ITEM 1. BUSINESS
BACKGROUND
Mark VII, Inc. ( the "Company") is a holding company, the principal assets of which are its transportation services subsidiary, Mark VII Transportation Company, Inc. ("Mark VII") and Mark VII's subsidiaries, principally Mark VII Trucking, Inc. ("Mark VII Trucking"); and its truckload subsidiary, MNX Carriers, Inc. ("Carriers"), a holding company for Missouri-Nebraska Express, Inc. ("Mo-Neb"), MNX Transport, Inc. ("Transport") and Transport's subsidiary, MNX Trucking, Inc. The Company was organized as a Missouri corporation on March 29, 1976, for the purpose of acquiring all the outstanding capital stock of Mo- Neb. Unless the context otherwise requires, the term "Company" includes the Company and its wholly owned subsidiaries.
On December 1, 1993, the Board of Directors authorized management to proceed with the separation of the Company into two publicly-held corporations, one owning the transportation services operation and the other owning the truckload operation (the "Distribution"). On June 3, 1994, the Company's shareholders approved the Distribution. On June 17, 1994, the Board determined not to effect the Distribution as previously scheduled and the Company entered into an agreement for the sale of substantially all of the assets (the "Asset Sale") of its truckload subsidiaries to Swift Transportation Co., Inc. ("Swift"). On September 22, 1994, the Company's shareholders approved the Asset Sale and the transaction was completed on October 3, 1994. The remaining assets of the truckload subsidiaries are being held for sale or lease.
On October 17, 1994, TemStar, Inc. ("TemStar"), a subsidiary of Mark VII, was dissolved and its remaining operations were absorbed by Mark VII.
INTRODUCTION
The Company is a sales, marketing and service organization that acts as a provider of transportation services and more recently also as a transportation logistics manager. As a provider of transportation services, the Company arranges for "door-to-door" transportation to and from any point in the United States and internationally, using a number of different transportation modes including rail, truck, ship and air. As a logistics manager, the Company provides its customers with value-added elements of the distribution chain, such as private fleet management, warehousing and regional and local distribution.
The Company has established a network of transportation sales personnel and logistics managers at its operating headquarters in Memphis, Tennessee and 93 branch sales offices in 34 states. The majority of the Company's sales offices are operated by independent commission agents responsible for the client relationship, office expenses and billing. The Company supports its agency offices by providing expertise in multiple transportation modes, rate negotiation and logistics design, as well as administrative and credit services.
The Company's network of agents acts as a link between shippers and carriers. Shippers use transportation services companies as either a complement to or substitute for in-house transportation departments. The Company complements in-house shipping departments by providing expertise in multiple modes of transportation, providing access to additional transportation equipment, negotiating transportation rates and increasing the productivity of in-house personnel. The Company allows shippers to outsource all or a part of the transportation function, thereby allowing them to devote assets and personnel to their primary business. The Company's services also may be utilized by transportation carriers to supplement their in-house sales departments and to improve equipment utilization. The Company maintains close relationships with transportation carriers including major railroads, trucklines, shipping lines and air freight carriers.
SERVICES PROVIDED
The Company's services can be broadly classified into the following categories. "Transaction based" services are identified with the traditional freight brokerage business where a shipper calls a transportation services company to arrange for service on a load-by-load basis. The transportation services company then assumes responsibility for the transportation carrier to perform in accordance with the shipper's specifications. Traditionally, a shipper calls a transportation services company when it cannot find needed transportation equipment. Similarly, a carrier may call the transportation services company when it needs freight to transport. The transportation services company arranges a match and adds a fee to the carrier's rate. However, the Company goes beyond traditional transaction based services.
"Process based" services involve the Company taking responsibility for all transactions of a particular type for a shipper or carrier. The Company's expertise in intermodal service and truck brokerage has led shippers and carriers to request the Company to regularly arrange loads for a pre-arranged fee. Both shippers and carriers avail themselves of this service, often realizing financial savings due to the Company's volume discounts and information base and its ability to arrange loads more efficiently. The Company can help trucklines maintain competitive positions, including allowing them the ability to supplement their sales and marketing efforts without incremental fixed costs. A shipper can outsource a portion of its traffic department's functions to the Company. Process based services generally are a result of the full or partial outsourcing of internal traffic department functions. For example, the Company currently coordinates the time-sensitive raw potato delivery for a number of processing plants of a major potato chip manufacturer. Other examples of process based services currently being executed by the Company are the procurement of truck and rail services for a substantial portion of a shipper's loads from a particular location, procurement of backhaul loads for private fleets, freight consolidation and forwarding for a customer with complex logistical needs, and utilization management of an equipment owner's fleet.
"Information/knowledge based" services involve management and consultation on any and all aspects of transportation for a shipper or carrier, including dedicated fleet, warehousing and risk management. The Company utilizes its sales network to design transportation and distribution programs for customers with complex logistical needs. For example, ERX Logistics, a joint venture between the Company and a warehousing firm, provides a major household appliance manufacturer with warehousing and time-sensitive delivery of its appliances to its dealers and building contractor customers. As part of its private fleet management services, the Company offers risk management and single source leasing. The risk management group provides consultation services, driver recruiting, safety program design, government compliance and claims handling. These services are being marketed by the Company to transportation companies and may be used separately or combined with the overall logistics management function. The Company's single source leasing services offer fleet owners the ability to lease a fully licensed and insured tractor, trailer and driver.
TRANSPORTATION MODES
Transportation modes used in the Company's services have been organized into product lines. Each product line has one or more managers to provide marketing and operational support to the Company's network of sales people and logistics professionals. Intermodal services involves the Company arranging for the pick up and delivery of shipments by trucklines, and the shipments' transport by railroads, in a coordinated manner. Related services may include load stabilization, the transfer of loads from one container to another and arranging for customs brokerage. Truck brokerage often involves daily negotiating and spot pricing, as compared to longer-term pricing with railroads. In addition, trucklines actively solicit loads from the Company's sales offices. Although the Company owns or leases only a limited equipment base, it has access to over 400,000 truckload units provided by trucklines meeting the Company's safety and service criteria. Ocean freight brokerage involves acting as agents for shippers and importers under non-vessel operating common carrier authority (NVOCC), using the services of ocean carriers. Rail services, separate from intermodal services, involve obtaining rail transport by boxcar or gondola for shippers' heavy or bulky freight. Other services, such as air freight forwarding, local truckload and heavy equipment transport, are important to the Company's strategy because they respond to a customer's total transportation needs and provide the Company's network of sales people and logistics managers a complete range of services to sell.
