain collective ratemaking activities through a rate bureau by exempting such ratemaking from the antitrust laws.
Certain members of Congress have proposed legislation that could result in complete deregulation of rates and tariff filings, repeal of antitrust immunity for collective ratemaking, total elimination of the ICC over a period of time and transfer of authority over motor carriers of property (as to unfair competition and trade practice matters) to other governmental agencies. Although trade association and industry leaders do not believe that such legislation will be enacted, they have provided comments to Congress in opposition to the legislation. Transit is unable to assess the likelihood of passage by Congress of such legislation.
Environmental Laws. Compliance by Transit with federal, state and local environmental protection laws has not in the past had, and is not expected to have in the future, a material effect upon its capital expenditures, liquidity, earnings or competitive position.
Operating Authority. Transit operates nationwide as an interstate common carrier pursuant to a Certificate of Public Convenience and Necessity granted by the ICC. This Certificate authorizes Transit to transport various classes of goods and products. Transit also operates as a contract carrier, pursuant to contract authority granted by the ICC. Transit is required to comply with ICC regulations and the failure to do so could subject it to civil or criminal penalties, the suspension or revocation of its operating authority or both. The suspension of operating authority could have a material adverse impact upon Transit's operations depending primarily upon the duration of the suspension and the class or classes of goods or products affected. In addition, the Department of Transportation regulates the hours of service of Transit's drivers and other safety aspects of operations. A failure by Transit with these regulations could subject it to civil or criminal liabilities.
The agencies owned by Transit also hold intrastate operating authority that subjects them to the jurisdiction of various state regulatory commissions. Transit believes that a material suspension or revocation of these certificates of operating authority would not have a material adverse effect upon Transit's operations.
Trademarks. Transit has registered trademarks on a number of variations of the Mayflower name and corporate logo in the United States and approximately 25 foreign countries. Depending on the jurisdiction of registration, trademarks are generally protected 10 to 20 years (if they are in continuous use during that period) and are renewable. These trademarks are material to Transit in the marketing of its services because of the name recognition possessed by Transit in the transportation services industry.
Executive Officers of the Registrant. The following persons comprise the Executive Officers of the Registrant. All of the Executive Officers have been employed by the Registrant or its subsidiaries in one of the capacities indicated below for more than five (5) years. Each officer serves a term of one year expiring at the Annual Meeting of the Board of Directors.
Name Age Position
Michael L. Smith 45 Chairman, President and Chief Executive Officer Patrick F. Carr 42 Senior Vice President, Chief Financial Officer and Treasurer Robert H. Irvin 42 Senior Vice President, Secretary and General Counsel
Michael L. Smith: Mr. Smith was originally employed at Old Mayflower in 1974. He has been a Director of the Registrant since October 1986, President of the Registrant since April 1989, Chief Executive Officer of the Registrant since January 1990, and Chairman of the Board of the Registrant since April 1992. He was Chief Operating Officer of the Registrant between April 1989 and January 1990. Mr. Smith was Executive Vice President of the Registrant from January 1987 to April 1989. He has been Chief Executive Officer of Transit since June 1989 and a director of Transit since October 1986. He was President of Transit from June 1989 to April 1991. He has been Chairman of the Board and Chief Executive Officer of the subsidiaries of Transit since June 1989. He has been Chairman of the Board and Chief Executive Officer of Contract Services since January 1987 and has been a director of Contract Services since October 1986. He was President of Contract Services and the subsidiaries of Contract Services from January 1987 through December 1992. Mr. Smith also serves as a Director of First Indiana Corporation, Somerset Group, Inc. and Acordia, Inc.
Patrick F. Carr: Mr. Carr has been Senior Vice President and Chief Financial Officer of the Registrant since January 1987. He has been President of Transit and its subsidiaries since April 1991 and has been a director of Transit since January 1987. Between January 1989 and January 1990, Mr. Carr was Executive Vice President of Transit and Executive Vice President of the subsidiaries of Transit. From January 1987 to January 1989, he was the Treasurer of Transit. He has been an officer of Contract Services since 1987 and was a director of Contract Services from 1987 to 1993.
Robert H. Irvin: Mr. Irvin has been Secretary of the Registrant since September 1986 and Senior Vice President and General Counsel since January 1987. He has been a director and an officer of Transit since 1987. From 1987 to 1993, he was a director of Contract Services. He has been an officer of Contract Services since 1987.
Item 2.
Item 2. Properties.
The Company itself owns no property other than the stock of Contract Services and Transit. All properties are owned by Contract Services and Transit.
