<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Number 000-23341
MOTOR CARGO INDUSTRIES, INC.
(Exact Name of the Registrant as Specified in its Charter)
Utah 87-0406479
- ----------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
845 West Center Street
North Salt Lake, Utah 84054
(801) 292-1111
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 17, 1998, the aggregate market value of the Registrant's voting
Common Stock held by non-affiliates of the Registrant based upon the last sale
price reported for such date on the Nasdaq National Market System was
approximately $35,234,927.
The number of shares of the Registrant's Common Stock outstanding as of March
17, 1998 was 6,990,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the
1998 Annual Meeting of Shareholders of the Registrant is incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Motor Cargo Industries, Inc. (the "Company") is a regional
less-than-truckload ("LTL") carrier which provides transportation and logistics
services to shippers within the Company's core service region. The Company's
core service region is the western United States, including Arizona, California,
Colorado, Idaho, New Mexico, Oregon, western Texas, Utah and Washington. The
Company transports general commodities, including consumer goods, packaged
foodstuffs, electronics, computer equipment, apparel, hardware, industrial goods
and auto parts for a diversified customer base. The Company offers a broad range
of services, including expedited scheduling and full temperature-controlled
service. Through its wholly-owned subsidiary, MC Distribution Services, Inc.
("MCDS"), the Company also provides customized logistics, warehousing and
distribution management services.
The Company utilizes 22 strategically located service centers (also
referred to as "terminals") to serve major markets within the Company's core
service region. In addition, the Company provides service to smaller markets
within its core service region pursuant to agreements with 20 independent
agents, most of which act as exclusive agents for the Company. See Item 1
"Business - Operations."
In 1997, the Company initiated a program to establish market and operations
presence in several major business economic areas ("BEAs") outside of the
Company's core service region. Unlike more traditional inter-regional expansion
models, the Company intends only to solicit tonnage from these markets moving
west into its core service region. The Company intends to utilize third-party
truckload carriers to transport freight from these markets to its core service
region. The Company anticipates that this strategy of selling into the region
will improve lane, route and service center densities in its core service region
without requiring the Company to incur the costs associated with building an
inter-regional terminal network. The Company intends to enter into interline
partnerships to provide immediate revenue and offset start-up costs associated
with certain BEA expansions. The Company commenced operations at its first BEA
expansion facility in Dallas in October 1997. The next BEA expansion facility is
scheduled to open in Chicago in April 1998. Additional BEAs under consideration
for 1998 and 1999 include major distribution centers such as Atlanta, Cleveland,
Houston, Indianapolis, Memphis, Minneapolis and St. Louis.
THE LTL INDUSTRY
The Company transports primarily LTL shipments. LTL shipments are
defined as shipments weighing less than 10,000 pounds. Generally, LTL carriers
transport freight from multiple shippers to multiple consignees on a scheduled
basis. Unlike truckload carriers, LTL carriers typically do not transport full
trailer loads directly from origin to destination. LTL operations require the
handling of shipments in several coordinated stages.
Typically, LTL carriers transport freight along scheduled routes from
multiple shippers to multiple consignees utilizing a network of terminals,
together with fleets of linehaul and pickup and delivery tractors and trailers.
Freight is picked up from customers by local drivers and consolidated for
shipment. The freight is then loaded into inter-city trailers and transported to
other terminals by linehaul drivers. Large LTL carriers have traditionally
employed a series of hub and spoke terminals. This method improves truck
utilization but requires both multiple cargo rehandlings, which are expensive,
and a fixed network of pickup, breakbulk and destination terminals, which is
capital intensive and requires a large staff of freight handlers. At each
breakbulk terminal, freight is unloaded and reloaded with other freight destined
for locations in the same general direction of another breakbulk terminal, where
the truck is sent for further unloading and loading, until the freight arrives
at a destination terminal located nearest the region of the consignee. At the
destination terminal, freight is then loaded onto a local truck for final
delivery. The Company emphasizes direct loading between the originating and
destination service centers in order to avoid the costly and time-consuming use
of breakbulk terminals.
LTL companies are generally categorized as regional, inter-regional or
national carriers, based upon length of haul and service territory. Carriers
with average lengths of haul less than 500 miles are referred to as regional
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carriers and generally provide either overnight or second day service. Regional
LTL carriers usually are able to load freight for direct transport to a
destination terminal, thereby avoiding the costly and time-consuming use of
breakbulk terminals (where freight is rehandled and reloaded for delivery to its
ultimate destination). Carriers with average lengths of haul between 500 and
1,000 miles are generally referred to as inter-regional carriers. National
carriers, with average lengths of haul greater than 1,000 miles, generally
operate coast-to-coast relying on networks of breakbulk and satellite terminals.
Due to the geographical size of the western United States, the Company has a
longer average length of haul than most other regional carriers. For the year
ended December 31, 1997, the Company had an average length of haul of
approximately 624 miles.
In general, the more freight volume an LTL carrier has within a given
geographical area, the lower its incremental operating costs. This is
particularly true with respect to its pickup and delivery operations where
increased freight volumes generally result in less distance between stops and
more shipments per stop ("route density"). As route density increases, an LTL
carrier is able to make more deliveries on shorter routes, thereby increasing
the number of shipments that can be delivered within a defined period and
lowering overall labor costs for each shipment. Similarly, the more business a
carrier experiences in a given traffic lane from one service center to another
("lane density") the lower its incremental costs. As lane density increases, a
carrier experiences improved load factors resulting in increased revenue per
mile, reduced empty miles and reduced costs associated with intermediate
shipment handling and reconsolidation. A carrier's incremental costs are also
improved as the amount of freight handled at a given service center location
("service center density") increases. As service center density improves, a
carrier experiences higher revenues, while maintaining the same fixed cost
structure, thereby improving asset utilization.
OPERATIONS
The Company picks up freight with pickup and delivery trucks during the
day and transports the freight to Company service centers by early evening.
Pick-ups and deliveries are typically made within a 70 mile radius of each
service center. Upon arrival at a service center, freight is unloaded, logged
onto the Company's computerized tracing system, and reloaded onto trailers
destined for the Company's other service centers. Trucks depart later in the
evening for their destination service centers. In order to ensure prompt
service, the Company enforces established time schedules for linehaul service
between service centers and utilizes an advanced computer system to track and
coordinate deliveries. Through the Company's wide-area computer network, all
vital information relating to shipments is available to each service center on a
real-time basis. Before the cargo arrives at its destination service center, a
manifest showing the contents of each trailer and the sequence in which it is
loaded, along with the delivery bills, is generated by the Company's
computerized tracing system and is available to the destination service center
manager via the Company's computer network. Upon arrival at the destination
service center, the freight is unloaded, sorted and delivered to its final
destination by local delivery trucks.
Instead of utilizing a "hub and spoke" system, which is typically used
by large, national LTL carriers, the Company emphasizes direct loading of
freight between service centers with no intermediate handling on most shipments.
Hub and spoke systems generally require shipments to be loaded and unloaded
several times at a number of service centers and breakbulk facilities prior to
delivery. Direct loading allows shipments to be transported directly from the
originating service center to the destination service center without
intermediate handling. Direct loading reduces the Company's costs because it
requires less loading and unloading of freight and requires fewer terminals and
breakbulk facilities.
The Company uses a single service center, rather than multiple satellite
terminals, in each of the major cities it serves. Single service centers reduce
rehandling of freight, shorten delivery times and thereby reduce the risk of
freight damage or loss.
In addition to the Company's 22 service centers, the Company also
utilizes 20 independent agents in smaller markets in which the Company does not
operate service centers. These agents are independent businesses which operate
within a specific area as the Company's pick-up and delivery agent. Shipments
are coordinated through these agents in the same manner as the Company's service
centers. Agents are compensated based upon a percentage of freight bill revenue
and are required to maintain standards established by the Company. The Company
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believes that its utilization of agents in smaller markets helps the Company
maintain a lower fixed cost structure and emphasize variable costs while
improving the level of local market presence and allowing the Company to provide
its customer base with broader geographical coverage. The table indicates the
location of each of the Company's service centers and agents within its core
service region:
<TABLE>
<CAPTION>
SERVICE CENTERS AGENTS
--------------- -------
<S> <C>
Albuquerque, New Mexico Battle Mountain, Nevada
Bakersfield, California Beatty, Nevada
Colorado Springs, Colorado Bishop, California
Denver, Colorado Boise, Idaho
El Paso, Texas Cedar City, Utah
Fresno, California Elko, Nevada
Grand Junction, Colorado Ely, Nevada
Kent, Washington Eugene, Oregon
Las Vegas, Nevada Flagstaff, Arizona
Medford, Oregon Hawthorne, Nevada
Newark, California Hermiston, Oregon
North Salt Lake, Utah Kingman, Arizona
Oxnard, California Las Vegas, New Mexico
Phoenix, Arizona Lovelock, Nevada
Pico Rivera, California Redding, California
Portland, Oregon Ridgecrest, California
Reno, Nevada Tonopah, Nevada
Rialto, California Wells, Nevada
Sacramento, California Wendover, Utah
San Diego, California Winnemucca, Nevada
Spokane, Washington
Tucson, Arizona
</TABLE>
In October 1997, the Company commenced operations at its BEA expansion
facility in Dallas. This facility functions similarly to the Company's other
service centers with respect to pick-up and shipping operations; however, the
Company does not regularly transport freight from its other service centers to
the Dallas facility for delivery. The Company transports freight from the Dallas
service center to service centers within its core service region using primarily
purchased linehaul transportation.
Approximately half of the Company's shipments are currently delivered
overnight. The Company uses two-man "sleeper" teams to transport the remaining
second and third day deliveries to outlying service centers and agents. Over 90%
of the Company's shipments are currently delivered within two days. When
necessary, the Company contracts with third parties for transportation services
("purchased linehaul transportation") to supplement peak demand periods and
address lane imbalances. The Company obtains purchased linehaul transportation
from several sources, including truckload carriers and independent contractors.
By utilizing purchased linehaul transportation, the Company is able to reduce
"empty miles" and improve load factors.
The Company selectively solicits business from customers to reduce
operational inefficiencies by improving the mix of shipment and lane density,
shipment size and lane flow. During the year ended December 31, 1997, the
Company handled an average of approximately 3,253 shipments per day with an
average weight per shipment of approximately 1,145 lbs. and average revenue per
bill of approximately $125.15. The Company's revenue per hundredweight was
$10.96 for the year ended December 31, 1997.
The Company's rates for LTL shipments are typically based on weight and
volume characteristics and the distance traveled. The Company periodically
publishes base rates that are generally applicable to customer shipments. The
Company typically offers special rates to customers based on tonnage levels and
other factors. In
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certain instances, the Company competes with other carriers for business by
participating in competitive bidding. Customers generally solicit bids for
relatively large shipment and tonnage volumes over a one or two year period.
These customers often enter into contractual relationships with a limited number
of carriers based upon price and service.
SPECIALIZED SERVICES
The Company offers a broad range of services, including service
capabilities beyond the scope of most LTL carriers. These services include
Priority+Plus, an expedited time-definite service; Protective+Plus, a full
temperature-controlled service for LTL shipments within the Company's core
service region; and Canadian+Plus, full points coverage into all major Canadian
markets through an exclusive regional marketing partnership with one of Canada's
leading LTL carriers. In November 1997, the Company began providing
less-than-container load service to Hawaii. The Company consolidates shipments,
loads containers and tenders them to a major transoceanic carrier for transport
to Hawaii. The shipments are then delivered by a local carrier in Hawaii
pursuant to an agreement between the carrier and the Company. The Company
intends to continue to evaluate additional niche service offerings which
complement existing operating systems.
In addition to the service offerings described above, the Company offers
customized services tailored to the ongoing needs of a particular customer.