AGENCY NETWORK AND OPERATIONS
Mark VII's operations are decentralized and are conducted primarily in branch sales offices. Of the 93 branch offices, 19 are operated by Mark VII and 74 are operated under agency agreements, for a total of 226 employee and agent sales people. Contracts with agents have a duration of ten years and are terminable by either party on each anniversary of the agreement by giving 30 days' notice. These agencies operate as independent businesses, responsible for all costs associated with sales, operations, billing and any related overhead for these items and are compensated by a percentage of fees associated with transportation arranged. Each of the 74 agency branches is responsible for obtaining its own office facilities. Offices operated by employees, rather than agents, are structured as stand-alone business units. Most sales offices have one to three operations people, who are responsible for controlling all aspects of executing the load, including (i) taking the order from the customer, (ii) arranging for carriers' services, (iii) monitoring progress of the load and reporting back to the customer and (iv) billing the customer on the Company's invoice forms. After billing, the Company's credit and collections department assumes responsibility for collections, through its central corporate lockbox arrangement. To foster the growth of its agency network, the Company provides new agents with advances to cover start-up and initial operating costs, which advances are typically repaid over 24 months.
Typically, an employee or agent sales person identifies a potential customer and determines its transportation requirements. The sales person then prepares a rate proposal from pricing data negotiated by the Company with representatives of the carriers the providers of other services that may be required. Before any rate proposal is presented to a customer, credit approval must be obtained from the Company's corporate credit department. Upon customer acceptance of a rate proposal, the operations unit in the sales office assumes responsibility for executing individual load orders for that customer.
The Company provides administrative support, such as computer systems support, sales support, credit services, collection services and accounts payable services, to its branch office operations. Specialty operations such as risk management, design and management of dedicated trucking operations and truck brokerage are available to support the logistics management or information/knowledge based service operations. The Company utilizes a Data General model MV9600 computer and software which integrates load tracking, customer records and billing, accounts payable and general accounting. This system can also access the computer systems of railroads to maintain up-to-date information on all loads. The Company also utilizes its electronic data interchange capabilities with a number of carriers and shippers so that customers may follow the movement of their shipments and receive electronic billing.
As additional equipment support for the Company's transportation services and logistics management services, the Company manages 11 owned tractors, 86 tractors owned by fleet contractors, and 107 leased tractors (53 on a month-to- month basis) and also owns or leases approximately 353 trailers. This equipment is used to provide dedicated trucking service. The Company also leases 344 and owns 102 domestic containers which are used in intermodal service and leases 263 temperature-controlled trailers used primarily in intermodal service.
In the transportation industry generally, results of operations 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 and third quarters than in the first and fourth quarters.
COMPETITION
The transportation services industry is highly competitive. The Company competes against other integrated logistics companies, as well as transportation services companies. The Company also competes against carriers' internal sales forces and shippers' transportation departments. This competition is based primarily on freight rates, quality of service, (such as damage free shipments, on-time delivery and consistent transit times), reliable pickup and delivery and scope of operations. Other logistics companies and transportation services companies and numerous carriers have substantially greater financial and other resources than the Company. The Company also competes with transportation services companies for the services of independent commission agents, and with trucklines for the services of independent contractors and drivers.
GOVERNMENT REGULATION
The Company is licensed by the Interstate Commerce Commission ("ICC") to engage in operations as a broker in arranging for the transportation, by motor vehicle, of general commodities between points in the United States. The ICC prescribes qualifications for acting in this capacity, including certain surety bonding requirements.
In its ocean freight forwarding business, the Company is licensed as an ocean freight forwarder and as a non-vessel operating common carrier by the Federal Maritime Commission (the "FMC"). The FMC prescribes qualifications for acting as a shipping agent, including the filing of tariffs and certain surety bonding requirements.
The Company's air freight forwarding business is subject to regulation, as an indirect air cargo carrier, under the Federal Aviation Act by the United States Department of Transportation (the "DOT"). The DOT's Economic Aviation Regulations exempt domestic air freight forwarders from most, but not all, of such act's requirements. The major provisions of the act that remain applicable to the Company forbid solicitation of certain rebates, require the carrier to provide safe service, equipment and facilities, prohibit discrimination with respect to foreign air cargo transportation, prohibit unfair or deceptive practices and authorize the DOT to inquire into the carrier's management for certain purposes.
In certain foreign markets in which the Company operates, the air freight forwarding business is subject to rate schedules and other restrictions which in the first instance are agreed to by the International Air Transport Association and subsequently approved by the governments concerned. The Company also is subject to certain foreign regulations.
Management does not believe that current regulations of its activities imposes significant economic restraints upon its operations or upon the entry of new competitors into the industry in general or into the markets that are served by the Company in particular.
Mark VII Trucking is a common and contract motor carrier regulated by the ICC and various state agencies. These regulatory authorities have broad powers, generally governing activities such as authority to engage in motor carrier operations, rates and charges, and certain mergers, consolidations and acquisitions. The Motor Carrier Act of 1980 substantially increased competition among motor carriers and limited the level of regulation in the industry. That act enables applicants to obtain ICC operating authority more easily and allows interstate motor carriers such as Mark VII Trucking to change their rates by a certain percentage per year without ICC approval. The law also allows for the removal of many route and commodity restrictions on the transportation of freight. Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. Matters such as weight and dimensions of equipment are also subject to federal and state regulations. Effective January 1, 1995, Congress pre-empted the states' authority to regulate rates and operating authority of interstate motor carriers engaged in intrastate operations.
EMPLOYEES
The Company employed 405 individuals at December 31, 1994. The employees were not represented by a collective bargaining unit. Management considers relations with its employees to be satisfactory.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
The following information sets forth the names, ages, offices held and, where applicable, previous positions as to current executive officers and key employees of the Company who are not directors. Officers are elected at the annual meeting of shareholders and serve for one year or until their successors are duly elected and qualified. There are no family relationships among any of the directors or executive officers.
Janet K. Pullen (age 40) has been Vice President of Finance, Assistant Treasurer and Assistant Secretary since July 1994. Ms. Pullen was Vice President/Chief Financial Officer of the Company from November 1988 to July 1994 and Treasurer of the Company from May 1992 to July 1994. From June 1985 until May 1992, she was also Secretary of the Company.
