SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended July 5, 1998.
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 000-8517
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Chemical Leaman Corporation
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(Exact name of registrant as specified in its charter)
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Pennsylvania 23-2021808
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(State or other jurisdiction of incorporation or organization) (IRS employer identification no.)
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102 Pickering Way, Exton, Pennsylvania 19341-0200
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (610) 363-4200
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Former name, former address and former fiscal year, if changed since last report
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $2.50 per share: 549,795 shares outstanding as
of August 7, 1998.
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CHEMICAL LEAMAN CORPORATION AND SUBSIDIARIES
INDEX
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Page #
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Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
July 5, 1998 (unaudited) and December 31, 1997 1-2
Condensed Consolidated Statements of Operations (unaudited)-
Three Months Ended July 5, 1998 and June 29, 1997 3
Condensed Consolidated Statements of Operations - Six
Months Ended July 5, 1998 (unaudited) and June 29, 1997 3
Condensed Consolidated Statements of Cash Flows - Six
Months Ended July 5, 1998 (unaudited) and June 29, 1997 4
Notes to Condensed Consolidated Financial Statements 5-7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition
and results of operations 8-10
Part II Other Information 11
Item 6 Exhibits and Reports on Form 8-K
Signature 12
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PART I
FINANCIAL INFORMATION
Item 1 Financial Statements
CHEMICAL LEAMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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July 5, December 31,
1998 1997
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(unaudited)
ASSETS
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Cash and cash equivalents $ 2,639 $ 2,681
Accounts receivable, net of allowance of $ 1,122 at
July 5, 1998 and $850 at December 31, 1997 20,018 22,871
Operating supplies 949 940
Prepaid expenses and other 9,510 8,252
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Total current assets 33,116 34,744
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Property and equipment, net 111,938 109,871
Recoverable environmental costs 14,685 14,002
Other assets 18,882 18,897
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$178,621 $177,514
======== ========
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1
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CHEMICAL LEAMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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July 5, December 31,
1998 1997
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(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
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Accounts and drafts payable $ 18,962 $ 19,317
Accrued salaries and wages 4,277 5,383
Other accrued liabilities 4,971 4,028
Estimated self-insurance liabilities 2,073 4,183
Current maturities of long-term debt 488 462
Current maturities of equipment obligations 319 166
--------- ---------
Total current liabilities 31,090 33,539
Long-term equipment obligations 18,858 10,177
Long-term debt 101,155 101,496
Estimated self-insurance liabilities 15,012 18,889
Other non-current liabilities 5,184 5,082
Redeemable preferred stock 5,318 5,318
Stockholders' equity
Common stock 2,677 2,677
Other stockholders' equity (673) 336
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Total stockholders' equity 2,004 3,013
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$ 178,621 $ 177,514
========= =========
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2
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CHEMICAL LEAMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands)
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FOR THE SIX FOR THE THREE
MONTHS ENDED MONTHS ENDED
----------------------- -----------------------
JULY 5, JUNE 29, JULY 5, JUNE 29,
1998 1997 1998 1997
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OPERATING REVENUES $ 183,082 $ 156,545 $ 92,474 $ 80,479
--------- ---------- -------- --------
OPERATING EXPENSES:
Salaries, wages and benefits 36,512 34,947 17,788 17,746
Purchased transportation and rents 88,619 69,131 46,298 35,246
Operations and maintenance 32,988 32,158 16,442 16,179
Depreciation and amortization 10,867 9,336 5,516 4,912
Taxes and licenses 1,800 1,457 450 777
Insurance and claims 2,514 4,402 1,216 1,587
Communication and utilities 3,847 3,320 1,925 1,638
Loss on disposition of revenue equipment, net 291 45 125 36
--------- --------- -------- --------
Total operating expenses 177,438 154,796 89,760 78,121
--------- --------- -------- --------
OPERATING INCOME 5,644 1,749 2,714 2,358
INTEREST EXPENSE, net 6,158 4,515 3,141 2,183
OTHER EXPENSE, net 764 165 408 356
--------- --------- -------- --------
Loss before income tax benefit (1,278) (2,931) (835) (181)
INCOME TAX BENEFIT (447) (1,223) (292) (66)
--------- --------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM (831) (1,708) (543) (115)
--------- --------- -------- --------
EXTRAORDINARY LOSS on early extinguishment of debt,
less applicable income taxes of $133 -- (199) -- --
--------- ---------- -------- --------
NET LOSS $ (831) $ (1,907) $ (543) $ (115)
========= ========== ======== ========
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3
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CHEMICAL LEAMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(In thousands)