Contract Services Properties
Contract Services is headquartered in Overland Park, Kansas, a suburb of Kansas City, Missouri. The Company moved to these premises in December 1987 and occupies approximately 18,000 square feet under a multi-year lease.
Contract Services owns twelve operating terminals and leases approximately 130 others. Contract Services' strategy is to lease facilities on terms that approximate the length of the service contracts at each locale. These properties typically include two to five acres of parking space with a small office facility for driver training and dispatch and a two to three bay maintenance facility. In some instances, Contract Services will secure its operating terminals from its client and negotiates its occupancy costs as a part of its service contract.
The average age of Contract Services' fleet is approximately 6 years. The 8,447 vehicles operated by Contract Services are primarily diesel and gas powered, although some units are propane powered. The operating fleet includes 1,345 customer owned vehicles. Nearly all vehicles owned by Contract Services are encumbered by liens in favor of the Company's lenders, under its financing agreements.
Contract Services' equipment is maintained under a comprehensive preventive maintenance program emphasizing avoidance of on-the-road failures while minimizing per mile maintenance and tire costs. Fleet maintenance standards are established by a corporate department located in its Overland Park headquarters facility. This department supervises the purchasing of equipment and establishes standards for preventive maintenance in addition to monitoring levels of repair parts inventories throughout the Contract Services system.
Contract Services has obtained a substantial portion of the additions to its fleet through operating leases. As of December 31, 1993, Contract Services was a party to operating leases with eight equipment finance entities. The Company has guaranteed the performance of Contract Services' obligations under a portion of these operating leases.
Transit Properties
Transit owns a 190-acre tract northwest of Indianapolis, Indiana upon which the Company's headquarters building is located. Located on the same tract is Transit's driver training facility, a building used for the preparation and maintenance of trailers, a storage building, and a warehouse and office facility used by an agent wholly owned by Transit. This entire tract is mortgaged to Mellon Bank, N.A. ("Mellon") as part of the security for a $5.0 million loan to Transit.
Transit also owns a total of approximately 182,000 square feet of office and warehouse space in Indianapolis, Indiana and Alexandria, Virginia that is used in its local moving and storage operations. All these properties owned by Transit are also mortgaged to Mellon. In addition, Transit owns another 40,000 square feet which are not encumbered and leases approximately 1.3 million additional square feet at various other locations.
At December 31, 1993, Transit and its Moving & Storage subsidiaries owned approximately 1,600 trailers, with an average age of 11 years, which are used primarily by owner-operators in hauling goods with the owner-operator's tractor. Transit also owned approximately 240 tractors, straight trucks and other vehicles at December 31, 1993. The majority of the tractors and trailers owned by Transit are subject to a security interest granted to the Company's lenders under its financing agreements.
Agents also provide equipment for Transit's use under long-term and short-term contract hauling arrangements. Approximately 400 of Transit's fleet of tractor-trailer units are maintained pursuant to long-term contract hauling arrangements, while approximately 1,700 additional units are available on a short-term basis, some of which are added to the fleet during the peak season.
Item 3.
Item 3. Legal Proceedings
Litigation
On October 24, 1989, two alleged shareholders of Old Mayflower filed suit in the federal district court against certain directors of Old Mayflower and the Company. The plaintiffs in this lawsuit are also the plaintiffs in a suit filed in Indiana state court on October 29, 1986. These complaints allege that the directors breached their fiduciary obligations to the shareholders of Old Mayflower by entering into a leveraged buy-out transaction at a grossly inadequate price. The suits purport to be class actions on behalf of all the shareholders. In addition to seeking injunctive relief, the plaintiffs are asking for compensatory and punitive damages.
The defendants in these suits believe the plaintiffs' claims to be without merit; however, because of the costs associated with defending these actions, the Company has joined in an agreement to settle both lawsuits. The settlement agreement must be approved by the federal and state courts. If approved, the maximum amount of the settlement will be approximately $2.1 million in cash and notes. Attorneys for the settlement class will receive approximately $725,000 in cash for fees and litigation expenses. The Company's insurance carrier will contribute $617,000 toward the cash payment with the balance to be paid by the Company. The remainder of the settlement amount, not more than approximately $1.4 million, will be paid in the form of unsecured subordinated notes of the Company to members of the settlement class that properly complete and submit proofs of claim. The settlement notes (a) will mature in ten years, (b) will be unsecured and subordinated to certain indebtedness of the Company, (c) will pay interest semi-annually, (d) will require no payment of principal until maturity, and (e) will not be registered with the Securities and Exchange Commission.
The subsidiaries become involved from time to time in various actions that are incidental to the ordinary course of their business, including property damage and personal injury claims. Based upon information currently available to it, the Registrant believes that its reserves and insurance coverage with respect to all such actions are adequate to cover liabilities reasonably anticipated at the date of this filing. (See Note 4 to Consolidated Financial Statements.)