Robert E. Liss (age 43) has been Executive Vice President, Special Services Division of Mark VII, since May 1993. From December 1992 to May 1993, he was Vice President of Mark VII. From January 1989 to December 1992, he was Vice President - Intermodal with C.H. Robinson Company, headquartered in Eden Prairie, Minnesota, a third party agent specializing in produce and freight brokerage.
Michael J. Musacchio (age 43) has been Executive Vice President, Logistics Services Division of Mark VII, since May 1993. From December 1992 to May 1993, he was Vice President of Mark VII. From August 1992 to December 1992, he was an agent with Mark VII. From December 1988 to July 1992, he was Vice President of Transportation with C. H. Robinson Company.
ITEM 2.
ITEM 2. PROPERTIES
All of the Company's operations at the 19 company locations are conducted in office space under leases with terms of less than four years. The Company's principal administrative offices are located in leased space in Memphis, Tennessee, Kansas City, Missouri and Indianapolis, Indiana. Each of the 74 agency branches is responsible for obtaining its own office facilities.
The Company also owns, and is holding for sale or lease, office, maintenance and fuel facilities in St. Joseph, Missouri and Joplin, Missouri and a four acre tract in Los Angeles, California. The St. Joseph facility has been leased for a nominal rental through September 1995. The Joplin facility has been leased through December 1998; the lease requires 270 days notice of an offer to purchase the property and the lessee has a right of first refusal on such an offer. A portion of the Los Angeles lot has been leased on a short-term basis.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In February 1993, an unfavorable verdict was rendered against Mo-Neb in litigation, which commenced in June 1989, involving the termination of four independent fleet contractors in 1989 and volume discounts on fuel purchases from 1986 through 1989. A circuit court jury in Buchanan County, Missouri assessed actual damages of $59,920 related to the lease termination; and actual damages of $128,160 and punitive damages of $4.2 million related to the fuel discount issue. In April 1993, the court reduced the punitive damage award to $350,000. On July 20, 1994, a lawsuit was filed against Mo-Neb by T. Lye Crouser, an independent fleet contractor, who had leased four tractors to Mo- Neb. This lawsuit, which was also filed in Buchanan County, Missouri Circuit Court, was based on an alleged breach of contract by Mo-Neb in connection with its fuel discount program. On December 12, 1994, the Company entered into a settlement agreement with respect to both of these cases which also disposed of all other similar fuel discount claims which have been asserted against Mo-Neb.
Various other legal actions are pending against the Company. Although the outcome of litigation cannot be predicted with any certainty, it is management's opinion that these actions will have no material impact upon the Company's financial condition or its results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during the three months ended December 31, 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock trades on the Nasdaq Stock Market's National Market System under the name Mark VII, Inc. The common stock is identified by the symbol "MVII" and, prior to June 20, 1994, was identified by the symbol "MNXI." The following table sets forth the high and low sale prices per share of the common stock for the periods indicated, as reported by the Nasdaq Stock Market:
On March 24, 1995, the last sale price per share of the common stock was $15 7/8. At March 15, 1995, there were 264 holders of record, representing an estimated 1,500 individual holders of the Company's common stock.
DIVIDENDS
The Company has never paid a cash dividend on its common stock. It is the intention of the Board of Directors to continue to retain earnings to finance the growth of the Company's business rather than to pay cash dividends. Future payments of cash dividends will depend upon the financial condition, results of operations and capital commitments of the Company, as well as other factors deemed relevant by the Board of Directors. The Company and its subsidiaries are currently subject to a line of credit which requires approval of the lender before paying dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for each of the years in the five-year period ended December 31, 1994 are derived from the Company's consolidated financial statements which have been examined by Arthur Andersen LLP, independent public accountants. The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto, and Report of Independent Public Accountants thereon, for the most recent three years, included elsewhere in this Annual Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Years 1993 Compared to 1992 and 1994 Compared to 1993
Operating revenues include the carriers' charges for carrying shipments (which are shown in transportation costs) plus commissions and fees. Net revenues include only the commissions and fees. Selling, general and administrative expenses include the percentage of the net revenue paid to agencies as consideration for providing sales and marketing, arranging for movement of loads, entering billing and accounts payable information on loads and maintaining customer relations, as well as other operating expenses. Lease payments for tractors, trailers and domestic containers are included in equipment rents.
The following table sets forth the percentage relationship of the Company's revenue and expense items to operating revenues for the periods indicated:
The following tables include dollar amounts in thousands.
Operating Revenues - The increases in total operating revenues are summarized in the following table:
The increases in loads of 37% and 33% in 1993 and 1994, respectively, were the result of substantial increases in the sales force at new and existing branch sales offices, the increase in logistics management and dedicated trucking operations and the acquisition of certain air freight operations in late 1993. The active sales force, including agents, was 147 in 1992, 171 in 1993 and 226 in 1994. The increases in the sales force have enabled the Company to increase the volume shipped by adding new customers and expanding volumes shipped by existing customers. Average revenue per load arranged decreased by 5% and by 6% for 1993 and 1994, respectively, as the greatest increase was generated in truck brokerage and air freight forwarding, which produce lower average revenues per load than intermodal services. Additionally, the Company has continued to increase its logistics management and dedicated trucking operations through the addition of several large projects and the expansion of the volume in existing projects. Temperature-controlled revenues (formerly operated as TemStar) declined in 1994 compared to 1993 due to substantial reductions in the trailer fleet used in this operation from approximately 500 units in 1992 and 1993 to approximately 260 units at the end of 1994. In addition, these revenues declined in 1993 compared to 1992 in part as a result of the flooding in the midwest. Management plans to continue to reduce this operation in early 1995 but to continue to provide service to a core group of customers.
Transportation Costs - The increases in purchased transportation expense were the result of the following factors:
The transportation services operation generally arranges for transportation of freight by rail, truck, ocean or air for shippers. The carriers with whom the Company contracts provide their own or other third parties' transportation equipment, the charge for which is included in transportation cost. As a result, the primary operating cost is for purchased transportation. The 4% and 6% decreases in 1993 and 1994, respectively, in average cost per load arranged were the result of the growth in the truck brokerage and air freight forwarding businesses which have a lower average transportation cost per load than intermodal services. The logistics management and dedicated trucking operations incur a greater portion of their costs in equipment rents, salaries and related costs, and selling, general and administrative costs than do the Company's transportation services operations. Thus, the increases in transportation costs were substantially lower than the increases in operating revenues. Transportation costs for the temperature-controlled group declined in 1994 due to the reduction in this operation as discussed above in "Operating Revenues" and in 1993 in part as a result of reduced volumes of loads caused by the flooding in the midwest.