These customized services often involve a high level of coordination between the
Company and the customer and may include time definite delivery, highly
specialized reporting requirements and electronic data interchange, full time
on-site loading by Company employees, return goods consolidation and management,
and specialized handling and equipment requirements.
Through a program referred to as "Motor Cargo USA," the Company also
provides customers with service to points outside its core service region. In
October 1997, the Company entered into a strategic interline partnership with a
large southeastern regional carrier. The companies utilize Dallas, Texas as
their interchange point. This service allows the Company to provide service to
additional points throughout the southeastern United States to its present
customer base. The Company expects to enter into additional interline
partnerships in 1998. Interchange points will be selected which will assist the
Company in offsetting startup costs associated with BEA expansions.
In 1995, the Company began providing customized logistics, warehousing
and distribution management services through its subsidiary MCDS. MCDS currently
provides "just-in-time" delivery services for two major specialty retailers.
These two customers currently account for more than 90% of the operating
revenues of MCDS; however, the Company believes that MCDS provides a significant
opportunity for future revenue and earnings growth.
CUSTOMERS AND MARKETING
The Company has approximately 3,000 regular customers with an average
monthly revenue billing of $1,000 or more. The Company's customers are not
concentrated in any one area or industry and no one customer accounts for over
5% of total revenues.
The Company has positioned itself in the high service end of the
regional LTL market. The Company targets prospective customers that require high
levels of customized service and are not inclined to select a carrier solely on
the basis of price. The Company emphasizes its ability to provide specialized or
customized services to shippers, including (i) highly flexible scheduling, (ii)
consistent and expedited transit commitments, (iii) strong management
information systems and electronic data interchange capabilities, (iv)
commitment to customer service and responsiveness and (v) a willingness to
provide transportation programs outside the scope of the traditional LTL
industry.
The Company has written contracts with most of its large customers.
These contracts specify rate levels and eliminate the need to negotiate rates
for individual shipments. The Company's contracts typically do not provide for
guaranteed volumes. Although the Company's contracts typically run for a
specified term of one year, they generally may be terminated by either party
upon 30 days' notice. The Company has pricing agreements with
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substantially all of its customers which are not covered by contracts. These
pricing agreements specify rate levels but do not require minimum tonnage
commitments on the part of the customer. Pricing agreements may generally be
terminated by either party upon five days' notice.
The Company's senior management is actively involved in the Company's
sales and marketing activities. In order to attract new customers, the Company
relies on its ability to provide quality service and on selective targeting of
potential accounts. At December 31, 1997, the Company had a marketing staff of
53 account executives located throughout its core service region. The account
executives are managed by four regional directors of sales. The account
executives are responsible for developing new business and maintaining relations
with existing customers. The Company also employs three corporate account
managers in its corporate account office in Chicago. These corporate account
managers solicit business from corporate level decision-makers who are
responsible for freight shipments to locations within the Company's core service
region.
The Company has designed and implemented a sales force automation system
which provides for improved contact and opportunity management, improved sales
forecasting and simplified reporting. The Company maintains comprehensive
customer base profiles of existing and prospective customers. Using this
database, key strategic and account development information is updated daily by
the Company's sales force using automated processes. The Company utilizes this
resource to track emerging opportunities and direct highly targeted and
precisely timed marketing messages to existing and prospective customers.
DRIVERS, INDEPENDENT CONTRACTORS AND OTHER PERSONNEL
At December 31, 1997, the Company employed 1,480 persons in the
following categories:
<TABLE>
<CAPTION>
CATEGORY NO. OF EMPLOYEES
-------- ----------------
<S> <C>
Full time drivers 414
Part time drivers and dock workers 580
Salaried and clerical 342
Warehousemen 17
Mechanics 68
Sales and sales management 59
</TABLE>
At December 31, 1997, the Company employed 87 linehaul drivers and 468
pick-up and delivery drivers. The Company selects its drivers based upon
experience and driving records. Pursuant to DOT regulations, drivers are
required to pass drug tests prior to employment and periodically thereafter. The
trucking industry experiences driver shortages from time to time; however, the
Company has maintained an adequate and qualified driver force. The Company's
linehaul schedules allow drivers to return home regularly, which contributes to
a low driver turnover rate. The Company's driver turnover rate was 13% in 1997.
The Company compensates linehaul drivers on a per mile basis. Pick-up and
delivery drivers are compensated on an hourly basis.
In addition to its employee drivers, the Company utilized approximately
78 linehaul drivers, as of December 31, 1997, pursuant to an agreement with FHF
Transportation, Inc. ("FHF"). These drivers operate tractors owned by the
Company but are not employees of the Company. The Company makes payments to FHF
based upon mileage.
The Company supplements its linehaul fleet with the use of approximately
50 independent contractors. Because independent contractors provide their own
tractor, independent contractors provide the Company with an alternative method
of obtaining the use of additional revenue equipment with reduced capital
investment. This approach reduces costs and maximizes flexibility by quickly
providing additional linehaul capacity during periods of peak demand. Further,
because independent contractors are compensated at a contracted rate per mile,
the use of independent contractors helps the Company reduce fixed overhead and
improve asset utilization. Independent contractors also allow the Company to
better adjust to seasonal fluctuations in shipping volumes.
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Approximately 5% of the Company's employees are covered by two separate
collective bargaining agreements relating to employees at the Company's North
Salt Lake, Utah and Reno, Nevada service centers. Although the employees covered
by these contracts are members of the International Brotherhood of Teamsters,
the contracts are not tied to the Teamsters National Master Contract. The
Company's agreement with North Salt Lake employees expires on November 30, 1999,
and the Company's Agreement with Reno employees expires on November 30, 2000.
Both agreements provide for automatic renewal from year to year after
expiration, subject to the right of either party to cancel or terminate the
agreement upon at least 60 days' notice prior to the date of expiration.
SAFETY AND INSURANCE
The Company emphasizes safety in all aspects of its operations. The
Company employs a Director of Safety and Compliance who has over 24 years of
safety-related experience with the Company. Each of the Company's terminals
conducts its own safety program and all tractors in use are inspected daily by
Company personnel. The Company has also established guidelines for hauling
hazardous materials. The Company earned the highest DOT safety and fitness
rating of "satisfactory" during its last audit.
The Company currently maintains liability insurance for bodily injury
and property damage in the amount of $30 million, with a self retention amount
of $500,000 per incident, and cargo insurance in the amount of $1 million, with
a self retention amount of $100,000, per load. The Company is self-insured with
respect to physical damage to its properties. The Company also maintains
workers' compensation insurance, with a deductible of $250,000 in Nevada, and
without a deductible in Washington. The Company is responsible for workers'
compensation claims in other states in which the Company operates up to an
aggregate of approximately $1.9 million per year, and the Company maintains
insurance for workers' compensation payments in excess of such amount.
REVENUE EQUIPMENT
At December 31, 1997, the Company operated a fleet of 562 tractors and
trucks and 2,298 trailers. The Company uses new linehaul tractors in linehaul
operations for approximately five years. After five years of use, the Company
trades-in used linehaul tractors and purchases new linehaul tractors. The table
below reflects, as of December 31, 1997, the average age of the type of
equipment, and the number of respective units:
<TABLE>
<CAPTION>
NUMBER AVERAGE
TYPE OF EQUIPMENT (CATEGORIZED BY PRIMARY USE) OF UNITS AGE
---------------------------------------------- -------- -------
<S> <C> <C>
Linehaul tractors 176 2.4
Pick-up and delivery tractors 295 3.0
Pick-up and delivery trucks 91 3.9
Trailers 2,298 6.6
</TABLE>
The Company lowers its cost structure and reduces cargo claims expenses
by using twin 28 foot trailers in its linehaul operations whenever possible. To
the extent permitted by state regulations, the Company also utilizes triple
trailers in its linehaul operations. The use of twin and triple trailers permits
more freight to be hauled behind a tractor than could be hauled if the Company
used one larger trailer.
The Company maintains its revenue equipment through the use of its own
maintenance facilities as well as outside vendors. The Company's service centers
in Pico Rivera, Las Vegas, Reno, Denver, Portland and North Salt Lake have
maintenance facilities. In addition to scheduled maintenance on its equipment,
the Company also performs occasional equipment modifications which are designed
to improve operating performance and reduce operating costs of equipment. All
data regarding equipment costs, depreciation, mileage and maintenance are
recorded on the Company's computer system, allowing management to access
equipment records quickly and plan scheduled maintenance efficiently.
The Company purchases all of its parts through nationally-recognized
vendors. To enable management to better control inventory and costs, all orders
are placed through the Company's central purchasing unit at the
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Company's headquarters. The Company is seeking to standardize its line parts by
concentrating its new truck purchases with two tractor manufacturers,
International and Freightliner.
FUEL AVAILABILITY AND COST
Fuel comprises 2% to 3% of the Company's total operating expenses.
Generally, in order to obtain lower fuel costs and greater flexibility in
fueling its fleet, the Company purchases its own fuel in bulk and requires its
drivers to fuel at Company terminals. The Company emphasizes fuel economy
through the use of modern, fuel-efficient equipment, driver and mechanic
training programs and aerodynamic improvements. Although fuel constitutes a much
lower percentage of costs to the Company than it would to a full truckload
carrier, increases in fuel prices or fuel taxes, shortages of fuel or rationing
of petroleum products could have a material adverse effect on the operations and
profitability of the Company.
Generally, in times of sharp fuel price increases, the Company
implements fuel surcharges. The Company presently has a sliding scale fuel
surcharge which is based on a fuel price index for the west coast. The fuel
surcharge currently has no effect due to low fuel prices. Because of the highly
competitive nature of the market for LTL services, the Company generally must
wait for larger carriers to implement fuel surcharges before the Company can
effectively implement fuel surcharges.
COMPETITION
The transportation industry is highly competitive on the basis of both
price and service. The Company competes with regional, inter-regional and
national LTL carriers and, to a lesser extent, with truckload carriers,
railroads and overnight delivery companies. Several large regional LTL carriers
operate within the Company's core service region, including Consolidated
Freightways, Yellow Corporation, Roadway Express and Arkansas Best Corporation.
Some of the Company's competitors are divisions or subsidiaries of larger
trucking companies. Many of the Company's competitors have greater financial
resources, more equipment and greater freight capacity than the Company. Certain
carriers occasionally experience periods of over capacity during which these
carriers reduce prices in order to increase utilization of revenue equipment.
The Company believes that it is able to compete effectively in its markets by
providing high quality customized service at competitive prices.
REGULATION
The Motor Carrier Act of 1980 significantly deregulated the trucking
industry and increased competition among motor carriers. Following enactment of
the Motor Carrier Act, applicants have obtained operating authority more easily,
and interstate motor carriers such as the Company are able to change their rates
and services with less regulatory oversight and delay. The Motor Carrier Act
also removed many route and commodity restrictions on transportation of freight.
Effective January 1, 1995, Section 601 of the Federal Aviation
Administrative Authorization Act and the Trucking Industry Regulatory Reform Act
("TIRRA") substantially deregulated intrastate operating authority. Prior to
TIRRA, the Company maintained intrastate authority in California, Nevada and
Utah. Subsequent to TIRRA, the Company obtained intrastate authority in
Colorado, Oregon, New Mexico and Washington.