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For the Six Months Ended
-------------------------------
July 5, June 29,
1998 1997
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OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ 1,314 $ (3,519)
INVESTING ACTIVITIES:
Acquisition of business (1,598)
Additions to property and equipment (12,834) (11,006)
Proceeds from the sales of property and equipment 1,207 751
--------- ---------
Net cash used in investing activities (13,225) (10,255)
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FINANCING ACTIVITIES:
Payments on equipment obligations (162) (62,439)
Proceeds from issuance of equipment obligations 1,796 3,998
Proceeds from revolving credit facility 7,200
(Decrease) increase in bank overdrafts (1,472) 2,882
Proceeds from issuance of long-term debt 100,000
Payments on long-term debt (315) (21,355)
Payments on early extinguishment of debt (199)
Proceeds from sale of receivables 5,000
Preferred stock dividends (178) (178)
--------- ---------
Net cash provided by financing activities 11,869 22,709
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Net (decrease) increase in cash and cash equivalents (42) 8,935
CASH AND CASH EQUIVALENTS:
Beginning of year 2,681 5,788
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End of year $ 2,639 $ 14,723
========= =========
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4
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Chemical Leaman Corporation and Subsidiaries
Notes To Condensed Consolidated Financial Statements (unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Preparation
The unaudited condensed consolidated financial statements of Chemical
Leaman Corporation (the "Company") included herein have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Although
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, the
Company believes that the disclosures included herein are adequate to make the
information presented not misleading . Operating results for the three and six
month periods ended July 5, 1998 and June 29, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998 or for future fiscal periods. These unaudited condensed consolidated
financial statements should be read in conjunction with the financial statements
included in the Company's Form 10-K for the year ended December 31, 1997, filed
with the Securities and Exchange Commission ("Annual Report").
In the opinion of the Company, the unaudited condensed consolidated
financial statements contain all adjustments necessary for a fair statement of
the results of operations for the three and six month periods ended July 5, 1998
and June 29, 1997 and for a fair presentation of financial position at July 5,
1998.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" was issued in July 1997. The Company adopted
SFAS No. 130 on January 1, 1998, as required. SFAS No. 130 established standards
for the reporting and display of comprehensive income and its components. The
main objective of the statement is to report a measure of all changes in equity
that result from transactions and other economic events of the period other than
transactions with owners. Such components of total comprehensive income for the
Company are net income and a minimum pension liability adjustment made pursuant
to SFAS No. 87. The effect of the minimum pension liability adjustment for the
first and second quarter of 1998 was immaterial.
Note 2 - December 31, 1997 Balance Sheet
The amounts presented in the balance sheet as of December 31, 1997 were
derived from the Company's audited consolidated financial statements which were
included in the Annual Report.
5
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Chemical Leaman Corporation and Subsidiaries
Notes To Condensed Consolidated Financial Statements (unaudited)
Note 3 - Contingencies/Litigation
Bridgeport, New Jersey
The Company is in litigation with its insurers to recover its costs in
connection with the environmental cleanup at its Bridgeport, NJ site, Chemical
Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co., et al, Civil Action No.
89-1543 (SSB) (D.N.J.). On April 7, 1993, the U.S. District Court for the
District of New Jersey entered a judgment requiring the insurers to reimburse
the Company for substantially all past and future environmental cleanup costs at
the Bridgeport site. The insurers appealed the judgment to the U.S. Court of
Appeals for the Third Circuit, but before the appeal was decided the Company and
its primary insurer settled all of the Company's claims, including claims
asserted or to be asserted at other sites, for $11.5 million. This insurer
dismissed its appeal, but the excess carriers did not. On June 20, 1996, the
U.S. Court of Appeals affirmed the judgment against the excess insurance
carriers, except for the allocation of liability among applicable policies, and
remanded the case for an allocation of damage liability among the insurers and
applicable policies on a several basis. On September 15, 1997, the District
Court issued an order and accompanying opinion ruling on the allocation of
damages among the applicable policies as directed by the Court of Appeals. The
District Court's decision found that the Company has already recovered $11.5
million in past Bridgeport investigation and remediation costs from its primary
insurer under the aforementioned settlement agreement. The District Court's
decision further found that the Company is entitled to have the balance of its
past costs and all future Bridgeport investigation and remediation costs
allocated among the liable excess carriers, according to specific percentages
set forth in the District Court's Order. The Company and its excess carriers are
engaged in settlement negotiations in an effort to resolve all of the Company's
claims, including those relating to the Bridgeport, NJ site.