Net Revenues - The increases in net revenues are summarized in the following table:
The increases in net revenues of 29% and 30% in 1993 and 1994, respectively, were partially the result of increased volumes of loads arranged by the Company. The increases in the truck brokerage and air freight forwarding businesses as a percentage of total transportation services operations in 1993 and 1994 also contributed to this increase as these operations have higher average net revenue as a percentage of total revenue than intermodal loads. Although the average net revenue as a percentage of revenue for truck brokerage and air freight forwarding is higher than for intermodal, the amount of average net revenues per load is lower due primarily to the relatively smaller size of shipments (measured in volume, weight or length of haul). Management expects the truck brokerage and air freight forwarding operations to continue to be the fastest growing parts of the Company's transportation services operations. Net revenues from dedicated trucking and logistics management increased substantially because a greater portion of their operating costs are included in salaries, wages and related costs and selling, general and administrative expenses. Net revenues for the temperature-controlled group declined in 1994 due to the reduction in this operation discussed previously and in 1993 due to reduced volumes of loads moved as a result of the midwest floods. Management expects to retain the portion of the temperature-controlled operations which have been operated at a profitable level.
Salaries and Related Costs - The 24% and 27% increases in this expense in 1993 and 1994, respectively, are as follows:
The increases of 21% and 35% in 1993 and 1994, respectively, in salaries and wages (excluding temperature-controlled) were due to the addition of driver wages for dedicated trucking operations, the increase in logistics management operations and the acquisition of certain air freight operations which utilize employees rather than agents, salary increases to existing employees and the addition of administrative and operations personnel to handle continued growth in the number of loads arranged. This increase, as well as the increase in selling, general and administrative expenses (excluding temperature-controlled) discussed below, exceeds the percentage increase in operating revenues (excluding temperature-controlled) due to growth in the dedicated trucking and logistics management operations, which (i) have a greater proportion of operating costs included in salaries and related costs and selling, general and administrative expenses rather than transportation costs as compared to transportation services operations and (ii) include new projects which have relatively higher fixed costs compared to operating revenues in their initial stages. While management expects these operations to continue to grow and consequently these expenses to increase as a percentage of operating revenue, the impact on operating results will be offset by the improvement in net revenue discussed above; therefore, management believes this is not a continuing material trend. Transportation services and administration salaries and related costs decreased from 1992 to 1993 as truckload sales salaries which were paid by Mark VII and charged to Carriers in 1992 were paid directly by Carriers in 1993 and 1994. Salaries and wages for temperature-controlled decreased in 1994 as TemStar's operations were absorbed in Mark VII's or terminated and increased in 1993 primarily as a result of an internal maintenance operation that was established in mid-1993 which reduced outside maintenance costs.
Selling, General and Administrative Expenses - The increases in this expense are summarized below:
Selling, general and administrative expenses (excluding temperature- controlled) increased 43% and 30% in 1993 and 1994, respectively. Transportation services and administration selling, general and administrative expenses increased primarily because of increased commissions paid to agency sales offices based on higher revenues. Administrative and operating costs related to the dedicated trucking and logistics management operations also increased substantially due to the addition of several large projects in 1993 and 1994, as discussed above. The decrease in costs for temperature-controlled in 1994 from 1993 was due in part to reduced volumes of loads discussed previously, as well as the use of its internal maintenance department to replace outside maintenance costs. The decrease in temperature-controlled costs in 1993 from 1992 was due in part to reduced volumes of loads caused by the flooding in the midwest.
Equipment Rents - The leasing of tractors and trailers for use in dedicated trucking operations and the leasing of 344 intermodal containers resulted in the 52% and 41% increases in this expense in 1993 and 1994, respectively.
Depreciation and Amortization - In 1993 and 1994, depreciation and amortization increased 73% and 31%, respectively, from the prior periods as the Company acquired 75 trailers and 5 tractors from Mo-Neb and 100 intermodal containers at a cost of approximately $3.1 million in the second and third quarters, respectively, of 1994. Additionally, the Company increased its investment in computer equipment and furniture in connection with the expansion of operations. Also, in January and July 1994, the Company acquired 328 trailers which had previously been leased by TemStar.
Interest and Other Expense, Net - Interest and other expenses increased 125% in 1994 from 1993 as a result of increased borrowings under the line of credit and increases in short-term borrowing rates. Interest and other expenses decreased 58% in 1993 from 1992 as a result of Mark VII's intercompany borrowing position changing from a net borrower to a net lender to Carriers' subsidiaries, which more than offset increased borrowings under the lines of credit.
Provision for Income Taxes - The Company's effective tax rates were 41.0%, 40.7% and 41.5% in 1992, 1993 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital needs have been met through bank lines of credit. Mark VII maintains a $20 million line of credit. This line bears interest at 1/2% over the bank's prime rate and expires in July 1997. The line is secured by accounts receivable and other assets of Mark VII and is guaranteed by the Company.
At December 31, 1994, the available line of credit was $8,804,000 and letters of credit totaling $2,650,000 had been issued on Mark VII's behalf to secure insurance deductibles and purchases of operating services. At March 24, 1995, Mark VII's outstanding letters of credit totalled $3,176,000; these letters of credit reduce the Company's borrowing availability. In addition, Mo- Neb had outstanding letters of credit of $2,001,000 which are secured by restricted cash deposits of $2,256,000. These deposits, $3,052,000 at yearend, along with the accrued claims and other liabilities to which they relate, are included in "Net current liabilities of discontinued operations."
The line of credit has no restrictions on intercompany advances among the Company's subsidiaries. Among other restrictions, the terms of the line of credit require that the Company earn $2 million in consolidated income from continuing operations annually, maintain consolidated tangible net worth of $19 million in 1995, $21 million in 1996 and $23 million thereafter and obtain approval of the lender before paying dividends.
The proceeds from the Asset Sale, net of cash used for the liquidation of net liabilities of the truckload operations that were not the subject of the Asset Sale, of approximately $7.4 million, were used to repay borrowings under the line of credit, to fund the restricted cash deposits which support Mo-Neb's letters of credit and to pay expenses associated with the previously proposed Distribution and the Asset Sale.