The Company was regulated by the ICC until the ICC Termination Act of
1995 abolished the ICC effective January 1, 1996. The Surface Transportation
Board, an independent entity within the DOT, assumed many of the
responsibilities of the ICC. The Company is also regulated by various state
agencies. These regulatory authorities have broad powers, generally governing
matters such as authority to engage in motor carrier operations, rates, certain
mergers, consolidations and acquisitions, and periodic financial reporting. The
trucking industry is subject to regulatory and legislative changes that can
affect the economics of the industry by requiring changes in operating practices
or influencing the demand for, and the costs of providing services to, shippers.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. Such matters as weight and dimensions of equipment are
also subject to federal and state regulation. The use of triple trailers is
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subject to state regulation and is prohibited by several states within the
Company's core service region. The Company is subject to federal, state and
local environmental laws and regulations governing the management of hazardous
wastes, other discharge of pollutants into the air and surface and underground
waters, and the disposal of certain substances. These regulations extend to the
Company's above-ground and underground fuel storage tanks. The Company is in the
process of modifying the underground storage tanks at several of its facilities
in order to comply with new federal regulations which become effective at the
end of 1998. In most cases, the Company is replacing its underground storage
tanks with above-ground tanks. The Company expects that its total capital
expenditures through the end of 1998 relating to the modification of its
remaining underground storage tanks will be approximately $575,000. The Company
believes that all of its fuel storage tanks will be in compliance with the new
regulations when they become effective. The Company also believes that it is in
material compliance with all other applicable environmental laws and regulations
and does not believe that the cost of future compliance should have a material
adverse effect on the Company's operations or financial condition.
ITEM 2. PROPERTIES
The Company owns its executive offices, located in North Salt Lake,
Utah, consisting of a two-story building of approximately 21,377 square feet. Of
the 22 service centers used by the Company within its core service region as of
December 31, 1997, eight were owned, 12 were leased and two had multiple
facilities that were partially owned and partially leased by the Company. These
facilities range in size according to the markets served. The Company has not
experienced and does not anticipate difficulties in renewing existing leases on
favorable terms or obtaining new facilities as and when required. The following
table sets forth the location of each service center owned or leased by the
Company as of December 31, 1997.
<TABLE>
<CAPTION>
# OF OWNED OR
LOCATION DOORS LEASED LEASE EXPIRATION
-------- ----- -------- ----------------
<S> <C> <C> <C>
Pico Rivera, CA 102 Leased December 1998
Rialto, CA 78 Owned
North Salt Lake, UT 77 Owned
Denver, CO
Building 1 43 Leased November 1998
Building 2 36 Owned
Newark, CA 35 Owned
Portland, OR 34 Owned
Reno, NV 32 Leased December 1999
Sacramento, CA 30 Owned
Kent, WA 30 Owned
Phoenix, AZ
Building 1 24 Owned
Building 2 14 Leased November 1998
El Paso, TX 20 Owned
Las Vegas, NV 20 Owned
San Diego, CA 20 Leased May 2001
Fresno, CA 20 Leased October 1998
Albuquerque, NM 12 Leased October 1998
Oxnard, CA 9 Leased Month-to-month
Bakersfield, CA 9 Leased October 2000
Tucson, AZ 8 Leased August 2000
Medford, OR 8 Leased July 2001
Spokane, WA 8 Leased August 1998
Colorado Springs, CO 7 Leased August 1998
Grand Junction, CO 3 Leased May 1998
</TABLE>
In October 1997, the Company commenced operations at its BEA expansion
facility in Dallas. The Dallas facility is leased by the Company pursuant to a
lease which expires in May 1998. Upon expiration of the current
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lease, the Company intends to move its Dallas operations to a different
location. The new location has 23 doors and the Company's lease term is from
June 1998 through May 2000.
In addition to the service center facilities leased by the Company as
described above, the Company also leases a sales office in Chicago pursuant to a
lease which expires in April 1998. The Company's subsidiary MCDS leases an
aggregate of 161,286 square feet of warehouse space in southern California
pursuant to two leases which expire in January 2001 and February 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is routinely a party to litigation incidental to its
business, primarily involving claims for personal injury or property damage
incurred in the transportation of freight. The Company maintains insurance to
cover liabilities in excess of self-insured amounts. The Company's management is
not aware of any claims or threatened claims that it believes are likely to
exceed insurance limits or have a materially adverse effect upon the Company's
operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
Effective August 28, 1997, the Company acquired Ute Trucking and
Leasing, LLC, a Utah limited liability company ("Ute"). By unanimous written
consent of the Company's shareholders effective October 3, 1997, the Company's
shareholders approved the Ute acquisition.
By unanimous written consent of the Company's shareholders effective
October 15, 1997, the Company's shareholders resolved to adopt the Motor Cargo
Industries, Inc. 1997 Stock Option Plan (the "1997 Stock Option Plan") and to
reserve 500,000 shares of the Company's authorized but unissued shares of Common
Stock for issuance under the 1997 Stock Option Plan.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
present executive officers and certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ---------
<S> <C> <C>
Marshall L. Tate 35 President and Chief Executive Officer, Director
Louis V. Holdener 59 Vice President, President of Motor Cargo
Marvin L. Friedland 55 Vice President and General Counsel, Secretary,
Director
Lynn H. Wheeler 56 Vice President and Chief Financial Officer
R. Scott Price 34 Vice President
Steven E. Wynn(1) 48 Vice President of Operations (Motor Cargo)
Kevin L. Avery(1) 40 Vice President of Traffic (Motor Cargo)
Jim D. Matt(1) 43 Vice President of Sales (Motor Cargo)
</TABLE>
(1) Messers Wynn, Avery and Matt are officers of the Company's principal
operating subsidiary, Motor Cargo, and are not officers of the Company.
10
<PAGE> 11
Marshall L. Tate has over 13 years experience in the trucking industry.
Mr. Tate has been employed by the Company since 1984, has served as its
President and Chief Executive Officer since March 1997, and was appointed to the
Board of Directors of the Company in 1996. Prior to becoming the Company's
President and Chief Executive Officer, Mr. Tate served in various divisional
positions as well as Vice President of Sales and Marketing and Executive Vice
President of Corporate Development for Motor Cargo. In 1995, Mr. Tate directed
the start-up of the Company's logistics warehousing and distribution management
services subsidiary, MC Distribution Services. Marshall L. Tate is the son of
Harold R. Tate, the majority shareholder and Chairman of the Board of Directors
of the Company.
Louis V. Holdener has over 32 years experience in the trucking industry.
Mr. Holdener has been employed by the Company since 1965, has served as
President of Motor Cargo, the Company's primary operating subsidiary, since
1991, and was named Vice President of the Company in 1997. Prior to 1991, Mr.
Holdener served in various positions with the Company, including Vice President
of Operations of Motor Cargo.
Marvin L. Friedland has served as Vice President and General Counsel of
the Company and its predecessors since 1982. Prior to joining the Company, Mr.
Friedland was an attorney in private practice. Mr. Friedland was appointed to
the Board of Directors in 1996. Mr. Friedland is a Certified Public Accountant
and a member of the California Bar and the Utah Bar.
Lynn H. Wheeler has been employed by the Company since 1983 and has
served as Vice President of Finance of Motor Cargo since 1988. Mr. Wheeler was
appointed Vice President and Chief Financial Officer of the Company in March
1997. Mr. Wheeler is a Certified Public Accountant, a Certified Internal Auditor
and a member of the American Institute of Certified Public Accountants.
R. Scott Price joined the Company in 1986 and has served as a Vice
President of the Company since October 1997. From 1995 to 1997, Mr. Price served
as Vice President of Sales of Motor Cargo. From 1986 to 1995, Mr. Price held
various positions with Motor Cargo, including Service Center Manager and
Director of Corporate Accounts.
Steven E. Wynn has been employed by Motor Cargo since 1973 and has
served as Vice President of Operations of Motor Cargo since 1991. From 1973 to
1991, Mr. Wynn served in various positions, including Director of Linehaul
Operations and Director of Operations for Motor Cargo.
Kevin L. Avery joined the Company in 1985 and has served as Vice
President of Traffic of Motor Cargo since 1992. From 1985 to 1992, Mr. Avery
served in various positions, including Director of Pricing, Rate Department
Manager and Director of Quality Assurance for Motor Cargo.
Jim D. Matt joined the Company in October 1997 as Vice President of
Sales for Motor Cargo. Prior to joining the Company, Mr. Matt was Vice President
of Sales for the Midwestern and Eastern divisions of Viking Freight Incorporated
from 1996 to 1997, Vice President of Sales and Marketing for Spartan Express
from 1995 to 1996 and Vice President of Sales and Marketing for Spartan Central
from 1992 to 1995.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq Stock Market
(National Market) under the symbol "CRGO". At March 17, 1998, there were
approximately 600 holders of the common stock, including 24 shareholders of
record.
Prior to the Company's initial public offering there was no established
trading market for the Company's Common Stock. The Company's Common Stock began
trading on the Nasdaq Stock Market on November 25, 1997. During the period from
November 25, 1997 through December 31, 1997 the high bid price was $12.125 and
the low bid price was $11.50.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company's operating subsidiary, Motor Cargo, is a party to a credit
agreement which restricts the payment of cash dividends by Motor Cargo during
the term of the credit agreement. Under the terms of the credit agreement, Motor
Cargo may not declare or pay cash dividends following the offering unless, as of
the end of the most recent fiscal quarter preceding the date of declaration or
payment of any dividend, (i) the ratio of Motor Cargo's current assets (less the
amount of the cash dividend) to current liabilities would be at least 1.10 to
1.0, (ii) the ratio of Motor Cargo's net, after tax income (plus non-cash
expenditures) for the twelve month period then ended (less the amount of the
cash dividend) to the current portion of long-term debt would not be less than
1.50 to 1 and (iii) after giving effect to the payment of such dividend, Motor
Cargo would otherwise be in full compliance with the terms of the credit
agreement. Accordingly, because the Company would ordinarily be dependent upon
cash dividends from Motor Cargo in order to pay a cash dividend on its Common
Stock, the provisions of the credit agreement limit the ability of the Company
to pay cash dividends.
The Company filed a Registration Statement on Form S-1 (file no.
333-37211) (the "Registration Statement") with respect to 2,230,000 shares (the
"Firm Shares") of its Common Stock, no par value, and an additional 334,500
shares (the "Option Shares") of Common Stock to be sold solely to cover
over-allotments, if any. Of the 2,230,000 Firm Shares offered pursuant to the
Registration Statement, 1,150,000 shares were offered by the Company and
1,080,000 shares were offered by certain selling shareholders (the "Selling
Shareholders"). The Registration Statement was declared effective by the
Commission on November 24, 1997. The managing underwriters for the offering were
Morgan Keegan & Company, Inc. and Furman Selz LLC. The offering of the Firm
Shares commenced and was completed, with all of the Firm Shares having been
sold, on November 25, 1997. The offering of the Option Shares commenced and was
completed, with 81,870 of the Option Shares having been sold, on December 3,
1997. All of the Option Shares sold were sold by shareholders of the Company and
no Option Shares were sold by the Company.
The following table illustrates the number of shares registered and the
aggregate price of the shares registered for the account of the Company and for
the Selling Shareholders. None of the proceeds of the sales made by the Selling
Shareholders were received by the Company.
<TABLE>
<CAPTION>
AGGREGATE PRICE
SHARES OF SHARES AGGREGATE PRICE
REGISTERED REGISTERED SHARES SOLD OF SHARES SOLD
---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Motor Cargo Industries, Inc. 1,167,250 $14,007,000 1,150,000 $13,800,000
Selling Shareholders:
Harold R. Tate 1,037,250 $12,447,000 1,000,000 $12,000,000
Marshall L. Tate 20,000 $ 240,000 5,847 $ 70,164
Marvin L. Friedland 20,000 $ 240,000 5,847 $ 70,164
Lauri Tate Franks 80,000 $ 960,000 37,546 $ 450,552
Darrell Tate 40,000 $ 480,000 25,847 $ 310,164
Troy Tate 120,000 $ 1,440,000 49,237 $ 590,844
Mia Tate 80,000 $ 960,000 37,546 $ 450,552
</TABLE>
12
<PAGE> 13
Underwriting discounts and commissions amounted to $0.84 per share
offered. The Company incurred an aggregate of $966,000 in underwriting discount
and commissions and approximately $733,700 in other expenses in connection with
the offering. None of such expenses were direct or indirect payments to
directors or officers of the Company, to persons owning 10 percent or more of
any class of equity securities of the Company or to any affiliate of the
Company. The net offering proceeds to the Company after deducting the total
expenses were approximately $12.1 million.