The Registrant becomes involved from time to time in actions arising from the operations of its subsidiaries. The Registrant routinely seeks to be dismissed from such actions on the grounds that it is not a proper party defendant.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of 1993 to a vote of security holders of the Registrant, through the solicitation of proxies or otherwise.
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PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Registrant's Common Stock was registered effective August 22, 1992, under Section 12 of the Securities Exchange Act of 1934. The Common Stock of the Registrant was listed on the Nasdaq National Market on December 1, 1992. Prior to that date there was no established public trading market for these securities. As of December 31, 1993, the Registrant had 276 shareholders of record.
The high and low sales prices for the Registrant's Common Stock during the portion of the fourth calendar quarter of 1992 following the date on which the Registrant's Common Stock began trading on the Nasdaq National Market were $10.50 and $7.50, respectively, as reported by Nasdaq.
The high and low sales prices reported by for the Registrant's Common Stock reported by the Nasdaq National Market during each calendar quarter of 1993 were as follows:
Quarter High Low
1 12 1/4 9 2 11 1/2 8 1/4 3 13 9 1/2 4 12 1/4 10 3/4
There were 278 holders of record of the Registrant's Common Stock on March 7, 1994. The high and low sales prices reported by the Nasdaq National Market on that date were $11 3/4 and $11 1/4.
The Registrant has not paid cash dividends in its two most recent fiscal years. The senior bank credit agreement entered into by the Registrant and its operating subsidiaries prohibits the payment of dividends on its Common Stock. (For a discussion of the Registrant's credit facilities, see Note 7 to Consolidated Financial Statements.) Therefore, the Registrant does not anticipate paying cash dividends on its Common Stock in the foreseeable future.
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CONSOLIDATED BALANCE SHEETS
MAYFLOWER GROUP, INC.
Intangible assets are amortized by the straight-line basis over periods ranging from 5 to 35 years.
D. Federal Income Taxes Effective April 1, 1992, the Company adopted Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires a significantly different approach to the financial accounting and reporting of income taxes than had been previously used and, in accordance with SFAS 109, the Company has chosen not to restate prior year financial statements. Refer to Note 9 for further discussion of SFAS 109. Prior to April 1, 1992, the Company computed income taxes in accordance with Accounting Principles Board Opinion No. 11.
E. Post-retirement Benefits Other Than Pensions Effective April 1, 1992, the Company adopted Financial Accounting Standards Board Statement No. 106 "Employers' Accounting for Post-retirement Benefits Other Than Pensions" ("SFAS 106"). SFAS 106 requires the Company to accrue for the expected cost of Post-retirement benefits during the years an employee renders service rather than the previous practice of expensing such costs as incurred. Refer to Note 10 for further discussion of SFAS 106.
F. Reserve for Self-insured Claims The Company is self-insured for certain risks and is covered by insurance policies for other risks. The Company maintains reserves for losses and premium adjustments using case basis evaluations and other analyses. Reserve and premium adjustment estimates are continually reviewed and adjustments are reflected in current operations. The Company recognizes the noncurrent nature of the self insured claims reserves by classifying a portion of these reserves as a noncurrent liability. See Note 4 for discussion of adjustment to self-insured claims reserves recorded in 1993.
G. Recognition of Operating Revenues Revenues and related direct expenses for Contract Services, which is primarily involved in student transportation, are recognized over the period during which the service is rendered, which generally corresponds with the traditional nine month school year.
Transit, which is primarily involved in the shipment of household goods and electronic and trade show products, recognizes revenue and associated transportation costs when the order has been unloaded at the destination. Transit's equipment financing subsidiary sells transportation equipment to certain of its owner-operators and agents. Beginning in 1993, revenues associated with these installment sales are recorded net of the related cost of goods sold as an operating expense, with the related gain on the sale being recognized on the installment basis. Revenues and operating expenses for 1992 and 1991 have been reclassified to conform with this presentation.
H. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount reported on the balance sheet for cash approximates fair value.
I. Inventories Inventories are stated at the lower of cost or market as determined for each specific unit.
J. Property and Equipment Property and equipment is stated on a cost basis. Depreciation is provided primarily by the straight-line method at annual rates considered adequate to amortize the costs over the estimated useful lives of the assets. The lives used in computing depreciation during the periods were:
Building and improvements 3 to 40 years Revenue equipment 3 to 10 years Other operating equipment and improvements 2 to 10 years
The portion of fleet operating buses used in the operations of Contract Services and classified as property and equipment, is based upon the Company's requirements for fleet buses to fulfill existing contract requirements, including an estimate of reserve buses necessary to ensure continuity of service based on historical maintenance records and experience. The remaining buses are classified as equipment and inventory held for resale.