At December 31, 1994, the Company had commitments of approximately $2.3 million for tractors which were financed in 1995 with an operating lease. These tractors replaced units leased on a month-to-month basis.
At December 31, 1994, the Company had a ratio of current assets to current liabilities of approximately 1.25 to 1. Management believes that the Company has sufficient borrowing capacity to cover its operating needs and capital requirements for the foreseeable future.
OTHER INFORMATION
In the transportation industry generally, results of operations 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 and third quarters than in the first and fourth quarters.
A new accounting pronouncement on employer's accounting for post-retirement benefits other than pensions was issued in December 1990, effective in 1993. The Company does not provide post-retirement benefits that are the subject of this pronouncement. A new accounting pronouncement on employers' accounting for post-employment benefits was issued in November 1992, effective in 1994. The Company does not provide any benefits for which additional accruals are required under this pronouncement.
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109 - Accounting for Income Taxes issued in February 1992. This standard requires, among other things, recognition of future tax benefits, measured by enacted tax rates, attributable to deductible temporary differences between financial statement and income tax bases of assets and liabilities and to tax net operating loss and tax credit carryforwards, to the extent that realization of such benefits is more likely than not.
DISCONTINUED OPERATIONS
On December 1, 1993, the Board of Directors authorized management to proceed with the separation of the Company into two publicly-held corporations, one owning the transportation services operation and the other owning the truckload operation. The separation was initially to have been effected through the Distribution and has now been effected through the Asset Sale. As a result, the financial condition and results of operations of the truckload subsidiaries have been recorded by the Company as a discontinuation of Carriers.
The loss from and on discontinued operations in 1993 of $13.8 million includes the following: (1) the loss from discontinued operations of $10.6 million includes $2.7 million of restructuring charges (relating to write-downs of assets held for sale because they are no longer essential to Carriers' operations and reserves for reductions in non-driver personnel), net of income from settlement of a lawsuit; an adjustment of approximately $2.2 million to increase accident and workers' compensation claim reserves, resulting from a change in the methodology used to estimate such reserves; and an extraordinary loss of $.9 million for early termination of equipment leases and debt which were to be refinanced in connection with the Distribution; and (2) the loss on discontinued operations of $3.1 million includes costs associated with the Distribution, consisting primarily of financial consulting, legal, professional and administrative costs and the estimated losses to be incurred by Carriers from December 1, 1993 through the anticipated date of the Distribution. See Note 2 of Notes to Consolidated Financial Statements.
As a result of the previously proposed Distribution and the Asset Sale, an additional loss on discontinued operations of $2.5 million before income taxes was recorded in 1994 ($1.3 million after applicable income tax benefits of $1.2 million). This additional pretax loss on discontinued operations was the net result of the gain on assets transferred to Swift in the Asset Sale, the writedown of other truckload assets which were not part of the Asset Sale to estimated realizable value, estimated severance and outplacement costs for employees not hired by Swift, the reversal of the reserves for extraordinary losses on early extinguishment of debt and other transaction costs provided in connection with the previously proposed Distribution which were not incurred under the Asset Sale and estimated costs associated with the Asset Sale, consisting primarily of financial consulting, legal, accounting and administrative costs. See Note 2 to Notes to Consolidated Financial Statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required under this item and set forth elsewhere in this Form 10-K as indicated in the following index are incorporated herein by reference.
Index to Consolidated Financial Statements Page Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders' Investment Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Public Accountants
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE COMPANY
The section entitled "Election of Directors" of the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of December 31, 1994 is incorporated herein by reference. Information concerning executive officers and key employees of the Company is set forth in Item 1 under the caption "Executive Officers and Key Employees of the Company" in reliance on General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. The following sets forth certain information with respect to one director who served in 1994 who will not be a nominee for election at the Company's 1995 Annual Meeting of Shareholders.
Mr. H. B. Oppenheimer (age 40) has served as a Director of the Company since 1986. Since April 1984, Mr. Oppenheimer has been President and Chief Executive Officer of H. B. Oppenheimer & Company Incorporated ("HBOC"), an investment banking firm in Kansas City, Missouri and since January 1993, Mr. Oppenheimer has been President and Chief Executive Officer and HBOC has been general partner in Global Source, a Kansas City, Missouri-based firm specializing in the retrieval of business information for clients. In 1994, Mr. Oppenheimer was a member of the Board's Audit, Compensation and Stock Option Committees.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required hereunder is incorporated by reference from the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of December 31, 1994.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required under Item 11 is incorporated by reference from the section entitled "Executive Compensation" of the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of December 31, 1994.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under Item 12 is incorporated by reference from the section entitled "Stock Ownership of Certain Beneficial Owners and Management" of the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of December 31, 1994.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 13 is incorporated by reference from the section entitled "Certain Relationships and Related Transactions," of the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of December 31, 1994.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
All financial statements of the Registrant as set forth under Item 8 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
Schedule Number Description Page of 1994 10-K II Valuation and Qualifying Accounts
The report of the Registrant's independent public accountants with respect to the above-listed financial statements and financial statement schedule appears on page of this Annual Report on Form 10-K.
All other financial schedules not listed above have been omitted since the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
(3) Exhibits Exhibit Page Number or Incorporation Number Description by Reference to
3(a) Restated Articles of Incorporation Exhibit 3(a) to Registration Statement on Form S-1 (SEC File No. 33-6550)
3(b) Amendment No. 1 to the Restated Exhibit 4.2 to Registration Articles of Incorporation of the Statement on Form S-8 (SEC Company File No. 33-86174)
3(c) Amended and Restated By-Laws Exhibit 3(b) to 1993 Annual Report on Form 10-K
4(a) Specimen Common Stock Certificate Exhibit 4.4 to Registration Statement on Form S-8 (SEC File No. 33-86174)
10.1 Engagement letter between H. B. Exhibit 10(a) to 1993 Annual Oppenheimer & Company Incorporated and Report on Form 10-K Registrant, dated November 11, 1993, with respect to financial advisory services
10.2 * MNX Incorporated Amended and Restated 1986 Exhibit 10(g) to 1990 Annual Incentive Stock Option Plan Report on Form 10-K
10.3 * Amendment No. 5 to the MNX Incorporated Exhibit 10(g) to 1991 Annual Amended and Restated 1986 Incentive Stock Report on Form 10-K Option Plan
10.4 * MNX Incorporated 1992 Non- Qualified Stock Exhibit 10(s) to 1991 Annual Option Plan Report on Form 10-K
10.5 * MNX Incorporated Stock Appreciation Rights Exhibit 10(o) to 1992 Annual Program, dated April 24, 1990 Report on Form 10-K
10.6 Amended and Restated Loan and Security Exhibit 10.1 to Quarterly Agreement Schedule and Promissory Note, Report on Form 10-Q for dated August 10, 1994, by and among the period ended July 2, Missouri-Nebraska Express, Inc., Mark 1994 VII Transportation Company, Inc., TemStar, Inc. and Marine Midland Business Loans, Inc.