The Company has used approximately $7.3 million of the net offering
proceeds to repay certain borrowings incurred to purchase revenue equipment. The
Company has used an additional $3.7 million of the net offering proceeds to
purchase revenue equipment. The remaining $1.1 million of net offering proceeds
are being used by the Company for working capital. None of the foregoing uses of
proceeds resulted in direct or indirect payments to directors of officers of the
Company, persons owning 10 percent or more of any class of equity securities of
the Company or to affiliates of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been summarized from the
Company's consolidated financial statements and are qualified in their entirety
by reference to, and should be read in conjunction with, such consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under Item 7 below.
13
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Operating revenues $68,726 $82,984 $80,808 $92,310 $105,381
Operating expenses
Salaries, wages and benefits 31,432 36,055 35,495 39,666 45,247
Operating supplies and expenses 9,899 12,145 12,669 14,947 15,706
Purchased transportation 11,021 12,238 11,532 14,164 15,389
Operating taxes and licenses 1,969 3,068 3,178 3,531 3,519
Insurance and claims 1,963 2,685 1,842 2,785 4,478
Depreciation and amortization 4,524 4,974 5,930 6,578 6,998
Communications and utilities 1,277 1,314 1,521 1,784 1,896
Building rents 758 1,093 1,274 1,540 1,745
------- ------- ------- ------- -------
Total operating expenses 62,843 73,572 73,441 84,995 94,978
------- ------- ------- ------- -------
Operating income 5,883 9,412 7,367 7,315 10,403
Other income (expense)
Interest expense (1,408) (1,392) (1,500) (1,430) (1,051)
Other, net (31) 104 107 (32) 221
------- ------- ------- ------- -------
Earnings before income taxes 4,444 8,124 5,974 5,853 9,573
Income taxes 1,475 2,943 2,094 2,118 3,805
------- ------- ------- ------- -------
Net earnings $ 2,969 $ 5,181 $ 3,880 $ 3,735 $ 5,768
======= ======= ======= ======= ========
Pro forma (1)
Earnings before income taxes $ 4,444 $ 8,124 $ 5,974 $ 5,853 $ 9,573
Income taxes 1,569 3,125 2,303 2,256 3,952
------- ------- ------- ------- -------
Net earnings $ 2,875 $ 4,999 $ 3,671 $ 3,597 $ 5,621
======= ======= ======= ======= ========
Earnings per common share
- basic $ 0.49 $ 0.86 $ 0.63 $ 0.62 $ 0.95
======= ======= ======= ======= ========
Weighted-average shares
outstanding - basic 5,820 5,820 5,820 5,820 5,939
======= ======= ======= ======= ========
Earnings per common share
- diluted $ 0.49 $ 0.86 $ 0.63 $ 0.62 $ 0.95
======= ======= ======= ======= ========
Weighted-average shares
outstanding - diluted 5,820 5,820 5,820 5,820 5,939
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $13,481 $18,741 $20,233 $23,197 $26,965
Current liabilities 10,741 13,414 14,752 15,752 11,597
Total assets 42,016 49,391 59,507 63,834 68,069
Long-term obligations, less
current maturities 13,745 14,044 17,724 16,820 6,492
Total liabilities 27,081 30,631 36,784 37,794 24,618
Stockholders' equity 14,935 18,760 22,723 26,040 43,451
</TABLE>
(1)Effective August 28, 1997, the Company acquired the membership interests of
Ute, a Utah limited liability company. A limited liability company passes
through to its members essentially all taxable earnings and losses and pays
no tax at the company level. Accordingly, for comparative purposes, a pro
forma provision for income taxes using an effective income tax rate of 38%
has been determined assuming Ute had been taxed as a C corporation for all
periods presented.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's
consolidated financial condition, liquidity and capital resources and results of
operations. This analysis should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this report.
OVERVIEW
The Company's results of operations for 1995, 1996 and 1997 reflect
fluctuations within the motor carrier industry and significant changes within
the Company's operations. Freight volumes and operating margins returned to more
normal levels in 1995 and 1996, following unusually high freight volumes in 1994
resulting from a Teamster strike which adversely affected certain unionized
carriers. In the second half of 1995 the Company initiated a significant
expansion of its terminal network in order to increase coverage within its core
service region. As part of this expansion, the Company opened new service
centers in Rialto, California; Oxnard, California; Bakersfield, California;
Fresno, California; and Grand Junction, Colorado. Accordingly, 1995 earnings
were significantly impacted by start-up costs and expenses associated with the
Company's terminal network expansion.
Costs associated with the Company's new service centers continued to
affect earnings in 1996 as several of these service centers were in the early
stages of operation. Earnings in 1996 were also adversely affected by sluggish
demand for LTL carrier services throughout the year, which resulted in severe
pricing pressures, and by escalating fuel prices in the latter half of 1996.
In 1997 the Company began to experience favorable results associated
with its terminal network expansion. Revenues produced by the Company's new
service centers during the year ended December 31, 1997 were more consistent
with the revenues of the Company's other service centers than in prior periods.
Higher demand for carrier services also contributed to a more stable pricing
environment during 1997. The Company's results of operations for the year ended
December 31, 1997 were also significantly affected by an aggressive account
rationalization program initiated by the Company in late 1996 to improve revenue
quality. By analyzing each account based upon revenue quality characteristics
such as revenue per bill and revenue per hundredweight, the Company was able to
identify accounts providing inadequate profit margins. While revenue growth was
negatively affected by this account rationalization, the Company's earnings for
the year ended December 31, 1997 were positively affected by the elimination of
certain business and tonnage which did not meet the Company's margin
requirements.
The Company's management believes that its expanded terminal network
provides the Company with the necessary infrastructure for continued growth
within its core service region. With an established terminal network in place to
provide high quality service throughout its core service region, the Company
intends to focus on improving route, lane and service center densities by
increasing the amount of business handled by the Company within its core service
region. The Company intends to achieve this growth by increasing the amount of
business generated by existing customers within its core service region and
acquiring new customers outside its core service region for the purpose of
soliciting new business into its core service region. The Company intends to
continue its rigorous analysis of costs and profitability associated with each
customer, lane and shipment.
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
items to revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Operating revenues 100.0% 100.0% 100.0%
Operating expenses
Salaries, wages and benefits 43.9 43.0 42.9
Operating supplies and expenses 15.7 16.2 14.9
Purchased transportation 14.3 15.3 14.6
Depreciation and amortization 7.3 7.1 6.6
Insurance and claims 2.3 3.0 4.2
Operating taxes and licenses 3.9 3.9 3.3
Communications and utilities 1.9 1.9 1.9
Building rents 1.6 1.7 1.7
----- ---- ----
Total operating expenses 90.9 92.1 90.1
----- ---- ----
Operating income 9.1 7.9 9.9
Other income (expense)
Interest expense (1.8) (1.6) (1.0)
Other, net 0.1 0.0 0.2
----- ---- ----
Earnings before income taxes 7.4 6.3 9.1
Income taxes 2.6 2.3 3.6
----- ---- ----
Net earnings 4.8% 4.0% 5.5%
==== ==== ====
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Operating revenues increased 14.2% in 1997 to $105.4 million from $92.3
million for 1996. The increase was attributable to the Company's efforts
beginning in the third quarter of 1996 to improve significantly the yield of its
revenue base, the addition of new customers and, to a lesser extent, expansions
within the Company's operating region. The number of shipments during 1997
increased by 9.3% to 816,567 compared to 747,024 for 1996. Revenue per hundred
weight increased to $10.96 in 1997 from $10.74 for 1996.
Of the $13.1 million increase in operating revenues for the year ended
December 31, 1997, $1.7 million was attributable to the Company's warehousing
and distribution management company, MCDS. The increase in revenues for MCDS
resulted primarily from the addition of a single large distribution management
project for a large retail company.
As a result of the Company's focus on revenue quality, tonnage grew by
9.4% to 466,131 in 1997, compared to 426,109 tons for 1996, while total
shipments increased 9.3% to 816,567 for 1997 compared to 747,024 for 1996.
Average revenue per bill increased 2.1% to $125.15 in 1997 compared to $122.54
for 1996. Lower margin yields resulting from a difficult freight market in early
1996 and sluggish demand throughout the year contributed to lower revenues in
1996. Revenues for the year ended December 31, 1997 were adversely affected by
the Company's decision to discontinue service to certain customers whose
business volumes did not meet minimum margin yield requirements.
As a percentage of operating revenues, salaries, wages and benefits
decreased to 42.9% for the year ended December 31, 1997 from 43.0% for 1996.
While salary and wage rates increased approximately 4.0% in 1997, salaries and
wages decreased as a percentage of revenues due to improved quality of revenue
as well as improved utilization of labor. Workers compensation costs increased
1.1% in 1997 due to a workers compensation credit which eliminated workers
compensation expense for the same period in 1996. Pension costs decreased 0.2%
in 1997 compared to 1996 due to a better rate of return on invested pension
assets.
16
<PAGE> 17
Operating supplies and expenses, which includes agent commissions,
tires, parts, repairs and fuel and other general operating expenses, decreased
in 1997 to 14.9% of operating revenues compared to 16.2% for 1996. This decrease
was due to lower fuel prices and agent commissions, partially offset by
increased general, marketing and employee related expense.
Purchased transportation decreased to 14.6% of operating revenues for
1997 from 15.3% for 1996. This decrease was primarily due to improved linehaul
load factors and higher revenue per operating mile.
Insurance and claims increased to 4.2% of operating revenues for the
year ended December 31, 1997, from 3.0% in 1996. This increase was a result of
the Company and its insurance carrier increasing the insurance reserves in 1997
for two accidents which occurred in prior years.
As a percentage of operating revenues, depreciation and amortization
decreased to 6.6% for the year ended December 31, 1997 compared to 7.1% for
1996. This decrease was due largely to increased revenue levels and continued
improvement in asset utilization of equipment acquired in the second half of
1995 to facilitate the Company's terminal network expansion.
As a percentage of operating revenues, interest expense decreased to
1.0% in 1997, compared to 1.6% for 1996. This decrease was due primarily to
lower debt levels resulting from strong operating cash flows and continued
improvement in cash management techniques. In addition, approximately $7.3
million of the Company's debt was paid off in December 1997 with proceeds from
the Company's initial public offering. At December 31, 1997, total obligations
were $6.6 million compared to $23.7 million at December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Operating revenues increased 14.2% in 1996 to $92.3 million from $80.8
million in 1995 due primarily to a 13% increase in tonnage to 426,109 in 1996
from 377,042 in 1995. This increase in tonnage was primarily attributable to new
customers and increased shipments from existing customers within the Company's
core operating region. The number of shipments in 1996 increased by 12.6% to
747,024 compared to 663,648 in 1995. During this same period, average revenue
per bill remained flat at $122.54 for 1996 compared to $122.51 for the same
period in 1995. Revenue per hundredweight decreased slightly to $10.74 in 1996
from $10.78 in 1995. In September 1996, the Company implemented a sliding-scale
fuel surcharge which resulted in a fourth quarter revenue increase of
approximately 1.5%.
As a percentage of operating revenues, salaries, wages and benefits
decreased to 43.0% in 1996 from 43.9% in 1995. This was largely attributable to
a workers compensation credit from a previous period which reduced fringe
benefit expense by approximately $800,000 and an increased use of purchased
transportation.
Operating supplies and expenses as a percentage of operating revenues
increased to 16.2% in 1996 compared to 15.7% in 1995. This increase was largely
attributable to increased fuel expense during the year which was only partially
offset by a fuel surcharge.
Purchased transportation increased to 15.3% of operating revenues in
1996 compared to 14.3% in 1995. This increase was attributable to increased use
of purchased transportation combined with reduced revenue per operating mile in
1996 as a result of severe price competition and costs associated with the
Company's terminal network expansion initiated during the second half of 1995.