K. Reclassification Certain amounts within the 1992 and 1991 Consolidated Financial Statements have been reclassified to conform with the 1993 presentation.
Note 2- Corporate Reorganization
Plan of Reorganization
Group was formed in 1986 for the purpose of acquiring another company whose name was Mayflower Group, Inc. ("Old Mayflower"), a holding company that owned 100% of the stock of three operating subsidiaries: Contract Services, Transit, and Mayflower Consumer Products, Inc. ("Consumer Products"). The acquisition was completed in December 1986 in a two-step merger (the "Merger"): a cash tender offer for all of the 7.9 million outstanding common shares of Old Mayflower at $31.50 per share followed by a merger of Old Mayflower into a wholly-owned subsidiary of Group. To finance the acquisition, Group raised approximately $330 million of debt financing, including a $110 million senior secured credit facility and $160 million through private placement of 12 5/8% Senior Subordinated Debentures ("Debentures") with Warrants to purchase common stock of Group. The remaining debt financing consisted of a secured bank loan to a subsidiary of Contract Services. Group sold Consumer Products in 1987 and eventually refinanced the senior secured credit facility with secured credit facilities at Transit and Contract Services.
Group is a holding company that relies upon the cash flow of its two operating subsidiaries to satisfy its obligations, which through December 1990 consisted primarily of interest payments on the Debentures. Following Group's financial reorganization, discussed below, it had no significant obligations remaining. From 1987 through 1991, operating results and cash flow generated by Group and its operating subsidiaries were not sufficient to pay significant amounts of principal on Group's senior debt or allow Group to remain in compliance with all financial covenants contained in the secured credit facilities. As a result, beginning after December 1990, Contract Services and Transit were prohibited by terms of the secured credit facilities from making any further cash dividend payments to Group for the purposes of servicing interest payments on its Debentures. Consequently, the two scheduled semiannual interest payments on the Debentures of $10.1 million each were not made in 1991 resulting in a default under the provisions of the related indenture. After various restructuring proposals were considered in early 1992, Group's Debenture holders, along with Group's common stock and warrant holders, overwhelmingly approved a Prepackaged Plan of Reorganization ("Plan of Reorganization"). The Plan of Reorganization was confirmed by the court and became effective in March 1992. Under the Plan of Reorganization, the holders of the Debentures received shares of newly issued common stock equal to approximately 94% of the common stock of Group. The existing holders of the common stock and warrants of Group received shares of newly issued common stock equal to approximately 5% of the common stock of Group. Two other creditors received approximately 1% of the common stock as payment in lieu of cash for services in connection with the Plan of Reorganization. The Plan did not affect Contract Services or Transit.
Basis of Presentation
Group emerged from the Plan of Reorganization on March 24, 1992, successfully completing Group's financial reorganization. Because the results of operations from March 25, 1992 to March 31, 1992 were not significant, the Company has used March 31, 1992 as the effective date of the Reorganization for accounting purposes. Accordingly, the Consolidated Statements of Operations and Cash Flows for the year ended December 31, 1992 reflect the results of operations of the Company prior to reorganization for the three months ended March 31, 1992 and the operations of the Company after reorganization for the nine months ended December 31, 1992. The Consolidated Balance Sheet at December 31, 1992 reflects the financial position of the Company subsequent to reorganization. The Consolidated Statements of Operations and Cash Flows for the year ended December 31, 1991 reflects the financial position and results of operations of the Company prior to reorganization. See discussion of pro forma financial information contained in Note 3.
Accounting Treatment Using Fresh Start Reporting
The Company accounted for the Reorganization using Fresh Start Reporting, in accordance with Statement of Position (SOP) 90-7 (Financial Reporting by Entities in Reorganization under the Bankruptcy Code) issued by the AICPA. Accordingly, all assets and liabilities were adjusted to reflect their estimated reorganization value, which approximated Group's book value less liabilities at the date of reorganization. This resulted in reorganization value in excess of amounts allocated to assets of $16.7 million, which is comparable to the amount of goodwill existing prior to reorganization. The reorganization value of Group, less liabilities, was determined to be approximately $86 million at March 31, 1992. This value was determined to fall within an acceptable range developed by considering several factors and relying upon various valuation methods including discounted values of estimated future cash flows, earnings multiples as appropriate in the two industries in which Transit and Contract Services operate, and other recent financial transactions. Forecasts used in earnings and cash flow estimates assumed revenue and cost patterns similar to historical levels in recent years.