It is the belief of the environmental counsel to the Company, and
management, that receipt of insurance proceeds sufficient to recover
substantially all of the costs of remediating the Bridgeport, NJ site, including
natural resources damages, and attorneys' fees and expenses, is likely to occur.
Note 4 - Other Events
On June 24, 1998, the Company announced that Palestra Acquisition Corp.
("Palestra"), a Delaware corporation and a wholly owned subsidiary of MTL Inc.,
a Florida corporation ("MTL"), had entered into an Agreement and Plan of Merger
("CLC Merger Agreement"), dated as of June 23, 1998, by and among Palestra, the
Company and its shareholders (each a "Shareholders" and, collectively, the
"Shareholders"). On July 28, 1998, MTL announced that Palestra and the Company
had entered into an Amendment No. 1 ("Amendment") to the CLC Merger Agreement.
Under the terms of the CLC Merger Agreement, as amended, MTL has agreed, subject
to the satisfaction of certain terms and conditions, to acquire all of the
outstanding shares of common stock, $2.50 par value per share, of CLC ("CLC
Common Stock") through the merger ("Merger") of Palestra with and into the
Company, which thereby will become a wholly-owned subsidiary of MTL. The
Shareholders have approved the consummation of the Merger. The Merger is
expected to close in August or September of 1998, and has an outside closing
date of October 31, 1998.
6
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Chemical Leaman Corporation and Subsidiaries
Notes To Condensed Consolidated Financial Statements (unaudited)
Under the terms of the CLC Merger Agreement, as amended, all shares
("Shares") of CLC Common Stock held by the Shareholders shall, by virtue of the
Merger, be converted into the right to receive an aggregate amount in cash (and
Common Stock of MTL, as described below) equal to $72.8 million less Transaction
Expenses (as defined in the CLC Merger Agreement, as amended) in excess of
$100,000, plus shares of preferred stock of MTL having a stated value equal to
$5.0 million (collectively "Merger Consideration"), subject to certain setoffs
as set forth in the CLC Merger Agreement. A portion of the Shares held by
certain Shareholders who are officers of CLC shall not be converted into cash,
but in lieu thereof, shall be converted into the shares of the Common Stock of
MTL as set forth in their employment agreements. In connection with the
transactions contemplated by the Merger, the Company will transfer all of the
common stock of Leaman Air Services, Inc., a subsidiary of the Company, to a
principal stockholder of the Company, as additional consideration for the Shares
held by such Shareholder.
The aggregate consideration for the outstanding shares of the Company's
Common Stock was determined based upon arms-length negotiation between Palestra
and the Company. Prior to the execution of the Merger Agreement, no material
relationship existed between the Company and MTL, or any of its affiliates, any
director or officer of CLC or any associate of any such director or officer.
In conjunction with the Merger, Palestra has initiated detailed Phase I
and Phase II environmental studies related to certain environmental sites. The
results of these studies are not presently known.
On July 28, 1998, MTL initiated a tender offer and consent solicitation
for the Company's 10-3/8% senior notes due 2005 (the "Notes"). This tender offer
is scheduled to expire August 24, 1998 unless extended.
The closing of the Merger is subject to the completion of the tender
offer for the Notes and an amendment to certain of the terms of these Notes in
connection therewith, satisfaction of all of the conditions to MTL's financing
arrangements in connection with the Merger, and customary conditions.
Accordingly, there can be no assurance that the merger will be successfully
completed.
7
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Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operation
Results of Operations
The Company employs an accounting calendar consisting of four thirteen
week quarters. Because of differences in the week ending dates of the three and
six month periods ended July 5, 1998 and June 29, 1997, there were three
additional billing days in the six month period ended July 5, 1998 versus the
six month period ended June 29, 1997 and there were two less billing days in the
three month period ended July 5, 1998 versus the three month period ended June
29, 1997. As such, the analysis of the results of operations between comparative
periods will be impacted by the difference in revenue days in 1998 versus 1997.
Three Month Period Ended July 5, 1998 Compared to the Three Month Period Ended
June 29, 1997
Operating Revenues
Operating revenues increased by $12.0 million from $80.5 million for
the three month period ended June 29, 1997 to $92.5 million for the three month
period ended July 5, 1998. Of this increase, approximately $12.7 million is
attributable to growth in existing operations of which $4.8 million is from
growth in the Company's logistics subsidiary. Operating revenues decreased $2.5
million as a result of two fewer revenue days in the 1998 period versus the 1997
period. The remaining $1.8 million increase is attributable to acquisitions in
the Company's dry bulk and tank cleaning subsidiaries.
Operating Expenses
Operating expenses increased $11.7 million from $78.1 million for the
three month period ended June 29, 1997 to $89.8 million for the three month
period ended July 5, 1998. Of this increase, approximately $12.8 million is
attributable to growth in existing operations of which $5.1 million is related
to growth in the Company's logistics subsidiary. Operating expenses were lower
by $2.4 million as a result of two fewer revenue days in the 1998 period versus
the 1997 period. The remaining $1.3 million is attributable to acquisitions in
the Company's dry bulk and tank cleaning subsidiaries.
Interest Expense
Interest expense increased from $2.2 million, or 2.7% of revenue for
the three month period ended June 29, 1997, to $3.1 million or 3.4% of revenue
for the three month period ended July 5, 1998. The increase in interest expense
is attributable to additional debt incurred in support of new business and
increased business from existing operations as well as higher interest rates and
increased debt as a result of the issuance of the Company's 10 3/8% Senior Notes
due 2005 (Senior Notes) completed on June 16, 1997.
Net Loss
The net loss for the three month period ended July 5, 1998 increased
$.4 million from $.1 million for the three month period ended June 29, 1997 to
$.5 million. The increase was due primarily to the after-tax effect of higher
operating profit attributable to increased revenue described above offset by
higher interest and other expense.
8
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Six Month Period Ended July 5, 1998 Compared to the Six Month Period Ended
June 29, 1997
Operating Revenues
Operating revenues increased $26.6 million from $156.5 million for the
six month period ended June 29, 1997 to $183.1 million for the six month period
ended July 5, 1998. Of this increase, approximately $3.8 million is attributable
to three additional billing days in the 1998 period versus the 1997 period. An
additional $3.5 million is attributable to acquisitions in the Company's dry
bulk and tank cleaning subsidiaries. The remaining increase of $19.3 million
results from an increase in existing operations of which $6.3 million is from
the Company's logistics subsidiary.
Operating Expenses
Operating expenses increased $22.6 million from $154.8 million for the
six month period ended June 29, 1997 to $177.4 million for the six month period
ended July 5, 1998. Of this increase, approximately $3.6 million is attributable
to the increased number of billing days in the 1998 period versus the 1997
period. An additional $3.0 million is attributable to acquisitions in the
Company's dry bulk and tank cleaning subsidiaries. The remaining increase of
$16.0 results from an increase in existing operations of which $6.2 million is
related to growth in the Company's logistics subsidiary.
Interest Expense
Interest expense increased from $4.5 million for the six month period
ended June 29, 1997, or 2.9% of revenue, to $6.2 million for the six month
period July 5, 1998, or 3.4% of revenue. The increase in interest expense is
attributable to additional debt incurred in support of new business and
increased business from existing operations as well as higher interest rates and
increased debt as a result of the issuance of the Company's Senior Notes
completed on June 16, 1997.
Net Loss
The net loss for the six month period ended July 5, 1998 decreased $1.1
million from $1.9 million for the six month period ended July 5, 1998 to $.8
million. The increase was due primarily to the after-tax effect of higher
operating profit attributable to increased revenue described above offset by
higher interest and other expense.
9
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Liquidity and Capital Resources
Since the issuance of the Company's Senior Notes on June 16, 1997, the
Company's primary sources of liquidity have been existing cash balances and the
New Revolving Credit Facility. The New Revolving Credit Facility provides
additional lines of credit up to $20 million. As of July 5, 1998, the New
Revolving Credit Facility had outstanding advances of $15,650 in addition to
standby letters of credit in the amount of $3.9 million.
The Company accounts for the Asset Backed Certificate ("Certificate")
issued in connection with the Company's accounts receivable securitization
facility as a sale for financial reporting purposes (see Annual Report, Part IV,
Note 5). In January of 1998, the Company amended the related Receivables
Contribution and Purchase Agreement and the Pooling and Servicing Agreement to
increase the Certificate amount to$33 million from $28 million. The Company used
the entire amount of the increase in the first quarter.
During the six month period ended July 5, 1998, cash provided by
operating activities was $1.3 million versus cash used in operating activities
of $3.5 million in the six month period ended June 29, 1997. Cash used in
investing activities was $13.2 million and $10.2 million for the six month
periods in 1998 and 1997, respectively. Cash from financing activities was $11.9
million for the first six months of 1998 versus $22.7 million in the first six
months of 1997. The decrease in cash from financing was a result of lower debt
proceeds in 1998 versus 1997 related to the issuance of the Company's Senior
Notes in 1997 offset by higher financing needs related to investing activities
in 1998 versus 1997.
Consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") increased $.9 million from $6.9 million for the three
month period ended June 29, 1997 to $7.8 million for the three month period
ended July 5, 1998. EBITDA increased $4.9 million from $10.9 million for the six
month period ended June 29, 1997 to $15.8 million for the six month period ended
July 5, 1998. EBITDA margin, defined as EBITDA divided by revenue, was 8.6% for
both the three month period ended July 5, 1998 and the three month period ended
June 29, 1997. EBITDA margin was 8.7% for the six month period ended July 5,
1998 versus 7.0% for the six month period June 29, 1997.
The Company expects that available cash balances, cash flows from
operations and available borrowings under the revolving credit facility will be
sufficient to fund the Company's working capital, debt service and capital and
environmental expenditure requirements for the foreseeable future.
As discussed in Note 4 of Notes to Condensed Consolidated Financial
Statements, the Company has entered into an Agreement and Plan of Merger with a
subsidiary of MTL, Inc. pursuant to which all of the outstanding Common Stock of
the Company will be converted into the right to receive cash and stock of MTL,
Inc. See Note 4 of Notes to Condensed Consolidated Financial Statements.
10
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PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On June 22, 1998, the Company and the holder of all of the issued and
outstanding shares of the Company's Series B Cumulative Convertible Preferred
Stock entered into an agreement pursuant to which, immediately prior to the
effective time of the Merger, the preferred stock will automatically convert
into and be exchanged for 30,200 shares of the Company's Common Stock. In
connection with the conversion and exchange, the Company will also pay to the
holder an amount equal to all accrued and unpaid dividends on the preferred
stock.
The foregoing sale of securities did not involve underwriters and was
exempt from registration under the Securities Act of 1933, as amended, by virtue
of the exemptions provided Section 3(a)(9) or 4(2) thereof for, respectively,
(i) exchanges of securities and (ii) transactions not involving any public
offering, as the securities were sold to a person who had a preexisting business
relationship with the Company and who purchased for investment without a view to
further distribution.
Item 4. Submission of Matters to a Vote of Security Holders
On or about June 12, 1998, the Company's shareholders acted by
unanimous written consent to adopt resolutions authorizing the Company to enter
into the Merger and to carry out the related transactions contemplated by the
CLC Merger Agreement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule (Article V)
(b) Reports on Form 8-K
In a Form 8-K dated June 24, 1998, the Company
reported an Agreement and Plan of Merger had been
signed wherein Palestra Acquisition
Corp.("Palestra"), an affiliate of MTL, Inc. ("MTL")
will acquire all of the outstanding shares of common
stock of the Company through the merger of Palestra
with and into the Company, which thereby will become
a wholly-owned subsidiary of MTL.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHEMICAL LEAMAN CORPORATION
Date: August 10, 1998 By: /s/ David R. Hamilton
--------------------------
David R. Hamilton
Chairman, Chief Executive
Officer and President
Date: August 10, 1998 By: /s/ David M. Boucher
-------------------------
David M. Boucher
Senior Vice President, Chief
Financial Officer and Secretary
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