As a percentage of operating revenues, depreciation and amortization
decreased to 7.1% in 1996 compared to 7.3% in 1995. This decrease was largely
attributable to increased revenue levels and better asset utilization of
equipment acquired in 1995 to facilitate the Company's terminal network
expansion.
Insurance and claims increased to 3.0% of operating revenues in 1996
compared to 2.3% for 1995. This increase was caused primarily by two large
liability claims.
17
<PAGE> 18
As a percentage of operating revenues, interest expense decreased
slightly to 1.6% in 1996 compared to 1.8% in 1995. This decrease resulted from
lower debt levels and improved cash management techniques. At December 31, 1996,
total obligations were $23.7 million compared to $23.9 million at December 31,
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been funds provided by
operations and bank borrowings. Net cash provided by operating activities was
approximately $10.7 million, $10.2 million and $12.6 million in 1995, 1996 and
1997, respectively. Net cash provided by operating activities is primarily
attributable to the Company's earnings before depreciation and amortization
expense.
Capital expenditures totaled approximately $15.0 million, $9.7 million
and $7.9 million during 1995, 1996 and 1997, respectively. The majority of the
Company's capital expenditures are financed with long-term debt. The Company's
budget for total capital expenditures is approximately $10.0 million for 1998.
These capital expenditures will consist primarily of the acquisition of new
revenue equipment and construction of terminal facilities.
Net cash provided by financing activities was $4.3 million in 1995 and
net cash used in financing activities was $0.6 million and $5.4 million in 1996
and 1997, respectively. At December 31, 1997, total borrowings under long-term
obligations totaled $6.6 million.
The Company is a party to a credit agreement with Sanwa Bank California
("Sanwa Bank"). The credit agreement provides for a $5 million revolving line of
credit. Any outstanding amounts under the revolving line of credit accrue
interest at a variable rate established from time to time by Sanwa Bank;
however, the Company may elect to have an advance accrue interest at a fixed
rate quoted by Sanwa Bank subject to certain prepayment restrictions. The credit
agreement is collateralized by the Company's cash and cash equivalents,
receivables, supplies inventory, and all documents, instruments, and chattel
paper now owned or hereafter acquired by the Company. At December 31, 1997 there
was no outstanding balance under the revolving loan agreement. The Company has
not drawn on the revolving line of credit since 1989.
The Sanwa Bank credit agreement also provides for term loans
collateralized by equipment. As of December 31, 1997, the amount available for
term loans under the credit agreement was $11.4 million. This amount is reduced
by 1/20th each quarter until the year 2002. As of December 31, 1997 the Company
had $5.0 million in term loans outstanding pursuant to the credit agreement.
In December 1997, the Company paid off approximately $7.3 million of
debt with proceeds from its initial public offering. At December 31, 1997, the
Company had outstanding long-term obligations (including current maturities)
consisting of approximately $6.6 million, most of which comprised obligations
for the purchase of revenue equipment. See Note F to the Company's Consolidated
Financial Statements.
INFLATION
Inflation has had a minimal effect upon the Company's profitability in
recent years. Most of the Company's operating expenses are inflation-sensitive,
with inflation generally producing increased costs of operation. Although the
Company historically has been able to pass through most increases in fuel prices
and taxes to customers in the form of fuel surcharges or higher rates, the
Company generally must wait for larger carriers to implement fuel surcharges
before the Company can effectively implement fuel surcharges. See Item 1
"Business-Fuel Availability and Cost." The Company expects that inflation will
affect its costs no more than it affects those of other regional LTL carriers.
SEASONALITY
The Company experiences some seasonal fluctuations in freight volume.
Historically, the Company's shipments decrease during the winter months. In
addition, the Company's operating expenses historically have been higher in the
winter months due to decreased fuel efficiency and increased maintenance costs
for revenue equipment in colder weather.
18
<PAGE> 19
THE YEAR 2000 ISSUE
The Company utilizes computer hardware and software in its operations.
Certain computer applications could fail or create erroneous results due to the
upcoming change in the century (the "Year 2000 Issue"). The Company regularly
upgrades its computer hardware and believes that it will not incur any
additional expenses to modify computer hardware due to the Year 2000 Issue. In
addition, the Company has received commitments from software vendors that will
allow the Company to upgrade third-party software programs with minimal expense
to the Company. The Company anticipates, however, that it will incur expenses of
approximately $100,000 over the next two years to upgrade certain proprietary
software developed for the Company. The Company does not expect that its
expenditures related to the Year 2000 Issue will have a material adverse effect
on the results of operations or financial condition of the Company.
CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations may contain forward-looking
statements. Such forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements may relate, but not be limited, to projections of revenues, income or
loss, capital expenditures, construction or expansion of regional facilities,
acquisitions, plans for growth and future operations, financing needs or plans
or intentions relating to acquisitions by the Company, as well as assumptions
relating to the foregoing. Further information on these and other factors which
could affect the Company's financial results can be found in the Company's
Registration Statement on Form S-1 (file no. 333-37211) and Prospectus dated
November 24, 1997. Forward-looking statements are inherently subject to risks
and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by or underlying the forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by this Item 8 are
set forth at the pages indicated in Item 14(a) below.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information to be included under the caption "Election of
Directors" in the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A of the Exchange Act in connection with the
1998 annual meeting of shareholders of the Company (the "Proxy Statement") is
incorporated herein by reference. In addition, reference is made to Item 10 in
Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information to be included under the caption "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information to be included under the caption "Present Beneficial
Ownership of Common Stock" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be included under the caption "Executive
Compensation--Certain Relationships and Related Transactions" in the Proxy
Statement is incorporated herein by reference.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) Consolidated Financial Statements
Report of Independent Certified Public F-1
Accountants
Consolidated Balance Sheets at December 31, F-2
1996 and 1997
Consolidated Statements of Earnings for the F-4
years ended December 31, 1995, 1996 and 1997
Consolidated Statement of Stockholders' F-5
Equity for the years ended December 31,
1995, 1996 and 1997
Consolidated Statements of Cash Flows for F-6
the years ended December 31, 1995, 1996 and
1997
Notes to Consolidated Financial Statements F-8
(a)(2) Financial Statement Schedules
Schedules are omitted because they are not
required or are not applicable or the
required information is shown in the
financial statements or notes thereto
(a)(3) The following exhibits are filed herewith or incorporated by reference:
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1
to the Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference). .
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-37211) and
incorporated herein by reference).
10.1 1997 Credit Agreement, dated September 30, 1997, between Motor
Cargo and Sanwa Bank California (filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference).
10.2 1997 Stock Option Plan (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (File No. 333-37211) and
incorporated herein by reference).(1)
10.3 Pension Plan of Employees of Motor Cargo and Trust Agreement
(filed as Exhibit 10.3 to the Company's Registration Statement
on Form S-1 (File No. 333-37211) and incorporated herein by
reference).(1)
10.4 Motor Cargo Profit Sharing Plan.(1)
10.5 Restricted Stock Agreement, dated October 2, 1997, between the
Company and Louis V. Holdener (filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference).(1)
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
10.6 Agreement to Purchase and Sell Leasehold Interest dated October
2, 1990 between Leonard L. Gumport and Motor Cargo (filed as
Exhibit 10.6 to the Company's Registration Statement on Form S-1
(File No. 333-37211) and incorporated herein by reference).
10.7 Lease Agreement dated December 23, 1996 between Channing, Inc.
and Motor Cargo (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 333-37211) and
incorporated herein by reference).
10.8 Lease Agreement dated as of January 1, 1989 between Andrea
Tacchino Company and Motor Cargo (filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No. 333-37211)
and incorporated herein by reference).
10.9 First Amendment to Lease dated March 1, 1990 between Andrea
Tacchino Company and Motor Cargo (filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (File No. 333-37211)
and incorporated herein by reference).
10.10 Lease Agreement dated October 31, 1995 between Pete Aardema and
Motor Cargo (filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File No. 333-37211) and
incorporated herein by reference).
10.11 Lease Agreement dated September 29, 1995 among Colburn R.
Thomason, Michael Tolladay, Kevin Tweed and Motor Cargo (filed as
Exhibit 10.11 to the Company's Registration Statement on Form S-1
(File No. 333-37211) and incorporated herein by reference).
10.12 Form of Salary Continuation Agreement (filed as Exhibit 10.12 to
the Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference).(1)
10.13 Contribution Agreement, dated August 28, 1997, between the
Company and the members of Ute Trucking and Leasing, LLC (filed
as Exhibit 10.17 to the Company's Registration Statement on Form
S-1 (File No. 333-37211) and incorporated herein by reference).
10.14 Management Agreement between the Company and FHF Transportation,
Inc. (filed as Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (file No. 333-37211 and incorporated
herein by reference).
11 Pro Forma Earnings Per Share Calculation*
21 Subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1 (file No. 333-37211
and incorporated herein by reference).
27 Financial Data Schedule.*
</TABLE>
- --------------
(1) Management contracts and compensatory plans and arrangements identified
pursuant to Item 14(a)(3) of Form 10-K.
* Filed with this report.
(b) Reports on Form 8-K
Not Applicable.
21
<PAGE> 22
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.
MOTOR CARGO INDUSTRIES, INC.
Date: March 25, 1998 By /s/ Lynn H. Wheeler
----------------------
Lynn H. Wheeler
Vice President and Chief Financial 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 and in the capacities and on the dates indicated.
Date: March 25, 1998 By /s/ Harold R. Tate
---------------------
Harold R. Tate, Director and
Chairman of the Board
Date: March 25, 1998 By /s/ Marshall L. Tate
------------------------
Marshall L. Tate, Director
(Principal Executive Officer)
Date: March 25, 1998 By /s/ Lynn H. Wheeler
-----------------------
Lynn H. Wheeler, Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: March 25, 1998 By /s/ Marvin L. Friedland
---------------------------
Marvin L. Friedland, Director
Date: March 25, 1998 By /s/ Robert Anderson
-----------------------
Robert Anderson, Director
Date: March 25, 1998 By /s/ James Clayburn La Force, Jr.