The most significant of the reorganization adjustments reduced Long-Term Debt by $155.1 million and Accrued Interest by $23.6 million, and increased Shareholders' Investment by $173.8 million, including the elimination of a retained deficit totaling $118.3 million prior to the Reorganization. The conversion of the Debentures to common stock resulted in an extraordinary gain totaling $93.1 million. In accordance with SOP 90-7, the Consolidated Statement of Operations for the year ended December 31, 1992 includes $1.7 million of interest expense related to the Debentures, representing the amount accrued in 1992 and shown as part of a claim on the petition filed with the court.
Note 3- Pro Forma Financial Information (Unaudited)
During 1992 and 1991, certain events occurred that result in the Consolidated Financial Statements not being comparable between the respective fiscal periods. As presented below, the pro forma net income excludes credits and charges relating to a) the corporate reorganization in March 1992 as discussed in Note 2 (which resulted in the exchange of common stock for subordinated debentures significantly increasing the equity and decreasing the debt of the Company) and b) the write-down of Transit's intangible assets of $69.0 million in December 1991 as discussed in Note 6. It also includes a) additional expense relative to the adoption of SFAS 109 and SFAS 106 (actual adoption date was April 1, 1992), and b) additional expense relative to the adoption of shorter lives of intangible assets and excess reorganization value to reflect the prevailing useful lives of similar assets (actual adoption date was October 1, 1992) as if these events and their related adjustments had occurred as of December 31, 1990. The effects of these pro forma adjustments result in the following pro forma operating profit, net income, and earnings per share for the years ended December 31, 1992 and 1991:
Pro forma earnings per share is based on the number of shares issued and outstanding as a result of the Plan of Reorganization.
The pro forma financial information should be read in conjunction with the related historical financial statements, and is not necessarily indicative of results of operations that would have occurred had the events giving rise to the pro forma adjustments actually taken place earlier.
Note 4 - Self-Insured Claims Adjustment
As discussed in Note 1F, the Company is self-insured for certain risks and, accordingly, maintains reserves for losses and premium adjustments which are determined using case basis evaluations and other analyses. Based on a review by management during the fourth quarter of 1993 of the calculations underlying the reserve for self-insured claims, the Company has determined that the portion of the reserve attributable to claims incurred by Contract Services prior to 1991 was $4.9 million below an appropriate level. As a result, the Company recognized $4.9 million, or $3.0 million net of tax, in additional self-insured claims expense, which had the effect of reducing earnings per share in 1993 by $.23. Management believes that the annual expense related to risks incurred under the self-insurance program since January 1, 1991, excluding this adjustment, has been sufficient to provide for anticipated losses, and that the magnitude of this expense is such that this adjustment represents a one-time nonrecurring increase to its reserve for self-insured claims.
Note 5- Extraordinary Items
In May 1993, the Company refinanced its primary debt facilities which were scheduled to mature in 1994 (Note 7). Such refinancing resulted in the write-off of $549,000 of deferred debt costs, net of tax, which has been accounted for as an extraordinary loss.
In 1992, the Company recognized an extraordinary gain totaling $93.1 million, resulting from the conversion of the Company's debentures to common stock in conjunction with its Plan of Reorganization (Note 2).
Note 6- Revaluation of Intangible Assets
The revaluation of intangible assets in 1991 represents a non-cash charge to operations that does not relate directly to normal ongoing business activity and, in the opinion of management, is nonrecurring. In 1986, the Merger (Note 2) was accounted for as a purchase and, accordingly, the assets and liabilities were adjusted to their estimated fair values based upon independent appraisals and business conditions at that time. During the final analysis and evaluation of various restructuring proposals, which were completed in 1991, the Company determined that the recorded value of Transit's goodwill and intangible assets were stated in excess of current market value. Accordingly, during 1991, goodwill and intangible assets were adjusted to reflect a write down of $37.8 million and $31.2 million, respectively.
Note 7- Financing Agreements
Long-term debt consists of the following:
Maturities on long-term debt during each of the next five years ending December 31, are as follows (in thousands):
1994 $ 2,276 1995 2,521 1996 2,521 1997 16,807 1998 15,126 Thereafter 58,432 -------- $ 97,683 ========
New Financing Agreements
Effective May 27, 1993, the Company consummated three separate agreements for refinancing certain of its debt facilities which were scheduled to expire in 1993 and 1994.
The first agreement was for an $80 million term loan from a group of lenders, the proceeds of which were used both to refinance existing obligations to secured lenders of Contract Services and Transit, and for working capital purposes. The term loan has two separate facilities. The first facility is for $65 million and has a ten-year maturity with interest only payments required in the initial three years. Amortization of principal begins in year four with equal annual installments through April 2003. Interest on this facility is to be paid quarterly, and is fixed at 9.5% per annum. The second facility is for $15 million and has a seven-year maturity with repayment of principal occurring in eight equal quarterly installments during years six and seven through April 2000. Interest on this facility is to be paid quarterly, and is computed using LIBOR plus 2.8% per annum, which was 6.3% at December 31, 1993.
The second financing agreement was for a $25 million loan facility to be used by Contract Services to finance the acquisition of new school buses over a period of approximately two years. At December 31, 1993, $11.7 million was outstanding under this loan facility. Periodic fundings under this agreement convert to five-year term notes when the amount outstanding exceeds $5 million, with no term note maturing later than September, 1999. The term notes bear interest at the prime rate plus 1.5% per annum, which was 7.5% at December 31, 1993. Alternatively, the Company may elect to fix the interest rate at the time each funding converts to a term note. The notes will be collateralized by a lien on the purchased school buses.
Through the third agreement, a group of banks provide the Company with a $70 million revolving credit facility. The facility, which has a maturity date of June 1995, will be used for letters of credit and seasonal working capital purposes. At December 31, 1993, the Company has letters of credit totaling $54.3 million, and no borrowings were outstanding under its line of credit. Interest is to be paid monthly, and is computed using the prime rate plus 1.5% per annum. The facility does not require compensating balances but does require the payment of a commitment fee at an annual rate of .375% of the unused portion of the facility and a fee of 2% per annum of the amount of letters of credit outstanding.
The first and third financing facilities discussed above are collateralized by substantially all of the assets of Transit and Contract Services and guaranteed by the Company.
Effective December 31, 1993, the Company entered into two new agreements to sell $13.9 million of installment notes receivable of Transit's equipment sales and financing subsidiary to the same creditors which had previously financed such notes receivable. The Company recognized no gain or loss on the sale of the notes receivable and proceeds were used to fully repay amounts outstanding under the related notes payable.
Financial Covenants and Restrictions
Under terms of the financing agreements with senior lenders, the ability of Contract Services and Transit to transfer cash to Group is limited to required income tax payments and $1.5 million annually for on-going cash expenses. The financing agreements also contain various restrictive financial covenants that, among other things, prohibit cash dividend payments, restrict property and equipment additions, restrict certain additional indebtedness, and require the maintenance of certain financial ratios.
Other
Interest paid during 1993, 1992 and 1991 totaled $8.3 million, $9.9 million, and $9.6 million, respectively.
The carrying value of the Company's borrowings does not significantly differ from its fair value. The fair value of the Company's long- term debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Note 8- Common Stock
Stock Option Plan
In 1992, the Company established two Stock Option Plans ("Option Plans"). The Option Plans provide for the issuance of 530,000 shares of common stock, no par value, to directors of the Company and officers and key employees of the Company and its subsidiaries. Options granted under the Option Plans become exercisable in 33.3% increments on the first, second and third anniversaries of the date of grant and must be exercised within ten years from the date of grant. As of December 31, 1993, 336,500 options are outstanding including options to acquire 159,500 shares of common stock at an exercise price of $6.875 per share and options to acquire 177,000 shares of common stock at an exercise price of $9.00 per share. In 1993, options to acquire 53,167 shares of the common stock at $6.875 per share became exercisable. No options have lapsed or were exercised in 1993 or 1992.
Restricted Stock Plan
In 1993, the Company adopted a restricted stock plan whereby key employees were granted restricted shares of the Company's stock. Shares were granted in the name of the employee, who has all rights of a shareholder, subject to certain restrictions or forfeitures. Restrictions on the grants expire on the third anniversary of the date of the grant. During 1993, 17,000 shares were granted. As of December 31, 1993, there were 8,000 shares available for grant.
The market value of shares granted under the plan has been recorded as unearned compensation and is presented as a reduction in the value of common stock. Compensation expense will be charged to general and administrative expense over the respective three-year vesting period. Such compensation expense was $14,000 in 1993.
Note 9- Federal Income Taxes
Effective April 1, 1992, the Company changed its method of accounting for income taxes from the deferred to the liability method required by SFAS 109. As provided by SFAS 109, financial statements have not been restated. The cumulative effect of adopting SFAS 109 as of April 1, 1992 was to decrease shareholders' investment by $8.9 million. For the nine months ended December 31, 1992, application of the new accounting method decreased income before federal income taxes and federal income tax expense by approximately $2.1 million.