10.7 Amended and Restated Guaranty, Surety Exhibit 10.2 to Quarterly Agreement and Security Agreement, dated Report on Form 10-Q for August 10, 1994 by Mark VII, Inc. in favor the period ending of Marine Midland Business Loans, Inc. July 2, 1994
10.8 Guaranty, Surety Agreement and Security Agreement, dated August 10, 1994 by MNX Exhibit 10.3 to Quarterly Carriers, Inc. in favor of Marine Report of Form 10-Q for the Midland Business Loans, Inc. period ending July 2, 1994
10.9 Engagement letter between H. B. Oppenheimer Exhibit 10.4 to Quarterly & Company Incorporated and Registrant, Report on Form 10-Q for the dated June 9, 1994, with respect to period ended July 2, 1994 financial advisory services
10.10 Amendment No. 1 to the Amended and Restated Exhibit 10.1 to Quarterly Loan and Security Agreement, Schedule and Report on Form 10-Q for the Promissory Note, dated October 28, 1994, by period ended October 1, 1994 and among Missouri-Nebraska Express, Inc., Mark VII Transportation Company, Inc., TemStar, Inc. and Marine Midland Business Loans, Inc.
10.11 Letter Agreement dated October 28, 1994 by Exhibit 10.2 to Quarterly and among Missouri-Nebraska Express, Inc., Report on Form 10-Q for the Mark VI Transportation Company, Inc., period ended October 1, 1994 MNX Carriers, Inc., TemStar, Inc., Mark VII, Inc. and Marine Midland Business Loans, Inc.
10.12*Amendment Number 1 to the Mark VII, Inc. Exhibit 99.1 to Registration 1992 Non-Qualified Stock Option Plan Statement on Form S-8 (SEC (formerly the MNX Incorporated 1992 File No. 33-86174) Non-Qualified Stock Option Plan)dated September 22, 1994
10.13 Asset Purchase Agreement dated June 17, Appendix B to Proxy 1994 by and among Swift Transportation Statement for 1994 Annual Co., Inc. (Nevada), Swift Transportation Meeting of Shareholders Co., Inc. (Arizona), Mark VII, Inc., MNX Carriers, Inc., and Missouri-Nebraska Express, Inc.
10.14 Amendment No. 1 to Asset Purchase Agreement Filed herewith dated September 30, 1994 by and among Swift Transportation Co., Inc. (Nevada), Swift Transportation Co., Inc. (Arizona), Mark VII, Inc., MNX Carriers, Inc., and Missouri-Nebraska Express, Inc.
11 Statement re: Computation of Earnings Filed herewith per Share
21 Subsidiaries of Registrant Filed herewith
23 Consent of Independent Public Accountants Filed herewith
27 Financial Data Schedule Filed herewith
* Management contracts or compensatory plans
(b) Reports on Form 8-K
On December 21, 1994, the Company filed a Current Report on Form 8-K, dated December 12, 1994, reporting that the Company had entered into a settlement agreement with respect to Moore v. Missouri-Nebraska Express, Inc. and Crouser v. Missouri-Nebraska Express, Inc. which also disposed of all other similar fuel discount claims which have been asserted against Missouri-Nebraska Express, Inc. These cases have previously been reported by the Company.
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.
MARK VII, INC.
By:/s/ R. C. Matney R. C. Matney Chairman of the Board, President and Chief Executive Officer
Date: March 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ R. C. Matney Chairman of the Board, President, March 27, 1995 R. C. Matney Chief Executive Officer and Director
/s/ J. Michael Head Executive Vice President-Finance, March 27, 1995 J. Michael Head Chief Financial Officer and Director )Principal Financial and Accounting Officer)
/s/ James T. Graves Vice Chairman, Secretary, General March 27, 1995 James T. Graves Counsel and Director
/s/ David H. Wedaman Executive Vice President, Chief March 27, 1995 David H. Wedaman Operating Officer and Director
/s/ Roger M. Crouch Director March 27, 1995 Roger M. Crouch
/s/ Douglass Wm. List Director March 27, 1995 Douglass Wm. List
/s/ William E. Greenwood Director March 27, 1995 William E. Greenwood
/s/ Dr. Jay U. Sterling Director March 27, 1995 Dr. Jay U. Sterling
MARK VII, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Reporting Entity and Principles of Consolidation - The consolidated financial statements include Mark VII, Inc. and its wholly owned subsidiaries, collectively referred to herein as "the Company." On December 1, 1993, the Board of Directors authorized management to proceed with the separation of the Company into two publicly-held corporations, one owning the transportation services operation and the other owning the truckload operation (the "Distribution"). On June 3, 1994, the Company's shareholders approved the Distribution. On June 17, 1994, the Board determined not to effect the Distribution as previously scheduled and the Company entered into an agreement ("the Agreement") for the sale of substantially all of the assets (the "Asset Sale") of its truckload subsidiaries to Swift Transportation Co., Inc. ("Swift"). On September 22, 1994, the Company's shareholders approved the Asset Sale and the transaction was completed on October 3, 1994.
The Company continues to operate the transportation services operation through its principal operating subsidiary, Mark VII Transportation Company, Inc. ("Mark VII"). As a result of the Asset Sale, the operations of MNX Carriers, Inc. ("Carriers"), and its truckload subsidiaries (Missouri-Nebraska Express, Inc. ("Mo-Neb"), MNX Trucking, Inc. and MNX Transport, Inc.) are reported as a discontinued operation in these consolidated financial statements.
(b) Revenue - Revenues earned as a third party agent include the carriers' charges for carrying the shipment plus commissions and fees. Revenues and related expenses are recognized on completion of the Company's service obligation.
(c) Property and Equipment - Property and equipment are stated at cost. Depreciation and amortization of property and equipment are provided using the straight-line method based on the estimated useful lives of the respective assets as follows:
Transportation equipment 3 to 7 years Computer equipment, furniture and other 3 to 5 years
(d) Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes which was adopted in 1992. The adoption of SFAS No. 109 did not have a significant effect on the financial position or results of operations of the Company.