------------------------------------
James Clayburn La Force, Jr., Director
22
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Motor Cargo Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Motor Cargo
Industries, Inc. and Subsidiaries (the Company) as of December 31, 1996 and
1997, and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial position of Motor Cargo
Industries, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Salt Lake City, Utah
February 20, 1998
F-1
<PAGE> 24
<TABLE>
<CAPTION>
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Notes E and M) $ 8,771,887 $ 8,616,702
Receivables (Notes B and E) 10,758,456 13,171,720
Prepaid expenses (Note O) 2,086,189 2,409,524
Supplies inventory (Note E) 338,830 503,498
Deferred income taxes (Note G) 1,074,600 1,581,000
Income taxes receivable 166,983 683,033
----------- -----------
Total current assets 23,196,945 26,965,477
PROPERTY AND EQUIPMENT, AT COST
(Notes C, E, F and O) 71,559,377 75,901,875
Less accumulated depreciation
and amortization 31,365,464 35,242,661
----------- -----------
40,193,913 40,659,214
OTHER ASSETS
Deferred charges 367,555 378,761
Unrecognized net pension obligation (Note H) 75,441 65,307
----------- -----------
442,996 444,068
----------- -----------
$ 63,833,854 $ 68,068,759
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 25
<TABLE>
<CAPTION>
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1997
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations (Note F) $ 6,844,960 $ 89,557
Accounts payable 2,981,597 4,123,703
Accrued liabilities (Notes H and P) 3,896,876 4,426,519
Accrued claims (Note Q) 2,028,631 2,956,911
------------ -----------
Total current liabilities 15,752,064 11,596,690
LONG-TERM OBLIGATIONS, less current
maturities (Note F) 16,819,747 6,491,882
DEFERRED INCOME TAXES
(Note G) 5,221,629 6,529,000
COMMITMENTS AND CONTINGENCIES
(Notes D, E, H, K, and L) - -
STOCKHOLDERS' EQUITY (Notes F, I and N)
Preferred stock, no par value; Authorized -
25,000,000 shares - none issued - -
Common stock, no par value; Authorized -
100,000,000 shares - issued 5,820,000 shares in
1996 and 6,990,000 in 1997 1,000 12,101,298
Retained earnings 26,039,414 31,349,889
----------- ------------
26,040,414 43,451,187
----------- ------------
$ 63,833,854 $ 68,068,759
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 26
<TABLE>
<CAPTION>
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Operating revenues $ 80,807,913 $ 92,310,142 $ 105,381,447
------------ ------------ -------------
Operating expenses
Salaries, wages and benefits 35,494,479 39,666,468 45,247,186
Operating supplies and expenses 12,668,945 14,947,069 15,706,124
Purchased transportation 11,531,478 14,164,292 15,388,965
Operating taxes and licenses 3,178,345 3,531,244 3,519,313
Insurance and claims 1,842,141 2,784,489 4,477,747
Depreciation and amortization 5,930,353 6,577,569 6,997,498
Communications and utilities 1,521,389 1,783,797 1,896,379
Building rents 1,274,081 1,540,407 1,744,877
------------ ------------ -------------
Total operating expenses 73,441,211 84,995,335 94,978,089
------------ ------------ -------------
Operating income 7,366,702 7,314,807 10,403,358
Other income (expense)
Interest expense (1,499,720) (1,429,843) (1,050,791)
Other, net 106,577 (32,073) 220,909
------------ ------------ -------------
(1,393,143) (1,461,916) (829,882)
------------ ------------ -------------
Earnings before income taxes 5,973,559 5,852,891 9,573,476
Income taxes (Note G) 2,094,000 2,118,000 3,805,000
------------ ------------ -------------
NET EARNINGS $ 3,879,559 $ 3,734,891 $ 5,768,476
============ ============ =============
Pro forma (Note A14)
Earnings before income taxes $ 5,973,559 $ 5,852,891 $ 9,573,476
Income taxes 2,303,000 2,256,000 3,952,000
------------ ------------ -------------
Net earnings $ 3,670,559 $ 3,596,891 $ 5,621,476
============ ============ =============
Earnings per common share - basic $ 0.63 $ 0.62 $ 0.95
============ ============ =============
Weighted-average shares outstanding - basic 5,820,000 5,820,000 5,938,602
============ ============ =============
Earnings per common share - diluted $ 0.63 $ 0.62 $ 0.95
============ ============ =============
Weighted-average shares outstanding - diluted 5,820,000 5,820,000 5,938,602
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 27
<TABLE>
<CAPTION>
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997
Additional
pension
Preferred Stock Common Stock cost
---------------- ------------------ over
Number Number unrecognized
of of Retained pension
Shares Amount Shares Amount earnings liability Total
------- ------ --------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 - $ - 5,820,000 $ 1,000 $19,069,781 $ (310,555) $18,760,226
Pension adjustment - - - - - 310,555 310,555
Distributions to LLC members - - - - (226,917) - (226,917)
Net earnings for the year - - - - 3,879,559 - 3,879,559
------- ------ --------- ----------- ----------- ---------- -----------
Balance at December 31, 1995 - - 5,820,000 1,000 22,722,423 - 22,723,423
Net distributions to LLC
members - - - - (417,900) - (417,900)
Net earnings for the year - - - - 3,734,891 - 3,734,891
------- ------ --------- ----------- ----------- ---------- -----------
Balance at December 31, 1996 - - 5,820,000 1,000 26,039,414 - 26,040,414
Distributions to LLC members - - - - (458,001) - (458,001)
Public sale of common
stock (Note N) - - 1,150,000 12,100,298 - - 12,100,298
Issuance of 20,000
shares pursuant to
Restricted
Stock Agreement (Note N) - - 20,000 - - - -
Net earnings for the year - - - - 5,768,476 - 5,768,476
------- ------ --------- ----------- ----------- ---------- -----------
Balance at December 31, 1997 - $ - 6,990,00 $12,101,298 $31,349,889 $ - $43,451,187
======= ====== ========= =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 28
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 3,879,559 $ 3,734,891 $ 5,768,476
------------ ------------ ------------
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 5,930,353 6,577,569 6,997,498
Provision for losses on receivables 270,000 286,000 220,000
Loss (gain) on disposition of
property and equipment 5,891 72,458 (156,914)
Amortization of unrecognized
pension obligation (benefit) (782,364) 5,790 10,134
Deferred income taxes 785,000 891,000 800,971
Changes in assets and liabilities
Receivables (383,072) (1,448,305) (2,633,264)
Prepaid expenses (65,573) (37,444) (323,335)
Supplies inventory 34,164 28,682 (164,668)
Income taxes receivable 26,495 (100,525) (516,050)
Other assets 144,841 (107,172) (11,206)
Accounts payable (380,033) 252,404 1,142,106
Accrued liabilities and claims 1,267,252 36,446 1,457,923
------------ ------------ ------------
Total adjustments 6,852,954 6,456,903 6,823,195
------------ ------------ ------------
Net cash provided by operating
activities 10,732,513 10,191,794 12,591,671
------------ ------------ ------------
Cash flows from investing activities
Purchase of property and equipment (14,982,131) (9,712,567) (7,935,965)
Proceeds from disposition of property
and equipment 190,280 1,800,989 630,080
------------ ------------ ------------
Net cash used in
investing activities (14,791,851) (7,911,578) (7,305,885)
------------ ------------ ------------
</TABLE>
(Continued)
F-6
<PAGE> 29
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities
Distributions to LLC members (226,917) (524,000) (458,001)
Contributions from LLC members - 106,100 -
Proceeds from public sale of common stock - - 12,100,298
Proceeds from issuance of long-term
obligations 33,780,585 55,564,002 48,385,000
Principal payments on long-term
obligations (29,252,749) (55,756,549) (65,468,268)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 4,300,919 (610,447) (5,440,971)
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents 241,581 1,669,769 (155,185)
Cash and cash equivalents at beginning of year 6,860,537 7,102,118 8,771,887
------------ ------------ ------------
Cash and cash equivalents at end of year $ 7,102,118 $ 8,771,887 $ 8,616,702
============ ============ ============
Supplemental cash flow information
Cash paid during the year for
Interest $ 1,477,356 $ 1,459,189 $ 1,102,819
Income taxes 1,882,300 2,077,215 2,811,000
</TABLE>
Supplemental schedule of noncash investing and financing activities
Year ended December 31, 1995
The Company decreased accrued pension cost by $397,576 and increased prepaid
pension cost by $384,788. Unrecognized net pension obligation decreased by
$5,790, and excess of additional pension cost over unrecognized net pension
obligation decreased by $310,555.
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 30
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. Financial statement presentation
The accounting and reporting policies of Motor Cargo Industries, Inc. and
Subsidiaries (the Company) conform with generally accepted accounting
principles and with general practices in the motor carrier industry. In
preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
significantly from those estimates. Significant estimates include accrued
claims and allowance for doubtful accounts.
2. Principles of consolidation
The consolidated financial statements include the accounts of Motor Cargo
Industries, Inc. (MCI) and its wholly-owned subsidiaries, Ute Trucking and
Leasing, LLC (Ute) and Motor Cargo and its wholly-owned subsidiaries, MC
Leasing, Inc., MC Distribution Services, Inc., and ICC, Inc. All
significant intercompany accounts and transactions have been eliminated.
3. Business activity
Motor Cargo is a regulated motor carrier which hauls commercial
commodities both intrastate and interstate.
4. Cash equivalents
For the purposes of the financial statements, the Company considers all
highly liquid debt instruments with a maturity of three months or less
when purchased to be cash equivalents.
5. Supplies inventory
Supplies inventory consists primarily of fuel and equipment parts and is
stated at the lower of cost (first-in, first-out method) or market.
F-8
<PAGE> 31
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Depreciation and amortization
Depreciation of property and equipment is provided on the straight-line
method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the useful life of
the asset or term of the lease.
Maintenance, repairs, and renewals which neither materially add to the
value of the property nor appreciably prolong its life are charged to
expense as incurred. Gains or losses on dispositions of property and
equipment are included in earnings.
7. Income taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income tax assets and liabilities are
provided based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the currently enacted tax
rates in effect for the years in which these differences are expected to
reverse. Deferred tax expense or benefit is the result of changes in
deferred tax assets and liabilities.
8. Insurance coverage and accrued claims
The Company is self-insured for health costs, cargo damage claims, and
automobile and general liability claims up to $70,000, $100,000, and
$500,000 respectively, per single occurrence. The Company also maintains
workers' compensation insurance, with a deductible of $250,000 in Nevada,
and without a deductible in Washington. The Company is responsible for
workers' compensation claims in other states in which the Company operates
up to an aggregate of approximately $1.9 million per year. Liabilities in
excess of these amounts are assumed by insurance companies up to
applicable policy limits.
The Company estimates and accrues a liability for its share of final
settlements using all available information including the services of a
third-party insurance risk claims administrator to assist in establishing
reserve levels for each occurrence based on the facts and circumstances of
the incident coupled with the Company's past history of such claims. The
Company accrues for workers' compensation and automobile liabilities when
reported, usually the same day as the occurrence. Additionally, the
Company accrues an estimated liability for incurred but not reported
claims. Expense depends upon actual loss experience and changes in
estimates of settlement amounts for open claims which have not been fully
resolved. The Company provides for adverse loss developments in the period
when new information becomes available.
F-9
<PAGE> 32
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. Revenue recognition
Freight charges and related expenses are generally recognized as revenue
and operating expense when freight is picked up. The application of this
method did not result in a material difference in reported net earnings in
any of the periods presented when compared to other preferred industry
methods.
10. Prepaid tires
The Company capitalizes tires purchased with new equipment and depreciates
them over the estimated useful life of the equipment (5 - 10 years).
Replacement tires are expensed upon placement into service (Note O).
11. Pro forma earnings per share
Pro forma basic earnings per common share are based upon the weighted
average number of common shares outstanding during each period presented.
Pro forma diluted earnings per common share are based on shares
outstanding (computed as under basic EPS) and dilutive potential common
shares. Potential common shares include the options to acquire 249,500
shares of common stock. However, these options were not included in the
computation of diluted EPS because the options' exercise price of $12 was
greater than the average market price of the common shares for the period
the shares were traded.
12. Fair value of financial instruments
The fair value of the Company's cash and cash equivalents, receivables,
accounts payable and accrued liabilities approximate carrying value due to
the short-term maturity of the instruments. The fair value of long-term
obligations approximate carrying value based on their effective interest
rates compared to current market prices.
13. Certain reclassifications
Certain nonmaterial reclassifications have been made to the 1995 and 1996
financial statements to conform to the 1997 presentation.
F-10
<PAGE> 33
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
14. Pro forma financial information (unaudited)
Effective August 28, 1997, MCI acquired the membership interests of Ute
(Note N). A limited liability company passes through to its members
essentially all taxable earnings and losses and pays no tax at the company
level. Accordingly, for comparative purposes, a pro forma provision for
income taxes using an effective income tax rate of 38% has been determined
assuming Ute had been taxed as a C Corporation for all periods presented.
15. Recently issued accounting pronouncements not yet adopted
Comprehensive income
In September 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." SFAS 130 requires entities presenting a complete
set of financial statements to include details of comprehensive income
that arise in the reporting period. Comprehensive income consists of net
earnings or loss for the current period and other comprehensive income,
which consists of revenue, expenses, gains, and losses that bypass the
statement of earnings and are reported directly in a separate component of
equity. Other comprehensive income includes, for example, foreign currency
items, minimum pension liability adjustments, and unrealized gains and
losses on certain investment securities. SFAS 130 requires that components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
statement is effective for fiscal years beginning after December 15, 1997
and requires restatement of prior period financial statements presented
for comparative purposes.
Disclosure of segments
Also in September 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise
and Related Information." This statement requires an entity to report
financial and descriptive information about their reportable operating
segments. An operating segment is a component of an entity for which
financial information is developed and evaluated by the entity's chief
operating decision maker to assess performance and to make decisions about
resource allocation. Entities are required to report segment profit or
loss, certain specific revenue and expense items and segment assets based
on financial information used internally for evaluating performance and
allocating resources. This statement is effective for fiscal years
beginning after December 15, 1997 and requires restatement of prior period
financial statements presented for comparative purposes.
Management does not believe that the adoption of SFAS 130 and SFAS 131
will have a material effect on the Company's consolidated financial
statements.
F-11
<PAGE> 34
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Trade receivables $10,829,234 $13,540,800
Other receivables 435,016 203,721
------------ ------------
11,264,250 13,744,521
Less allowance for doubtful accounts (505,794) (572,801)
------------ ------------
$10,758,456 $13,171,720
============ ============
</TABLE>
The history of the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year $ 950,478 $ 855,000 $ 505,794
Provisions 270,000 286,000 220,000
Write-offs (365,478) (635,206) (152,993)
--------- --------- ---------
Balance at end of year $ 855,000 $ 505,794 $ 572,801
========= ========= =========
</TABLE>
NOTE C - PROPERTY AND EQUIPMENT
Cost of property and equipment and estimated useful lives are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997 Years
------------ ----------- -----
<S> <C> <C> <C>
Land $ 4,984,268 $ 4,984,268 -
Buildings 9,696,481 9,838,846 20-45
Revenue equipment 46,678,422 49,286,334 5-10
Service cars and equipment 356,722 562,108 3-10
Shop and garage equipment 128,765 140,355 3-10
Office furniture and fixtures 2,004,227 2,125,858 3-10
Other property and equipment 5,731,077 6,414,403 3-10
Leasehold improvements 1,952,308 2,149,953 4-5
Construction in progress 27,107 399,750 -
------------ -----------
$ 71,559,377 $75,901,875
============ ===========
</TABLE>
F-12
<PAGE> 35
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - LEASES
The Company leases buildings and revenue equipment under operating lease
agreements. The following is a schedule of future minimum lease payments
under operating leases:
<TABLE>
<CAPTION>
Equip- Total
Buildings ment leases
----------- ------- -----------
<S> <C> <C> <C>
Year ending December 31,
1998 $ 1,200,830 $67,071 $ 1,267,901
1999 414,658 - 414,658
2000 266,458 - 266,458
2001 92,895 - 92,895
Thereafter - - -
----------- ------- -----------
Total minimum lease payments $ 1,974,841 $67,071 $ 2,041,912
=========== ======= ===========
</TABLE>
The leases generally provide that property taxes, insurance, and
maintenance expenses are obligations of the Company. It is expected that
in the normal course of business, operating leases that expire will be
renewed or replaced by leases on other properties. The total rent expense
for the years ended December 31, 1995, 1996, and 1997, was approximately
$1,274,081, $1,540,407 and $1,714,223, respectively.
NOTE E - REVOLVING BANK LOAN
The Company has a revolving bank loan. Under the loan agreement,
borrowings are limited to the lesser of 70% of allowable trade
receivables, or $5,000,000. Any outstanding amounts accrue interest at the
lending institution's prime rate, which is payable monthly. No principal
payments are required until maturity (May 1998) as long as the loan does
not exceed the required limits. The agreement is collateralized by cash
and cash equivalents, receivables, supplies inventory, and all documents,
instruments, and chattel paper now owned or hereafter acquired by the
Company. At December 31, 1996 and 1997, there were no draws against the
loan.
The Company also has a line of credit with a limit of $11,430,795 as of
December 31, 1997. This line is collateralized by revenue equipment. The
upper limit of this line reduces by 1/20th each quarter until reaching $0
in the year 2002. As of December 31, 1997, there was $5,000,000 drawn
against the line (Note F).
F-13
<PAGE> 36
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Prime (8.5% at December 31, 1997) note payable on a line of credit (up
to $11,430,795) to a bank, due in 2002, interest payments due monthly
with quarterly principal payments due beginning in 2000,
collateralized by revenue equipment (Note E) $10,975,714 $ 5,000,000
8.75 - 10.53% notes payable to a corporation, due through 2003, payable
in monthly installments of $18,964, including interest,
collateralized by real property 1,927,386 1,581,439
Prime plus 1% (9.25% at December 31, 1996) note payable
to a bank, payable in quarterly installments of
$6,562 plus interest, collateralized by real
property; paid in full during 1997 190,314 -
6.75 - 10% notes payable to corporations, payable in monthly
installments totaling $163,087 plus interest, collateralized by
revenue equipment; paid in full during 1997 4,529,960 -
6.5 - 10.45% notes payable to banks, payable in monthly installments
totaling $205,063 plus interest, collateralized by revenue equipment;
paid in full during 1997 4,218,358 -
8.4 - 9.25% notes payable to banks, payable in monthly installments
totaling $28,864 plus interest, collateralized by real property; paid
in full during 1997 1,822,975 -
----------- -----------
23,664,707 6,581,439
Less current maturities 6,844,960 89,557
----------- -----------
$16,819,747 $ 6,491,882
=========== ===========
</TABLE>
F-14
<PAGE> 37
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - LONG-TERM OBLIGATIONS - CONTINUED
Maturities of long-term obligations are as follows:
<TABLE>
<S> <C>
Year ending December 31,
------------------------
1998 $ 89,557
1999 99,990
2000 3,113,115
2001 1,515,188
2002 730,089
Thereafter 1,033,500
-----------
$ 6,581,439
===========
</TABLE>
The line of credit agreements contain various restrictive covenants
including provisions relating to the maintenance of net worth,
debt-to-equity ratio, and cash-flow coverage. As of December 31, 1997, the
Company was in compliance with all covenants under the line of credit
agreements.
NOTE G - INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $1,081,000 $1,009,000 $2,507,112
State 228,000 218,000 496,917
---------- ---------- ----------
1,309,000 1,227,000 3,004,029
---------- ---------- ----------
Deferred
Federal 655,475 743,985 664,806
State 129,525 147,015 136,165
---------- ---------- ----------
785,000 891,000 800,971
---------- ---------- ----------
$2,094,000 $2,118,000 $3,805,000
========== ========== ==========
</TABLE>
F-15
<PAGE> 38
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - INCOME TAXES - CONTINUED
The income tax provision reconciled to the tax computed at the federal
statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal income taxes at
statutory rate $ 2,031,000 $ 1,990,000 $ 3,255,000
State income taxes, net of
federal tax benefit 252,100 248,800 402,000
One time charge attributed
to Ute (1) - - 238,000
Income taxes attributed to Ute (209,000) (138,000) (147,000)
All other 19,900 17,200 57,000
----------- ----------- -----------
$ 2,094,000 $ 2,118,000 $ 3,805,000
=========== =========== ===========
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets (liabilities)
Allowance for doubtful accounts $ 193,200 $ 219,000
Vacation accrual 353,500 407,000
Reserve for claims 575,300 955,000
Unfunded pension (58,800) (197,000)
Accrued compensation 58,400 68,000
Equipment temporary differences (5,221,229) (6,400,000)
Prepaid tires (47,400) -
----------- -----------
Net deferred tax liability $(4,147,029) $(4,948,000)
=========== ===========
</TABLE>
(1) Effective August 28, 1997, Ute was acquired by MCI and became a taxable
entity (Note N). Previously, its earnings and losses were included in the
personal tax returns of the members, and Ute did not record an income tax
provision. Effective with the change in ownership, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," income taxes will be provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between
the basis of property and equipment for financial and income tax reporting.
The deferred tax liability represents the future tax return consequences of
these differences, which will be taxable when the liabilities are settled.
Accordingly, a deferred tax liability at the date of the change of
approximately $238,000 was recorded through a one time non-cash charge to
the deferred tax provision.
F-16
<PAGE> 39
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - PENSION AND PROFIT-SHARING PLANS
1. Pension plan
The Company participates in a defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of
service and hours of service in the current year. A participant is fully
vested after five years. Contributions are intended to provide not only
for benefits attributed to service to date, but also for those expected
benefits to be earned in the future.
The following table sets forth the plan's funded status as of the periods
presented, in accordance with FASB Statement 87: "Employers' Accounting
for Pensions":
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligations, including
vested benefits of $3,808,232 and $4,231,411,
for the years ended December 31, 1996 and
1997, respectively $ 3,972,111 $ 4,413,501
=========== ===========
Projected benefit obligation for service
rendered to date $(4,111,673) $(4,413,501)
Plan assets at fair value, primarily U.S.
government securities and common stock funds 4,125,240 4,929,225
----------- -----------
Projected benefit obligation less than
plan assets 13,567 515,724
Unrecognized net obligation at January 1, 1987,
being recognized over 16 years 75,441 65,307
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (379,979) (790,462)
----------- -----------
Accrued pension costs included in
accrued liabilities $ (290,971) $ (209,431)
=========== ===========
</TABLE>
F-17
<PAGE> 40
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - PENSION AND PROFIT-SHARING PLANS - CONTINUED
1. Pension plan - continued
Net pension cost included the following components:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 247,891 $ 238,559 $ 248,967
Interest cost on projected
benefit obligation 268,620 288,520 318,316
Actual return on plan assets 768,665 (497,698) (769,440)
Net (deferral) amortization (944,968) 199,300 420,617
---------- ---------- ----------
Net pension cost $ 340,208 $ 228,681 $ 218,460
========== ========== ==========
</TABLE>
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8% for the years
ended December 31, 1995, 1996 and 1997. The expected long-term rate of
return was 8% for the years ended December 31, 1995, 1996 and 1997.
2. 401(k) profit-sharing plan
The Company has a qualified 401(k) profit-sharing plan (the Plan) in which
substantially all of its employees participate. All employees who have
completed one year of service with the Company are eligible to participate
in the Plan. Under the Plan, employees are allowed to make contributions
of between 1% and 15% of their annual compensation. The Company matches
certain percentages of employee contributions up to 6%, depending on the
Company's operating ratio. All amounts contributed by a participant are
fully vested at all times. A participant becomes vested over time and is
fully vested in any Company matching contributions after 7 years of
service. Expenses for Company contributions approximated $345,000,
$310,000, and $525,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
NOTE I - STOCK OPTIONS
In October 1997, the Company's Board of Directors and stockholders adopted
the Motor Cargo Industries, Inc. 1997 Stock Option Plan (the Option Plan).
The Company reserved 500,000 shares of common stock under the Option Plan.
Accordingly, the Board of Directors has approved the granting of options
under the Option Plan as follows:
F-18
<PAGE> 41
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - STOCK OPTIONS - CONTINUED
1997 Stock Option Plan
Directors, officers and key employees have been granted options to acquire
249,500 shares of common stock. The options were granted at $12.00 per
share, which was the market price of the Company's shares on the date
granted. The options vest periodically through October of 2001. The
options expire upon the earlier of an expiration date fixed by the
committee responsible for the administering of the Plan or 10 years from
the date of the grant.
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(FAS 123). Therefore, the Company continues to account for stock based
compensation under Accounting Principles Board Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for the
stock based compensation been determined consistent with FAS 123, the
Company's net earnings and earnings per share would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
1997
----------
<S> <C> <C>
Net earnings Pro forma as reported $5,621,476
==========
Pro forma $5,580,655
==========
Earnings per share - basic Pro forma as reported $ 0.95
==========
Pro forma $ 0.94
==========
Earnings per share - diluted Pro forma as reported $ 0.95
==========
Pro forma $ 0.94
==========
</TABLE>
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions; expected volatility of 36.3 percent; risk-free interest rate
of 6.66 percent; and expected life of 7.5 years. Dividends were assumed
not to be paid during the period of calculation. The weighted average fair
value of options granted was $6.44.
Option pricing models require the input of highly subjective assumptions
including the expected stock price volatility. Also, the Company's
employee stock options have characteristics significantly different from
those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate. Management believes the
best input assumptions available were used to value the options and that
the resulting option values are reasonable.
F-19
<PAGE> 42
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - STOCK OPTIONS - CONTINUED
Changes in the Company's stock options are as follows:
<TABLE>
<CAPTION>
Weighted
average
Stock Exercise exercise
options price price
----------- ----------- ------------
<S> <C> <C> <C>
Outstanding at January 1, 1997 - $ - $ -
Granted 249,500 12.00 12.00
Exercised - - -
Canceled or expired - - -
-----------
Outstanding at December 31, 1997 249,500 12.00 12.00
===========
Exercisable at December 31, 1997 - - -
===========
</TABLE>
NOTE J - RELATED PARTY TRANSACTIONS
Related parties include the Company's officers, directors, stockholders
and other entities under their common control.
During the years ended December 31, 1995, 1996, and 1997 the Company made
payments for consulting services of $480,000, $480,000, and $160,000,
respectively, to an entity in which the Company's chairman is a 50% owner.
The agreement terminated April 1997 and was not renewed.
Guaranteed payments to members of Ute were $140,000 for the years ended
December 31, 1995 and 1996, and $105,000 for the year ended December 31,
1997.
NOTE K - DEFERRED COMPENSATION
The Company has salary continuation agreements with certain key management
employees. Under the agreements, the Company is obligated to provide for
each such employee or his beneficiaries, during a period of not more than
ten years after the employee's death, disability, or retirement, annual
benefits ranging from $17,000 to $23,000. The Company has purchased
universal life insurance policies on the lives of these participants.
These insurance policies, which remain the sole property of the Company,
are payable to the Company upon the death of the participant or maturity
of the insurance policy. As of December 31, 1997, the value of the
insurance policies approximated the deferred compensation obligations.
F-20
<PAGE> 43
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - DEFERRED COMPENSATION - CONTINUED
The Company separately contracts with the participants to pay stated
benefits substantially equivalent to those received or available under the
insurance policies upon retirement, death, or permanent disability. The
expense incurred for the years ended December 31, 1995, 1996 and 1997, was
approximately $18,000, $62,660 and $36,000, respectively.
NOTE L - COMMITMENTS AND CONTINGENCIES
1. Letters of credit
At December 31, 1997, the Company had outstanding letters of credit
totaling $2,010,000 ($2,010,000 at December 31, 1996). There were no draws
against these letters of credit during any of the periods presented.
2. Litigation
The Company is involved in litigation arising in the normal course of
business. It is not possible to state the ultimate liability, if any, in
these matters. In the opinion of management, such litigation will have no
material effect on the financial position and results of operations of the
Company, in excess of amounts accrued.
NOTE M - CONCENTRATION OF CREDIT RISK
The Company maintains cash and cash equivalents at several financial
institutions. At December 31, 1997, uninsured amounts held in these
financial institutions totaled approximately $10,427,000, (approximately
$9,121,000 as of December 31, 1996).
NOTE N - CAPITAL TRANSACTIONS
Effective December 31, 1995, a prior entity known as Motor Cargo
Industries, Inc., a related entity through common ownership, was merged
into Motor Cargo as a result of which its wholly-owned subsidiary MC
Leasing, Inc. became a wholly-owned subsidiary of Motor Cargo. The merger
was accounted for in a manner similar to a pooling of interests with
assets acquired approximating liabilities assumed and no additional shares
of Motor Cargo's common stock being issued.
F-21
<PAGE> 44
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - CAPITAL TRANSACTIONS - CONTINUED
On January 1, 1996 a new entity, MCI was incorporated. Following its
incorporation, the Company issued 5,120,000 shares of common stock in
exchange for all of the outstanding common stock of Motor Cargo (256
shares). This transaction was accounted for in a manner similar to a
pooling of interests. MCI, which had no significant assets or liabilities
at the time of the exchange, functions as a non-operating holding company
for the operating entities. The consolidated financial statements for all
periods presented include the accounts and operations of all entities for
the periods the entities were in existence.
Effective August 28, 1997, the membership interests of Ute were acquired
in exchange for 700,000 shares of common stock of the Company. Because of
the common ownership of the two entities, this transaction was accounted
for in a manner similar to a pooling of interests. Ute is included in the
consolidated financial statements for all periods presented as a
wholly-owned subsidiary of MCI. Revenues and earnings for Ute for each of
the three years in the period ended December 31, 1997 are as follows:
$7,773,901 and $523,606; $9,018,480 and $361,350; $8,894,890 and $258,785,
respectively. All revenue generated in Ute is from the renting and
contracting, under an independent operating agreement, of revenue
equipment to Motor Cargo. Therefore, Ute's related operations are
eliminated in the consolidated financial statements.
In November 1997, the Company completed an initial public offering of
1,150,000 new shares of its common stock. The net proceeds of 12,100,298
were used to reduce certain borrowings that existed at the time of the
offering, which were incurred to purchase revenue equipment, as well as,
purchasing additional revenue equipment.
Also in October 1997, the Company's Board of Directors awarded an officer
of the Company 20,000 shares of the Company's common stock. The award was
made pursuant to a Restricted Stock Agreement which states that 20,000
shares of the Company's common stock will be issued in the officer's name.
The Company will hold the certificates for the shares, which will be
released in four installments, each consisting of 25% of the shares issued
based on the officer's continued employment. In the event the officer
voluntarily ceases his employment with the Company or the Company
terminates his employment for cause, the shares not previously released
will be forfeited. Termination of employment by the Company without cause,
or termination due to disability or death will result in the prompt
release of some or all shares not previously released, depending upon the
date of the relevant event.
F-22
<PAGE> 45
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - PRIOR PERIOD ADJUSTMENT
During the year ended December 31, 1997, the Company changed its method of
accounting for tires. The previous method involved recording new tires,
(tires purchased with new equipment and replacement stock) as prepaid
tires upon purchase and amortizing them based on normal tread-wear. The
new method involves expensing replacement tires upon placement into
service. Under the new method, tires purchased with new equipment are
capitalized as equipment and depreciated over the estimated useful life of
the equipment (5-10 years). Management believes the new method should
simplify the comparability of its financial statements with other
regulated motor carriers. The effect of the change, which was not
significant, was retroactively applied to all periods presented.
NOTE P - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Salaries, wages, and payroll taxes $1,943,386 $2,430,614
Accrued employee benefits 684,301 769,063
Vacation accrual 925,274 1,064,935
All other 343,915 161,907
---------- ----------
$3,896,876 $4,426,519
========== ==========
</TABLE>
NOTE Q - ACCRUED CLAIMS PAYABLE
The history of accrued claims payable is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,552,200 $ 1,675,118 $ 2,028,631
Provisions 1,462,594 2,385,923 4,148,866
Expenditures (1,339,676) (2,032,410) (3,220,586)
----------- ----------- -----------
Balance at end of year $ 1,675,118 $ 2,028,631 $ 2,956,911
=========== =========== ===========
</TABLE>
F-23
<PAGE> 46
INDEX TO EXHIBITS
Exhibits
3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1
to the Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-37211) and
incorporated herein by reference).
10.1 1997 Credit Agreement, dated September 30, 1997, between Motor
Cargo and Sanwa Bank California (filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference).
10.2 1997 Stock Option Plan.(1)
10.3 Pension Plan of Employees of Motor Cargo and Trust Agreement
(filed as Exhibit 10.3 to the Company's Registration Statement
on Form S-1 (File No. 333-37211) and incorporated herein by
reference).(1)
10.4 Motor Cargo Profit Sharing Plan.(1)
10.5 Restricted Stock Agreement, dated October 2, 1997, between the
Company and Louis V. Holdener (filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference).(1)
10.6 Agreement to Purchase and Sell Leasehold Interest dated October
2, 1990 between Leonard L. Gumport and Motor Cargo (filed as
Exhibit 10.6 to the Company's Registration Statement on Form S-1
(File No. 333-37211) and incorporated herein by reference).
10.7 Lease Agreement dated December 23, 1996 between Channing, Inc.
and Motor Cargo (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 333-37211) and
incorporated herein by reference).
10.8 Lease Agreement dated as of January 1, 1989 between Andrea
Tacchino Company and Motor Cargo (filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference).
10.9 First Amendment to Lease dated March 1, 1990 between Andrea
Tacchino Company and Motor Cargo (filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference).
10.10 Lease Agreement dated October 31, 1995 between Pete Aardema and
Motor Cargo (filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File No. 333-37211) and
incorporated herein by reference).
10.11 Lease Agreement dated September 29, 1995 among Colburn R.
Thomason, Michael Tolladay, Kevin Tweed and Motor Cargo (filed
as Exhibit 10.11 to the Company's Registration Statement on Form
S-1 (File No. 333-37211) and incorporated herein by reference).
10.12 Form of Salary Continuation Agreement (filed as Exhibit 10.12 to
the Company's Registration Statement on Form S-1 (File No.
333-37211) and incorporated herein by reference).(1)
<PAGE> 47
10.13 Contribution Agreement, dated August 28, 1997, between the
Company and the members of Ute Trucking and Leasing, LLC (filed
as Exhibit 10.17 to the Company's Registration Statement on Form
S-1 (File No. 333-37211) and incorporated herein by reference).
10.14 Management Agreement between the Company and FHF Transportation,
Inc. (filed as Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (file No. 333-37211 and incorporated
herein by reference).
11 Pro Forma Earnings Per Share Calculation*
21 Subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1 (file No. 333-37211
and incorporated herein by reference).
27 Financial Data Schedule.*
- --------------
(1) Management contracts and compensatory plans and arrangements identified
pursuant to Item 14(a)(3) of Form 10-K.
* Filed with this report.
<PAGE> 1
Exhibit 11
MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma earnings available to
common shareholders $3,670,559 $3,596,891 $5,621,476
========== ========== ==========
Basic EPS
Shares
Common shares outstanding entire period 5,820,000 5,820,000 5,820,000
Weighted-average common shares issued
during period - - 118,602
---------- ---------- ----------
Weighted-average common shares
outstanding during period-basic 5,820,000 5,820,000 5,938,602
========== ========== ==========
Pro forma earnings per common share-basic $ 0.63 $ 0.62 $ 0.95
========== ========== ==========
Diluted EPS
Shares
Weighted-average common shares
outstanding during period - basic 5,820,000 5,820,000 5,938,602
Dilutive effect of stock options - - -
---------- ---------- ----------
Weighted-average common shares
outstanding during period - diluted 5,820,000 5,820,000 5,938,602
========== ========== ==========
Pro forma earnings per common share -
diluted $ 0.63 $ 0.62 $ 0.95
========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR MOTOR CARGO INDUSTRIES, INC. FOR THE YEAR ENDED
DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,617
<SECURITIES> 0
<RECEIVABLES> 13,172
<ALLOWANCES> 573
<INVENTORY> 503
<CURRENT-ASSETS> 26,965
<PP&E> 75,902
<DEPRECIATION> 35,243
<TOTAL-ASSETS> 68,069
<CURRENT-LIABILITIES> 11,597
<BONDS> 0
0
0
<COMMON> 12,101
<OTHER-SE> 31,350
<TOTAL-LIABILITY-AND-EQUITY> 68,069
<SALES> 0
<TOTAL-REVENUES> 105,381
<CGS> 0
<TOTAL-COSTS> 94,978
<OTHER-EXPENSES> 221
<LOSS-PROVISION> 220
<INTEREST-EXPENSE> 1,051
<INCOME-PRETAX> 9,573
<INCOME-TAX> 3,805
<INCOME-CONTINUING> 5,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,768
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
</TABLE>