Federal income taxes paid totaled $4.5 million, $4.2 million, and $.4 million in 1993, 1992 and 1991, respectively. At December 31, 1993, the Company has net operating loss carryforwards of $4.8 million and alternative minimum tax credit carryforwards of $3.2 million for federal income tax purposes. The net operating loss carryforwards expire in years 2003 and 2006, while the alternative minimum tax credit carryforwards have an indefinite carryforward period. Because management believes these carryforwards will be used prior to expiration, no valuation allowance has been recorded. Transit has a capital loss carryforward of $2.6 million. The capital loss carryforward will expire in 1994. Because of the uncertainty of the ability to generate sufficient capital gains against which to utilize the capital loss, this carryforward has been fully provided for in the valuation allowance. Due to the Company's change in ownership resulting from its Plan of Reorganization (Note 2) the annual aggregate utilization of the net operating loss carryforward and the capital loss tax carryforward will be limited to approximately $6.0 million annually.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Significant components of the Company's noncurrent and current deferred taxes as of December 31, 1993 are as follows (in thousands):
For 1991, the Company did not provide for any deferred income taxes on timing differences in the recognition of revenues and expenses for tax and financial statement purposes, due to the absence of taxable income after consideration of net operating loss carryforwards.
For 1993, 1992, and 1991, effective rates that differed from the U.S. federal statutory rates were used in recording federal tax expense. The primary reasons for these differences are as follows. For 1993, the Company recorded additional income tax expense to reflect the cumulative effect on the net deferred income tax liability of tax rate increases, as required by SFAS No. 109, primarily as a result of the enactment in August 1993 of Omnibus Budget Reconciliation Act. Also in 1993, the Company recorded additional income tax expense to eliminate a federal income tax receivable from prior years which was determined to be unrealizable. In 1993, 1992 and 1991, a difference in rates was created as a result of the nondeductibility of amortization of intangible assets. These intangible assets were created at the time of Group's formation in 1986 and were also generated by the excess reorganization value resulting from the Plan of Reorganization for 1992. The following table summarizes the differences between the statuary federal income tax rate and the effective tax rate provided in the Consolidated Statements of Operations.
Federal income taxes currently payable are remitted to Group in the form of dividends from Transit and Contract Services based upon the separate liability of each segment, but limited to the consolidated liability. The benefit of consolidation, if any, upon the current liability is shared ratably between Transit and Contract Services.
Note 10- Pension Plans and Other Post-retirement Benefits
Pension Plans
Transit sponsors a noncontributory defined benefit pension plan that covers full-time Transit employees. Benefits are based on years of service and compensation during the five highest consecutive years of earnings before retirement. The Company's policy is to fund actuarially determined amounts adequate to meet future benefit payment requirements.
At December 31, 1993, plan assets consisted of U.S. government and corporate bonds, listed stocks, and cash equivalents.
Net pension cost for the Company's defined benefit pension plan included the following components:
The funded status and amount recognized in the Consolidated Balance Sheets at December 31, 1993 and 1992 were as follows (in thousands):
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% and 8.5% at December 31, 1993 and 1992, respectively. The rate of future compensation increases used was 5% and 6% at December 31, 1993 and 1992, respectively. The weighted average expected long-term rate of return on plan assets in 1993, 1992, and 1991 was 9.0%.
Contract Services sponsors a defined contribution profit sharing plan covering substantially all full-time employees. Contributions to this plan are made by Contract Services based upon a discretionary contribution formula. Contract Services expensed $170,000 and $350,000 in connection with this plan in 1993 and 1992, respectively. No amount was expensed in 1991.
Other Postretirement Benefit Plans
Effective April 1, 1992, the Company adopted SFAS 106. In accordance with SOP 90-7, the cumulative effect of the accounting change was recognized as a $3.0 million reduction in shareholders' investment ($.24 per share). In prior years, the Company had recognized the expense related to these benefits as they were paid. As the effect on net income of adopting SFAS 106 was not significant, postretirement benefit cost for prior periods has not been restated.
The Company's contributory defined benefit postretirement plans make available health and life insurance benefits to the majority of the Company's retirees and their eligible dependents. The postretirement plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and co-insurance. Eligibility for these benefits is based upon retirement from the Company as well as those retirees having met certain age and vesting service requirements.
The Company provides contributions to the plan as necessary to fund the plan's current benefits and expenses.