(e) Cash and Cash Equivalents - Cash in excess of daily requirements is invested in marketable securities with maturities of three months or less.
(f) Intangible Assets - Goodwill and other intangible assets of $2,307,882 (net) are being amortized on the straight-line basis over 10 to 20 years.
(g) Fiscal Year - The Company's fiscal year ends on the Saturday nearest December 31. Operations in 1993 and 1994 included 52 weeks and operations in 1992 included 53 weeks.
(h) Earnings (Loss) Per Share - Primary earnings (loss) per share are computed by dividing income by the average common shares outstanding plus the dilutive effect of common stock equivalents outstanding, using the treasury stock method based on the average market price of the Company's common stock. Common stock equivalents were less than 3% dilutive in 1992 and thus are not included in primary average common shares and common equivalents outstanding for 1992. Fully diluted earnings (loss) per share are determined in the same manner using the ending market price of the Company's common stock, if higher than the average market price.
(i) Reclassifications - Certain reclassifications have been made to the 1993 financial statements to conform to the 1994 presentation.
(2) DISCONTINUED OPERATIONS:
The planned Distribution, and subsequently the Asset Sale, have been recorded as a discontinuation of the truckload subsidiaries. Losses on discontinued operations were recorded in 1993 and 1994 as follows:
The costs associated with the previously proposed Distribution and the Asset Sale consist primarily of financial consulting, legal, accounting and administrative costs, including approximately $1.1 million to H. B. Oppenheimer & Company Incorporated ("HBOC"), an investment banking firm controlled by one of the Company's outside directors, H. B. Oppenheimer.
On June 17, 1994, the Board determined not to effect the Distribution as previously scheduled and the Company entered into the Agreement with Swift for the Asset Sale. The Agreement provided that Swift purchase from the Company approximately 556 tractors, 1,827 trailers, 715 satellite communication units, certain inventory and certain prepaid expenses. The Asset Sale was approved by the Company's shareholders on September 22, 1994 and the transaction was closed on October 3, 1994.
The purchase price of $40.6 million included cash of approximately $9.1 million and the assumption of approximately $31.5 million of debt and capital lease obligations on revenue equipment. Also assumed were approximately $10.5 million of minimum future payments under operating leases of revenue equipment. Full and unconditional release of Mo-Neb's revenue equipment debt, capital lease and operating lease obligations, as well as the Company's guaranties of such obligations, was obtained.
In connection with the Asset Sale, Swift is leasing the Company's St. Joseph, Missouri facility through September 1995 for $2,000 per month. From July 1, 1994 until October 1, 1994, Swift managed and operated the assets that were subject to the Agreement. Swift received all revenues, income, earnings and profits and was responsible for all obligations related to the assets during this period.
(3) CREDIT FACILITY:
The Company has a $20 million line of credit agreement. This line bears interest at 1/2% over the bank's prime rate and expires in July 1997. The line is secured by accounts receivable and other assets of Mark VII and is guaranteed by the Company. The available line of credit at December 31, 1994 was $8.8 million. Letters of credit totaling $2.7 million have been issued on the Company's behalf to secure insurance deductibles and purchases of operating services. The line of credit has no restrictions on intercompany advances among the Company's subsidiaries.
The following is a summary of data on the lines of credit:
The line of credit requires that the Company earn annual consolidated income from continuing operations of $2 million, maintain minimum consolidated tangible net worth of $17 million in 1994, $19 million in 1995, $21 million in 1996 and $23 million thereafter and obtain approval from the lender prior to paying dividends.
(4) INCOME TAXES:
The Company files a consolidated federal tax return with its subsidiaries and, as agreed, the consolidated tax provision is allocated among the members of the consolidated group based on their respective contributions to consolidated income before income taxes. Components of the provision for income taxes consisted of the following:
A reconciliation between the provision for income taxes and the expected taxes using the federal statutory income tax rate of 34% follows:
Deferred tax assets (liabilities) are comprised of the following:
(5) LONG-TERM OBLIGATIONS AND OPERATING LEASES:
Long-term obligations at December 31, 1994, included the following:
Property and equipment at December 31, 1994 included the following amounts related to capital lease obligations:
Scheduled annual principal payments on the Company's long-term obligations and commitments for operating leases are as follows:
Excluded from the operating lease commitments above are scheduled rentals on tractors and trailers with lease terms of three to six years which have annual cancellation provisions. If these leases are not cancelled, the additional future lease payments would be approximately $1,991,000 , $1,829,000, $1,512,000, $958,000, $672,000 and $385,000 in 1995, 1996, 1997, 1998, 1999 and 2000, respectively.
(6) CONTINGENCIES AND COMMITMENTS:
In February 1993, an unfavorable verdict was rendered against Mo-Neb in litigation, which commenced in June 1989, involving the termination of four independent fleet contractors in 1989 and volume discounts on fuel purchases from 1986 through 1989. A circuit court jury in Buchanan County, Missouri assessed actual damages of $59,920 related to the lease termination; and actual damages of $128,160 and punitive damages of $4.2 million related to the fuel discount issue. In April 1993, the court reduced the punitive damage award to $350,000. On July 20, 1994, a lawsuit was filed against Mo-Neb by T. Lyle Crouser, an independent fleet contractor, who had leased four tractors to Mo- Neb. This lawsuit, which was also filed in Buchanan County, Missouri Circuit Court, was based on an alleged breach of contract by Mo-Neb in connection with its fuel discount program. On December 12, 1994, the Company entered into a settlement agreement with respect to both of these cases which also disposed of all other similar fuel discount claims which have been asserted against Mo-Neb.
Various other legal actions are pending against the Company. Although the outcome of litigation cannot be predicted with any certainty, it is management's opinion that these actions will have no significant impact upon the Company's financial condition or its results of operations.
Prior to July 1, 1993, Mo-Neb maintained an aggregate $1 million self-insured retention on general and auto liability insurance for any claims in excess of $500,000 during a policy period. From July 1, 1993 through December 31, 1993, Mo-Neb's self-insured retention for its general and auto liability and for workers' compensation insurance coverage was $500,000 per occurrence. Effective December 31, 1993, Mo-Neb reduced its self-insured retention for general and auto liability and workers' compensation to $100,000 and $50,000, respectively. Policy limits for claims in excess of the retention levels are $20 million per occurrence on general and auto liability.