Net postretirement benefit expense for the Company included the following components for the year ended December 31, 1993 and the nine months ended December 31, 1992 (in thousands):
The funded status and amounts recognized in the Consolidated Balance Sheets for the Company's defined benefit postretirement plans at December 31, 1993 and 1992, were as follows (in thousands):
For measurement purposes, the weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% in 1993 and 8.5% in 1992. The Company's health care cost trend rate is 11% for 1994 and is assumed to gradually decrease to approximately 8% by the year 2000 and remain approximately at that level thereafter. If these trend rates were to be increased by one percent each year, the December 31, 1993, accumulated postretirement benefit obligation would increase by $1.1 million and the aggregate of the service and interest cost components of 1993 annual expenses would increase by $166,000.
Note 11- Commitments and Contingencies
During 1993, the Company agreed to a settlement of two class action lawsuits which had been filed against it in 1986 and 1989 on behalf of the shareholders of Old Mayflower. The complaints had alleged that the directors of Old Mayflower had breached their fiduciary obligation by entering into the Merger, discussed in Note 2. The Company and other defendants in these suits believe the plaintiffs' claims to be without merit. Because of the costs associated with defending these actions, however, the Company agreed to settle the two lawsuits. The settlement is subject to approval by the courts. The maximum amount of the settlement will be $1.5 million, net of approximately $600,000 contributed by the Company's insurance carrier. The Company will pay approximately $100,000 in cash, and the remainder, not to exceed $1.4 million, in the form of unsecured subordinated notes which mature in ten years.
Contract Services and Transit become involved from time to time in various actions that are incidental to the ordinary course of their businesses, including property damage and personal injury claims. Management believes that the disposition of these matters will not have a material adverse effect on the financial position of the Company.
The Company has guaranteed aggregate rental and certain residual values under various leasing arrangements entered into by the Company's subsidiaries. It also has guaranteed the collection of certain installment notes receivable, which were sold by Transit's equipment sales and financing subsidiary. The contingent liability resulting from these guarantees totaled approximately $44.9 million at December 31, 1993. The Company has a right to property and equipment which serves as collateral against these contingent obligations that, the Company believes, would substantially offset any potential obligation.
The Company's operating subsidiaries lease certain transportation equipment and warehouse facilities, as well as data processing and other office equipment. Generally, these leases require the Company's operating subsidiaries to pay maintenance and insurance costs. There are no significant capital leases. Total rent expense was $25.8 million, $23.9 million, and $22.7 million for 1993, 1992, and 1991, respectively. Future minimum lease payments on noncancellable operating leases are as follows (in thousands):
1994 $ 22,076 1995 18,562 1996 14,088 1997 5,961 1998 2,074 Thereafter 1,753 ---------- $ 64,514 ==========
At December 31, 1993, the Company has committed to approximately $19.4 million in capital purchases during 1994. This includes $15.0 million, or 159 units, for school and transit buses by Contract Services and $4.4 million for 175 trailers by Transit.
Note 12- Segments of Business
Contract Services engages in passenger transportation service businesses, primarily contract public school busing and, to a lesser extent, municipal transit and paratransit contracting. Transit primarily operates as a common carrier and a contract carrier under ICC authority, engaging in the shipment and storage of household goods, electronic, trade show, and other commercial products for individual and corporate customers. Other operations sell and finance transportation equipment to Transit's agents and owner-operators, and sell and underwrite commercial lines of insurance coverage.
Operating profit represents operating revenue less operating expenses. In computing operating profit, interest expense, purchase fee on receivables sold, gains on the sale of property and equipment (other than sales of new and used buses) and federal income taxes have not been included.
Corporate assets primarily include deferred debt costs, prepaid federal income taxes and cash.
Both Contract Services and Transit operate throughout the United States with no significant geographic emphasis. No single customer accounts for 10% or more of the consolidated operating revenues, and export sales to foreign unaffiliated customers are immaterial to consolidated operating revenues.
Note 13- Related Party Transactions
Four directors of the Company, prior to its reorganization, were associated with firms that are shareholders of the Company and which provided financial services in relation to the Merger and Plan of Reorganization. The Company incurred fees of $871,000 during 1991 related to services provided by those firms. No fees were incurred in 1993 and 1992.
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 8-K in the fourth quarter of 1993.
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.
MAYFLOWER GROUP, INC.
By: /s/ Michael L. Smith Michael L. Smith, Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated this 30th day of March, 1994.
Signature Title
1. Principal Executive Officer
/s/ Michael L. Smith Chairman, President, Chief Executive Officer and Director
2. Principal Financial Officer
/s/ Patrick F. Carr Senior Vice President, Chief Financial Officer and Treasurer
3. Principal Accounting Officer
/s/ Ronald W. Martin Vice President and Chief Accounting Officer
4. Non-employee Directors
/s/ Roderick M. Hills Director
/s/ Perry J. Lewis Director
/s/ Lary R. Scott Director
/s/ Sheldon M. Stone Director S-1
S-4