Letters of credit totaling $2.7 million have been issued on Mo-Neb's behalf. These letters of credit were secured by restricted temporary investments of $3.0 million at December 31, 1994, which investments are included in net current liabilities of discontinued operations.
At December 31, 1994, the Company had commitments approximating $2.3 million which were financed in 1995 with an operating lease.
(7) STOCK OPTIONS:
The Company has reserved 400,000 shares of common stock for issuance to key employees under an incentive stock option plan. The plan provides for the issuance of stock options with the stock purchase price to be at least 100% of the stock's fair market value on the date of grant. Options are generally exercisable for ten years from the date of grant.
The following table is a summary of data regarding incentive stock options:
The per share exercise prices of options outstanding as of December 31, 1994, ranged from $4.25 to $14.00 per share. The average per share exercise price of options exercisable at December 31, 1994, was $5.89.
In 1992, the Board of Directors of the Company adopted a non-qualified stock option plan and reserved 400,000 shares of common stock for issuance thereunder. In 1994, the Board of Directors and shareholders of the Company approved an amendment to the plan which increased the number of shares reserved for issuance thereunder to 675,000 shares. Options are generally exercisable ten years from the date of grant.
The following table is a summary of data regarding non-qualified stock options:
The per share exercise prices of options outstanding as of December 31, 1994, ranged from $7.75 to $14.00 per share. The average per share exercise price of options exercisable at December 31, 1994, was $8.42.
In 1990, the Company granted stock appreciation rights for 52,000 shares of the Company's common stock at a base price of $4.25 per share to key employees of the Company. Stock appreciation rights for 21,000 shares were outstanding at December 31, 1994. The rights provide for cash payments to holders of the rights for increases in the market price of the Company's common stock as of April 1 of each year until and including April 1, 2000. The base price is adjusted each April 1 if the market closing price on that date is greater than the previous base price. The adjusted base prices as of April 1, 1992, 1993 and 1994 were $8.75, $8.75, and $14.75 per share, respectively. Compensation of $25,000 and $170,000 was paid under this plan in 1992 and 1994, respectively. No compensation was paid under the plan in 1993. As of December 31, 1994, no additional compensation has been accrued based on the closing market price of $11.25 per share on that date.
(8) JOINT VENTURE:
Mark VII has entered into a partnership with a warehousing and distribution company to provide contract management services for a number of regional distribution centers for one of the Company's largest customers. The partnership, ERX Logistics ("ERX"), employs drivers and warehousemen to operate the warehouses, tractors and trailers owned by the customer.
The Company has guaranteed $1 million of a $5 million line of credit to provide working capital for ERX. This line is secured by accounts receivable of ERX. Borrowings under this line averaged $1,203,000 in 1994. The maximum monthend borrowing was $2,614,000. The balance outstanding on this line was $1,837,000 at December 31, 1994.
(9) RELATED PARTY TRANSACTIONS:
Mark VII and Carriers routinely engaged in intercompany transactions as Carriers hauled freight for Mark VII's customers and as Mark VII brokered loads for Carriers' customers. Transportation costs on Mark VII's loads hauled by Carriers is shown in the accompanying statements of income. The Company's operating revenue on Carriers' loads brokered to Mark VII was $334,000, $442,000 and $248,000 for 1992, 1993 and 1994, respectively. In 1992, Mark VII employed the truckload sales force and charged Carriers $2,230,000 for sales efforts. Mark VII and Carriers make routine cash advances to one another for working capital needs. Interest is charged on these advances at the prevailing bank line of credit rate. Interest expense to the Company on such advances was $113,000 for 1992. Interest income to the Company on such advances was $251,000 and $211,000 for 1993 and 1994, respectively.
On January 1, 1993, pursuant to the terms of an Asset Purchase Agreement, MNX Trucking, a wholly owned subsidiary of the Company, purchased substantially all of the assets and assumed certain liabilities of LTS, Inc. ("LTS"). LTS was engaged in contract truck transportation services. Roger Crouch, a member of the Board of Directors of the Company, was the sole shareholder of LTS. The consideration paid was 38,613 shares of common stock of the Company transferred from treasury stock. The acquisition has been accounted for as a purchase. Acquired goodwill was recorded at $354,287 and was being amortized on the straight-line basis over ten years, the period of Mr. Crouch's Employment and Noncompete Agreement (the "Employment Agreement"). Tangible assets acquired totaled $310,696 and liabilities assumed totaled $448,928.
Contemporaneously with the execution of the Asset Purchase Agreement, Mr. Crouch entered into the Employment Agreement with the Company pursuant to which Mr. Crouch (1) received a one-time cash payment of $210,000 and (2) is guaranteed an annual base salary of $225,000. An intangible asset of $210,000 was being amortized over the ten-year term of the Employment Agreement. The assets and liabilities and results of operations of MNX Trucking are included in discontinued operations. In connection with the Asset Sale, the unamortized balance of MNX Trucking's intangible assets of $505,000 was written off.
During 1992, HBOC received fees of $224,000 for financial consulting services provided to the Company, primarily in connection with obtaining the Company's $20 million line of credit. In 1993 and 1994, HBOC received $109,000 and $712,000, respectively, for financial consulting services provided to the Company, principally in connection with the previously proposed Distribution and the Asset Sale. An additional $282,000 of financial consulting fees in connection with the Asset Sale have been paid to HBOC in 1995.
QUARTERLY FINANCIAL DATA (in thousands, except per share data) (Unaudited):
The results of operations for each of the four quarters of 1993 and 1994 are summarized below. The amounts below are unaudited, but, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such periods have been made.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Mark VII, Inc.:
We have audited the accompanying consolidated balance sheets of MARK VII, INC. (a Missouri corporation) AND SUBSIDIARIES as of January 1, 1994 and December 31, 1994, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended December 31, 1994. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mark VII, Inc. and Subsidiaries as of January 1, 1994 and December 31, 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied to our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Kansas City, Missouri, February 24, 1995.
EXHIBIT INDEX
Exhibit Number Description
10.14 Amendment No. 1 to Asset Purchase Agreement dated September 30, 1994 by and among Swift Transportation Co., Inc. (Nevada), Swift Transportation Co., Inc. (Arizona), Mark VII, Inc., MNX Carriers, Inc., and Missouri-Nebraska Express, Inc.
11 Statement re: Computation of Earnings per Share
21 Subsidiaries of Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule