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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-24180
MTL INC.
(Exact Name of the Registrant as Specified in its Charter)
FLORIDA 59-3239073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3802 Corporex Drive
Tampa, Florida 33619
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code:
813-630-5826
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 December 31, 1998, there were 2,000,000 outstanding shares of the
Registrant's Common Stock, $0.01 par value.
Documents Incorporated by Reference: None.
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PART I
ITEM 1. BUSINESS
GENERAL
MTL is the largest bulk tank truck carrier in the United States based
on revenues. Through a network of 194 terminals located across the United
States and Canada, MTL transports a broad range of chemical products and
provides its customers with supplementary transportation services such as dry
bulk hauling, transloading, tank cleaning, third-party logistics, intermodal
services and leasing. Many of the chemical and chemical-related consumer
products transported by MTL require specialized trailers and experienced
personnel for safe, reliable and efficient handling. MTL is a core carrier for
many of the Fortune 500 companies who are engaged in chemical processing,
including The Procter & Gamble Company, Union Carbide, Dow Chemical, Allied
Signal, DuPont and PPG Industries.
In addition to MTL's own fleet operations, it uses affiliates and
owner-operators. Affiliates are independent companies which, through
comprehensive contracts with MTL, operate their terminals exclusively for MTL.
Owner-operators are independent contractors who, through contracts with MTL,
supply one or more tractors and drivers for MTL's or affiliate's use.
Management believes that the use of affiliates and owner-operators results in a
more flexible cost structure, increases MTL's asset utilization and increases
return on invested capital. MTL is a holding company and operates principally
through five main operating subsidiaries which are Montgomery Tank Lines,
Quality Carriers, Chemical Leaman Tank Lines, Fleet and Levy. Through these
principal transportation subsidiaries, as of December 31, 1998, MTL operated
8,003 trailers, of which 6,950 were owned or leased by MTL, and 3,679 tractors,
of which 905 were owned or held directly under lease by MTL.
On June 9, 1998, MTL was recapitalized through a merger with a
corporation controlled by Apollo Investment Fund III, LP and certain related
companies. On August 28, 1998, MTL completed its acquisition of Chemical Leaman
Corporation and its subsidiaries ("CLC"). Founded in 1913, CLC was, prior to
the CLC merger, the largest bulk tank truck carrier in the United States based
on revenues. The combination of CLC and MTL has united two of the leading bulk
transportation service providers under one holding company.
The for-hire tank truck industry is highly fragmented and MTL believes
that it consists of in excess of 200 tank truck carriers, with the top five
carriers representing $1.4 Billion or approximately 23.8% Of 1997 for-hire tank
truck industry revenues. Recently, however, the industry has begun to undergo
consolidation. MTL believes such consolidation is primarily the result of
economies of scale in the provision of services to a larger customer base,
cost-effective purchasing of equipment, supplies and services by larger
companies and the decision by many smaller, capital constrained operators to
sell their trucking businesses rather than make substantial investments to
modernize their fleets. As a result of its leading market position and
decentralized operating structure, MTL believes it is well-positioned to
benefit from these current industry trends.
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ORGANIZATION OF MTL
The following chart shows the organization of MTL and its subsidiaries as of
December 31, 1998.
[CHART OF PARENT MTL INC.]
DEVELOPMENT OF MTL
MTL was founded in 1965. MTL is a holding company, and operates
principally through its transportation subsidiaries. MTL has grown over the
past five years from 53 terminals to 194 terminals and has expanded its area of
geographic coverage. Much of this growth has been accomplished through
strategic acquisitions. MTL plans to continue to grow both its core business
and the variety of services it provides to its customers.
On June 11, 1996, MTL acquired all of the outstanding stock of Levy, a
Quebec-based tank truck carrier for a purchase price of $5.1 million in cash
plus the assumption of debt. Such purchase price was
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financed with borrowings from an unsecured line of credit, and was determined
based upon the fair market value of assets acquired and discounted, projected
profit potential of the Levy operation after consolidation with MTL. As of the
date of such acquisition, Levy serviced the chemical, petroleum and glass
industries with a fleet of over 400 trucks and tank trailers.
On June 9, 1998, Sombrero Acquisition Corp., a Florida corporation and
wholly-owned subsidiary of Apollo, merged with and into MTL with MTL as the
surviving corporation. In such merger, the holders of the outstanding shares of
common stock of MTL, other than certain exempted shares, received $40 in cash
for each share of the common stock of MTL held by them. The total consideration
that was paid to shareholders of MTL in connection with the merger consisted of
$194.6 million and included payments to holders of certain options of MTL, net
of the option exercise proceeds, and the implied value of shares which were
retained by management. MTL treated such merger as a recapitalization for
accounting purposes. Immediately following such merger, Apollo owned 85.4%,
certain other investors owned 4.4%, and management of MTL owned approximately
10.2% of the common stock of MTL. Immediately following such merger, on a fully
diluted basis, Apollo owned 76.9%, certain other investors owned 4% and
management of MTL owned 19.1% of the common stock of MTL.
The MTL merger, the private offering of notes, the credit agreement
and the equity investment are collectively referred to herein as the "MTL
Transactions."
On August 28, 1998 MTL acquired CLC. The shareholders of CLC received
an aggregate of $70.7 million in cash, $10.75 million of which amount was
placed in an escrow account for CLC shareholders' indemnification obligations,
and $5.0 million stated value of redeemable preferred stock. A portion of the
shares held by certain shareholders of CLC who are officers of CLC, having a
value of $1.1 million based on the per share consideration, were converted into
shares of MTL common stock.
On February 3, 1999, the Company entered into a settlement agreement
with former shareholders of CLC regarding the remaining consideration owed in
the CLC acquisition. The agreement calls for a payment of $3 million to the
former shareholders as a settlement of final payment of amounts owed under the
merger agreement and a cancellation of the 50 preferred shares issued in
connection with the acquisition.
All of the domestic, direct and indirect, subsidiaries of MTL,
including CLC and its subsidiaries, have guaranteed MTL's borrowings under the
new credit agreement and CLC and its subsidiaries have executed a supplemental
indenture to become guarantors of the notes pursuant to the terms of the
indenture.
The CLC merger, the related tender offer for certain notes of CLC,
the refinancing of the credit agreement in connection with such transactions,
the preferred and common equity investments made in
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connection with the acquisition of CLC and the related borrowings under the new
credit agreement are collectively referred to as the "CLC Transactions."
SERVICES PROVIDED
BULK TRANSPORTATION SERVICES
The primary service MTL provides its customers is the transportation
of bulk liquid and dry bulk chemical products. MTL provides its services
through both Company owned terminals and through affiliates. As of December 31,
1998, 59 of MTL's 194 terminals were operated by affiliates, and in 1998, on a
pro forma basis, affiliate terminals were responsible for approximately 23.6%
of MTL's total revenues. MTL, both at its MTL owned terminals and its
affiliates, relies heavily on the use of owner-operators for its tractor needs.
MTL believes that the combination of its affiliate program and its emphasis on
the use of owner-operators results in a flexible, low fixed cost operating
structure which provides MTL's customers with superior service levels.
AFFILIATE PROGRAM
Affiliates are established and maintained as independent corporations
in order to preserve the entrepreneurial motivation common to small businesses.
Each affiliate enters into a comprehensive contract with MTL pursuant to which
it is required to operate its terminal exclusively for MTL. Each affiliate is
supported by MTL's corporate staff and is linked via computer to MTL's central
management information system located at its Tampa, Florida headquarters.
Affiliate facilities are frequently staffed and managed by former MTL employees
who MTL believes have the operating experience and management capability to be
an effective affiliate.
Affiliates obtain various benefits from their relationship with MTL,
such as greater equipment utilization through participation in MTL's backhaul
program, access to and enhancement of customer relationships, driver
recruitment, safety training, expanded marketing resources and access to
sophisticated management information systems. Affiliates also benefit from
MTL's purchasing leverage for insurance coverage, tractors and trailers, fuel,
tires, and other significant operating requirements.
Affiliates predominantly operate under the marketing identity of
Montgomery and Quality and typically receive approximately 85% of gross
revenues from each shipment they transport. Affiliates are responsible for
their own operating expenses. MTL pays its affiliates weekly on the basis of
completed billings to customers. MTL collects all accounts receivable and
deducts any amounts advanced for fuel, insurance, or other miscellaneous
expenses, including charges, as applicable, for MTL's tank trailers, from these
weekly billing settlements.
Contracts with affiliates typically carry a one-year term, renewable
on a yearly basis unless terminated by either party. Contracts between MTL and
its affiliates also contain restrictive covenants which prohibit affiliates
from competing directly with MTL in a specific geographic area for a period of
one year following termination of a contract. In addition, MTL requires its
affiliates to meet certain operating and financial standards.
Affiliates engage their own drivers and personnel as well as utilize
the services of owner-operators who must meet MTL's operating and financial
standards. The affiliate assumes all operating expenses such as fuel, licenses,
fuel taxes and tank cleaning. However, MTL reimburses affiliates for certain
expenses passed through to its customers, such as tolls and scaling charges.
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Affiliates are required to pay for their own workers' compensation
coverage, which must meet both MTL and statutory coverage levels. Affiliates
retain responsibility for liabilities up to $10,000 per incident arising from
accidents, spills or contamination incurred while transporting a load.
Liability beyond the obligations of the affiliate is the responsibility of MTL
or its insurer. MTL makes additional insurance coverage available to its
affiliates for physical damage, running a tractor without a trailer, health and
life, and garage-keepers insurance for additional fees.
OWNER-OPERATORS
MTL and its affiliates extensively utilize owner-operators.
Owner-operators are independent contractors who, through a contract with MTL,
supply one or more tractors and drivers for MTL or affiliate use.
Owner-operators are compensated on the basis of a fixed percentage of the
revenue generated from the shipments they haul. The owner-operator must pay all
insurance, maintenance, highway use taxes. All owner-operators utilized by
either MTL or an affiliate must meet specified guidelines relating to driving
experience, safety records, tank truck experience, and physical examinations in
accordance with Department of Transportation ("DOT") regulations. MTL
emphasizes safety to its independent contractors and their drivers and
maintains driver safety inspection programs, safety awards, terminal safety
meetings and stringent driver qualifications.
MTL and its affiliates dedicate significant resources to recruiting
and retaining owner-operators. MTL attempts to enhance the profitability of its
owner-operators through purchasing programs which take advantage of MTL's
significant purchasing power. Programs cover such operating expense items as
fuel, tires and insurance. As of December 31, 1998 MTL had contracts with 2,251
owner-operators.
LEASING
In conjunction with its provision of bulk transportation services MTL
provides dedicated tractors and trailers to affiliates and other third parties,
including shippers. MTL believes its leasing business is among the largest in
the industry and provides a stable source of revenue and profitability. Trailer
lease terms range from one to 84 months and do not include a purchase option.
Tractor lease terms range from 12 to 60 months and may include a purchase
option.
TANK WASH OPERATIONS
To maximize equipment utilization, MTL relies on approximately 50 MTL
and affiliate tank wash facilities, as well as the services of other commercial
tank wash facilities located throughout its operating network. MTL and
affiliate facilities allow MTL to generate additional tank washing fees from
non-affiliated carriers and shippers. Management believes that the availability
of these facilities enables MTL to provide an integrated service package to its
customers.
INTERMODAL AND BULK RAIL OPERATIONS
MTL offers a wide range of intermodal services by transporting liquid
bulk containers on specialized chassis to and from a primary mode of
transportation such as rail, barge or vessel. MTL also provides rail
transloading services which enable products to be transloaded directly from
rail car to trailer. This allows shippers to combine the economy of long-haul
rail transportation with the flexibility of local truck delivery.
Through the CLC merger, MTL has expanded the range of
transportation-related services it provides to include the following:
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THIRD-PARTY LOGISTICS
An increasing number of chemical producers are seeking to outsource
their transportation logistics functions in order to focus on their core
competencies. In order to capitalize on this trend, MTL has established
third-party logistics capabilities. As a result of MTL'S size and reputation in
the industry, as well as a strategic focus on the provision of logistics
services as a value added service, a number of opportunities have arisen
allowing MTL the opportunity to provide a broader range of logistics management
services to selected chemical producers. Among these services are mode and
carrier selection for truck, rail, ocean and air transportation as well as rate
negotiation, carrier performance evaluation, cost analysis and, in some cases,
on site management of the shipper's captive transportation function.
OWNER-OPERATOR SERVICES
MTL, through its subsidiary, Power Purchasing, Inc., offers products
and services to both its internal and external fleet and to its owner-operators
at favorable prices. By offering purchasing programs which take advantage of
MTL's significant purchasing power for products and services such as tractors,
fuel and tires as well as automobile, general liability and workers'
compensation insurance, MTL believes it strengthens its relationships with its
owner-operators and results in improved driver recruitment.
CAPACITY MANAGEMENT SYSTEMS
MTL has developed load brokerage capabilities in order to enhance its
ability to handle its customers' trucking requirements. To the extent that MTL
does not have the equipment necessary to service a particular shipment, MTL
will broker the load to another carrier, thereby meeting the customer's
shipping needs and generating additional revenues for MTL, in the form of
commissions. Through its relationship with over sixty bulk carriers, MTL can
assure timely response to customer needs.
TRACTORS AND TRAILERS
As of December 31, 1998, MTL operated 8,003 trailers, of which
approximately 7,079 were owned or leased by MTL, 839 were owned by affiliates
and 85 were owned by shippers. A typical trailer measures 42.5 feet in length,
eight feet in width and 10.5 feet in height. The volume of the trailer ranges
from 5,000 to 7,000 gallons with a payload capacity of up to 55,000 pounds. The
cost of a new standard stainless steel trailer ranges from $47,000 to $64,000,
depending on specifications. The combined companies' capital expenditures for
new and used trailers in 1998 were $18.6 million for the purchase of
approximately 464 trailers, the majority of which represented additions to
MTL's fleet in connection with MTL's continuing expansion.
MTL generally acquires, and historically CLC acquired, new tractors
with a utilization period of approximately five years. MTL's general philosophy
is to purchase new trailers and utilize a routine general maintenance program
that will allow trailers to achieve a life of 15 to 20 years.
As of December 31, 1998, MTL operated approximately 3,679 tractors, of
which approximately 814 were operated by MTL drivers, 2,251 were operated by
owner-operators and 553 were operated by affiliates. Of the approximately 1,039
tractors owned by MTL, 225 were leased to affiliates and owner-operators. MTL
primarily purchases high-end tractors manufactured by Mack Trucks, Inc.,
Freightliner Corporation and/or Peterbilt Company. In 1998, MTL purchased 114
new and used tractors at costs ranging from $10,700 to $80,000 per tractor. MTL
attempts to standardize its equipment purchases which reduces training and
parts inventory costs and allows for a more standardized preventive maintenance
program.
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The majority of MTL and affiliate terminals provide preventive
maintenance and service and receive computer generated reports which indicate
when inspection and/or servicing of units is required. Major repairs are
performed by unaffiliated third parties. MTL complies with DOT periodic
inspection requirements by performing inspections on its tractors every 60 days
as part of its company-wide service/inspection program. MTL's maintenance
facilities are registered with DOT and are qualified to perform trailer
inspections and repairs for MTL's fleet and equipment owned by third parties.
The following table shows the age of trailers and tractors operated by
MTL and in service as of December 31, 1998, all numbers are approximated as of
such date:
<TABLE>
<CAPTION>
TRAILERS
<3 YRS 3-5 YRS 6-10 YRS 11-15 YRS 16-20 YRS >20 YEARS TOTAL
----- ------- -------- --------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Company 550 1,199 1,088 1,861 912 1,469 7,079
Affiliate 267 174 101 147 78 72 839
Leased 0 0 0 0 0 0 0
Shipper 5 7 30 15 6 23 85
Other 0 0 0 0 0 0 0
--- ----- ----- ----- --- ----- -----
Total 822 1,379 1,219 2,023 996 1,564 8,003
=== ===== ===== ===== === ===== =====
</TABLE>
<TABLE>
<CAPTION>
TRACTORS
<3 YRS 3-5 YRS 6-10 YRS 11-15 YRS 16-20 YRS >20 YEARS TOTAL
----- ------- -------- --------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Company 76 443 110 181 2 1 814
Affiliate 223 271 47 11 0 0 553
Owner/Operator 501 860 558 290 26 16 2,251
Leased Rented 1 58 2 0 0 0 61
--- ----- ----- ----- --- ----- -----
Total 801 1,631 718 483 28 18 3,679
=== ===== ===== ===== === ===== =====
</TABLE>
DRIVERS AND OTHER PERSONNEL
At December 31, 1998 MTL employed approximately 2,500 people. Of
these, approximately 818 were drivers. MTL also utilized the services of
approximately 2,179 owner-operators. Additionally, the affiliates employed
directly 641 drivers. MTL's remaining 1,680 employees, included 189 mechanics
and 236 tank washers. The balance were support personnel, including clerical and
administrative personnel and dispatchers.
Each terminal manager has direct responsibility for hiring drivers and
administrative personnel. Where appropriate, the terminal manager is also
responsible for hiring mechanics and customer service and tank wash personnel.
MTL drivers and owner-operators are hired in accordance with specific
guidelines regarding safety records, driving experience and a personal
evaluation of MTL's staff. MTL employs only qualified tank truck drivers with a
minimum of two years of over-the-road, tractor trailer experience. These
drivers are then enrolled in a rigorous training program conducted at one of
MTL's five safety schools.
Owner-operators are retained by MTL under contracts generally
terminable by either party upon short notice. However, they may be terminated
immediately under certain circumstances. Owner-operators retain responsibility
for their own operating expenses. MTL provides its employees with health,
dental, vision, life, and certain other insurance coverages. These and other
insurance programs are available to affiliates and owner-operators for a fee.
As of December 31, 1998, 232 employees in MTL terminals and
approximately 74 employees of three affiliate terminals were members of the
International Brotherhood of Teamsters.
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MARKETING
MTL conducts its marketing activities at both the national and local
levels. MTL employs 32 geographically dispersed sales managers who market MTL's
services primarily to national accounts. These sales managers have extensive
experience in marketing specialized tank truck transportation services. The
corporate sales staff also concentrates on developing dedicated logistics
opportunities. MTL's senior management is actively involved in the marketing
process, especially in marketing to national accounts. In addition, a
significant portion of MTL's marketing activities are conducted locally by
MTL's terminal managers and dispatchers who act as local customer service
representatives. These managers and dispatchers maintain regular contact with
shippers and are well-positioned to identify the changing transportation needs
of customers in their respective geographic areas.
CUSTOMERS
GENERAL
MTL's client base consists of customers located throughout North
America, including many Fortune 500 companies, such as Procter & Gamble, Union
Carbide, PPG Industries, Dow Chemical and DuPont. During 1998, no single
customer accounted for more than 5.1% of the combined companies' total
revenues. For the fiscal year ended December 31, 1998, MTL's 10 largest
customers accounted for 24.4%, of revenues.
CUSTOMER SERVICE AND QUALITY ASSURANCE
In order to achieve its goal of providing to its customers the highest
quality service and creating the highest level of customer and employee
satisfaction, MTL has implemented a quality assurance program at all levels of
MTL. MTL's Quality Assurance Program is designed to enable the achievement of
superior customer service through the development and implementation of
standardized operating procedures for each area within MTL. This includes
marketing and contracts, dispatch and terminal operations, safety, driver
hiring and training, trailer operations, tractor operations, and procedures for
administration functions, payroll and settlement, insurance, sales, data
processing, and fuel tax and permits.
MTL has developed and implemented a statistical measurement tool
called the Terminal Safety Ranking Profile. This profile establishes a uniform
method of evaluating, measuring and comparing the safety performance of all
field operation facilities. Through utilization of this tool, individual
facilities and regions of MTL can be evaluated for performance trends or areas
of deficiency needing improvement.
MTL has also implemented a Quality Corrective Action procedure which
is intended to identify, document and correct safety and service
non-conformance. In addition, MTL has established cross-functional teams known
as Continuous Process Improvement teams which have been charged with the
responsibility of identifying ways in which to improve MTL processes as well as
to manage the implementation of such improvements.
Most of CLC's tractor fleet, including both CLC-owned and
owner-operator tractors, are equipped with OmniTRACS(R) mobile satellite
communications systems which provide continuous monitoring and two-way
communications with tractors in transit. This information is used to track load
status, optimized the use of drivers and equipment and respond to emergency
situations. CLC's Internet Website enables customers to access the OmniTRACS(R)
system to view the exact status of their loads in transit at their convenience.
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ADMINISTRATION
MTL operates through 194 facilities located across the United States
and Canada. Each of the 135 MTL and 59 affiliate terminals operates as a
separate profit center, and terminal managers retain responsibility for most
operational decisions in their given service area. Effective supervision of a
service area requires maximum personal contact with both customers and drivers.
Therefore, to achieve mutually defined operating objectives, the functions of
dispatch, customer service, and general administration typically rest within
each separate terminal. Cooperation and coordination between the terminals is
further encouraged by MTL's backhaul policy. Any terminal which generates a
backhaul shipment for another terminal receives a commission on the revenue
generated by the backhaul shipment.
From its headquarters in Florida, management constantly monitors each
terminal's operating and financial performance, safety and training record, and
customer service effort. All terminals are required to adhere to MTL safety,
maintenance, customer service and other operating procedures, and the terminal
manager is responsible for insuring compliance with these strict guidelines.
Senior corporate executives and safety department personnel conduct unannounced
visits to verify terminal compliance. MTL attempts to achieve uniform service
and safety at all MTL and affiliate terminals, while simultaneously providing
terminal managers the freedom to focus on generating business in their region.
COMPETITION
The tank truck business is extremely competitive and fragmented. MTL
competes primarily with other tank truck carriers and private carriers in
various states. With respect to certain aspects of its business, MTL also
competes with intermodal transportation, railroads and less-than-truckload
carriers. Intermodal transportation has increased in recent years as reductions
in train crew size and the development of new rail technology have reduced
costs of intermodal shipping.
Competition for the freight transported by MTL is based primarily on
rates and service. Management believes that MTL enjoys significant competitive
advantages over other tank truck carriers because of MTL's low cost structure,
overall fleet size and age, national terminal network and tank wash facilities.
MTL's largest competitors are Matlack Systems, Inc., DSI Transports,
Inc. and Trimac Transportation Services, Ltd., an operation based in Canada.
There are approximately 195 other recognized tank truck carriers, most of whom
are primarily regional operators.
MTL also competes with other motor carriers for the services of MTL
drivers and owner-operators. MTL's overall size and its reputation for good
relations with affiliates and owner-operators have enabled it to attract a
sufficient number of qualified professional drivers and owner-operators.
Competition from non-trucking modes of transportation and from
intermodal transportation would likely increase if state or federal fuel taxes
were to increase without a corresponding increase in taxes imposed upon other
modes of transportation.
RISK MANAGEMENT AND INSURANCE/SAFETY
The primary risks associated with MTL's business are bodily injury and
property damage, workers' compensation claims and cargo loss and damage. MTL
maintains insurance against these risks and is subject to liability as a
self-insurer to the extent of the deductible under each policy. MTL currently
maintains liability insurance for bodily injury and property damage in the
amount of $100 million per incident, having no deductible. There is no
aggregate limit on this coverage.
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MTL currently maintains first dollar workers' compensation insurance coverage.
MTL is self-insured for damage or loss to the equipment it owns or leases, and
for cargo losses.
MTL employs a safety and insurance staff of in excess of 30
professionals. In addition, MTL employs specialists to perform compliance
checks and conduct safety tests throughout MTL's operations. MTL conducts a
number of safety programs designed to promote compliance with rules and
regulations and to reduce accidents and cargo claims. These programs include
training programs, driver recognition programs, an ongoing Substance Abuse
Prevention Program, driver safety meetings, distribution of safety bulletins to
drivers, and participation in national safety associations.
ENVIRONMENTAL MATTERS
MTL's activities involve the handling, transportation, storage, and
disposal of bulk liquid chemicals, many of which are classified as hazardous
materials, hazardous substances, or hazardous wastes. The combined companies'
tank wash and terminal operations engage in the storage or discharge of
wastewater and stormwater that may contain hazardous substances, and from time
to time MTL stores diesel fuel and other petroleum products at their terminals.
As such, MTL is subject to environmental, health and safety laws and regulation
by U.S. federal, state, local and Canadian government authorities.
Environmental laws and regulations are complex, change frequently and have
tended to become more stringent over time. There can be no assurance that
violations of such laws or regulations will not be identified or occur in the
future, or that such laws and regulations will not change in a manner that
could impose material costs on MTL.
MTL has environmental management programs that it carries out in
conjunction with its safety program. Facility managers are responsible for
environmental compliance, and for preparing semi-annual self-audit forms which
are submitted to the Vice President, Safety, Health & Environmental
Administration as well as to a regional environmental manager. The self-audits
are required to address operations, safety training and procedures, equipment
and grounds maintenance, emergency response capabilities, and wastewater
management. MTL also contracts with an independent environmental consulting
firm that conducts periodic, unscheduled, compliance assessments, which focus
on conditions with the potential to result in releases of hazardous substances
or petroleum, and which also include screening for evidence of past spills or
releases. MTL's relationship to its affiliates could, under certain
circumstances, result in MTL incurring liability for environmental
contamination attributable to an affiliate's operations, although MTL has not
incurred any such derivative liability in the past. MTL's environmental
management program has recently been extended to its affiliates.
MTL's wholly-owned subsidiary, EnviroPower, Inc., is staffed with
environmental experts who manage MTL's environmental exposure relating to
historical operations and develop policies and procedures, including periodic
audits of MTL's terminals and tank cleaning facilities, in order to minimize
the existence of circumstances that could lead to future environmental
exposure. EnviroPower is also MTL's principal interface with the U.S.
Environmental Protection Agency ("EPA") and various state environmental
agencies.
As a handler of hazardous substances, MTL is potentially subject to
strict, joint and several liability for investigating and rectifying the
consequences of spills and other environmental releases of such substances
either under CERCLA or comparable state laws. From time to time, MTL has
incurred remedial costs and regulatory penalties with respect to chemical or
wastewater spills and releases at its facilities and, notwithstanding the
existence of its environmental management program, MTL cannot assure that such
obligations will not be incurred in the future, nor that such liabilities will
not result in a material adverse effect on MTL's financial condition or results
of operations or its business reputation. As the result of environmental
studies conducted at its facilities in conjunction with its environmental
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management program, MTL has identified environmental contamination at certain
of such sites which will require remediation.
MTL has also been named a "potentially responsible party," or has
otherwise been alleged to have some level of responsibility, under CERCLA or
similar state laws for cleanup of off-site locations at which MTL's waste, or
material transported by MTL, has allegedly been disposed of. MTL has asserted
defenses to such actions and has not incurred significant liability in the
CERCLA cases settled to date. While MTL believes that it will not bear any
material liability in any current or future CERCLA matters, there can be no
assurance that MTL will not in the future incur material liability under CERCLA
or similar laws. See "Risk Factors -- Transporting Hazardous Substances Could
Create Environmental Liabilities" for a discussion of certain risks of MTL
associated with transporting hazardous substances.
CLC is currently solely responsible for remediation of the following
two federal Superfund sites:
Bridgeport, New Jersey. During 1991, CLC entered into a Consent Decree
with the EPA filed in the U.S. District Court for the District of New Jersey,
U.S. v. Chemical Leaman Tank Lines, Inc., Civil Action No. 91-2637 (JFG)
(D.N.J.), with respect to its site located in Bridgeport, New Jersey, requiring
CLC to remediate groundwater contamination. The Consent Decree required CLC to
undertake Remedial Design and Remedial Action ("RD/RA") related to the
groundwater operable unit of the cleanup.
In August 1994, the EPA issued a Record of Decision, selecting a
remedy for the wetlands operable unit at the Bridgeport site at a cost
estimated by the EPA to be approximately $7 million. In October 1998, the EPA
issued an administrative order that requires CLC to implement the EPA's
wetlands remedy. In April 1998, the federal and state natural resource damages
trustees indicated their intention to bring claims against CLC for natural
resource damages at the Bridgeport site. The trustees' have indicated that
their demand for natural resources damages is due to wetlands damage, certain
other conditions and oversight cost reimbursement. CLC is currently negotiating
with the state and federal trustees to enter a consent decree that will resolve
the natural resource damages claims. CLC has also entered an agreement in
principle to reimburse EPA'S past costs in investigating and overseeing
activities at the site over a three year period for which MTL has established
reserves. In addition, the EPA has investigated contamination in site soils. No
decision has been made as to the extent of soil remediation to be required, if
any.
CLC is in litigation with its insurers to recover its costs in
connection with the environmental cleanup at the Bridgeport site. Chemical
Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co., et at., 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
CLC 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 CLC and its
primary insurer settled all of CLC'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. In September 1997, the District Court issued an order allocating
liability among applicable policies. An appeal from the allocation is currently
pending before the Third Circuit. Since some of the CLC's insurance carriers
are insolvent, allocation of the costs among the insurers will affect the
amount of recovery CLC can expect to receive. CLC anticipates that it will
recover the majority of the costs associated with remediation of the Bridgeport
site, including attorneys fees and expenses, from its insurance carriers.
11
<PAGE> 13
]
West Caln Township, PA. The EPA has alleged that CLC disposed of
Hazardous Materials at the William Dick Lagoons Superfund Site in West Caln,
Pennsylvania. On October 10, 1995, CLC entered a Consent Decree with the EPA
which required CLC to (1) pay the EPA for installation of an alternate water
line to provide water to area residents;
(2) perform an interim groundwater remedy at the site; and
(3) conduct soil remediation. U.S. v. Chemical Leaman Tank Lines, Inc.,
Civil Action No. 95-CV-4264 (RJB) (E.D. Pa.).
CLC has paid all costs associated with installation of the waterline.
CLC has completed a hydrogeologic study, and has commenced activities for
construction of a groundwater treatment plant to pump and treat groundwater.
The EPA anticipates that CLC will operate the plant for about five years, at
which time the EPA will evaluate groundwater conditions and determine whether a
final groundwater remedy is necessary. Field sampling for soil remediation
recently commenced. The Consent Decree does not cover the final groundwater
remedy or other site remedies or claims, if any, for natural resource damages.
Other Environmental Matters. CLC has been named as PRP under CERCLA
and similar state laws at approximately 40 former waste treatment and/or
disposal sites including the Helen Kramer Landfill Site where CLC recently
settled its liability. In general, CLC is among several PRP's named at these
sites. CLC is also incurring expenses resulting from the investigation and/or
remediation of certain current and former CLC properties, including its
facility in Tonawanda, New York and its former facility in Putnam County, West
Virginia. As a result of its due diligence for the acquisition of CLC, MTL
identified other owned or formerly owned properties that may require
investigation and/or remediation. CLC's involvement at some of the above
referenced sites could amount to material liabilities, and there can be no
assurance that costs associated with these sites, individually or in the
aggregate, will not be material. MTL has established reserves to cover amounts
associated with the Helen Kramer Landfill, CLC's facility at Tonawanda, New York
and CLC's former facility in Putnam County, West Virginia.
REGULATION
As a motor carrier, MTL is subject to regulation. There are additional
regulations specifically relating to the tank truck industry including testing
and specifications of equipment and product handling requirements. MTL may
transport most types of freight to and from any point in the United States over
any route selected by MTL. The trucking industry is subject to possible
regulatory and legislative changes that may affect the economics of the
industry by requiring changes in operating practices or by changing the demand
for common or contract carrier services or the cost of providing truckload
services. Some of these possible changes may include increasingly stringent
environmental regulations or limits on vehicle weight and size. In addition,
MTL's tank wash facilities are subject to stringent local, state and federal
environmental regulations.
The Federal Motor Carrier Act of 1980 served to increase competition
among motor carriers and limit the level of regulation in the industry. The
Federal Motor Carrier Act also enabled applicants to obtain Interstate Commerce
Commission ("ICC") operating authority more readily and allowed interstate
motor carriers such as MTL greater freedom to change their rates each year
without ICC approval. The law also removed many route and commodity
restrictions on the transportation of freight. A series of federal acts,
including the Negotiated Rates Act of 1993, the Trucking Industry Regulatory
Reform Act of 1994 and the ICC Termination Act of 1995, further reduced
regulation applicable to interstate operations of motor carriers such as MTL,
and resulted in transfer of interstate motor carrier registration
responsibility to the Federal Highway Administration of DOT. On February 13,
1998, the Federal
12
<PAGE> 14
Highway Administration published proposed new rules governing registration to
operate by interstate motor carriers. That proposal may lead to revised
procedures for motor carriers like MTL to register to conduct interstate motor
carrier operations. The form of such revised procedures presently cannot be
predicted by MTL. See "Risk Factors--Increasing Trucking Regulations May
Increase Cost" for a discussion of the risks associated with increased
regulations.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. To a large degree, intrastate motor carrier operations
are subject to safety and hazardous material transportation regulations that
mirror federal regulations. Such matters as weight and dimension of equipment
are also subject to federal and state regulations. DOT regulations mandate drug
testing of drivers. To date, the DOT's national commercial driver's license and
drug testing requirements have not adversely affected the availability to MTL
of qualified drivers. Alcohol testing rules were adopted by the DOT in February
1994 and became effective in January 1995 for employers with 50 or more
drivers. These rules require certain tests for alcohol levels in drivers and
other safety personnel. MTL does not believe the rules will adversely affect
the availability of qualified drivers.
Title VI of The Federal Aviation Administration Authorization Act of
1994, which became effective on January 1, 1995, largely deregulated intrastate
transportation by motor carriers. This Act generally prohibits individual
states, political subdivisions thereof and combinations of states from
regulating price, entry, routes or service levels of most motor carriers.
However, the states retained the right to continue to require certification of
carriers, based upon two primary fitness criteria--safety and insurance--and
retained certain other limited regulatory rights. Prior to January 1, 1995, MTL
held intra-state authority in several states. Since that date, MTL has either
been "grandfathered in" or has obtained the necessary certification to continue
to operate in those states. In states in which MTL was not previously
authorized to operate, it has obtained certificates or permits allowing it to
operate or is in the process of obtaining said certificates in order of
importance to MTL.
From time to time, various legislative proposals are introduced
including proposals to increase federal, state, or local taxes, including taxes
on motor fuels. MTL cannot predict whether, or in what form, any increase in
such taxes applicable to MTL will be enacted.
SEASONALITY
The business of MTL is subject to limited seasonality, with revenues
generally declining slightly during winter months, namely the first and fourth
fiscal quarters, and over holidays. Highway transportation can be adversely
affected depending upon the severity of the weather in various sections of the
country during the winter months. MTL's operating expenses also have been
somewhat higher in the winter months, due primarily to decreased fuel
efficiency and increased maintenance costs of revenue equipment in colder
months.
RECENT DEVELOPMENTS
On March 4, 1999 MTL completed its exchange offer of $100,000,000
aggregate principal amount of its 10% Senior Subordinated Notes due 2006 and
$40,000,000 aggregate principal amount of Floating Interest Rate Subordinated
Term Securities due 2006 for an equal aggregate principal amount of its 10%
Series B Senior Subordinated Notes due 2006 and its Series B Floating Interest
Subordinated Term Securities due 2006.
On February 2, 1999 MTL started the reorganization of its U.S.
subsidiaries, wherein its two principal chemical hauling operations, Montgomery
Tank Lines and Chemical Leaman Tank Lines, will be integrated into one entity
named Quality Carriers, Inc.
13
<PAGE> 15
ITEM 2. PROPERTIES
As of December 31, 1998 MTL's facilities were located in the following
cities:
<TABLE>
<CAPTION>
MTL OPERATED AFFILIATE OPERATED
<S> <C> <C> <C> <C>
Albany, NY* Fall River, MA Palmer, MA Akron, OH Norfolk, VA
Ames, TX Follansbee,WV Pasadena, TX Apex, NC Owensboro, KY
Appleton, WI Freeport, TX*(1) Pedricktown, NJ Atlanta, GA Parker, PA
Atlanta, GA(1)* Friendly, WV* Philadelphia, PA Augusta, GA Pasadena, TX
Augusta, GA(1)* Ft. Worth, TX* Pittsburgh, PA Austin, MN Pearisburg, VA
Avenel, NJ Gales Ferry, CT Point Comfort, TX Avondale, PA Philadelphia, PA
Baltimore, MD* Geismar, LA Port Arthur, TX* Barberton, OH Pittsburgh, PA
Bangor, ME Greensboro, NC* Portland, OR Baton Rouge, LA Prairie Ville, LA
Baton Rouge, LA(1) Greenup, KY Proctor, WV* Birmingham, AL Roanoke, VA
Bayonne, NJ Greer, SC Rathway, NJ Bradford, PA Salisbury, NC
Beaumont, TX Hagerstown, MD Rock Hill, SC* Branford, CT Savannah, GA
BenSalem, PA Hayward, CA(1) Ross, OH* Bristol, WI St. Louis, MO
Bergen, NY Hopewell, VA(1) Saddle Brook, NJ Calvert City, KY Tampa, FL
Branford, CT* Houston, TX(3)* Savannah, GA(1) Charleston, SC Toledo, OH
Bridgeport, NJ* Ironton, OH Security, MD* Chattanooga, TN Triadelphia, PA
Bristol, PA* Jessup, MD South Gate, CA(1) Cincinnati, OH Tuscaloosa, AL
Brownsville, TX Jonesboro, GA* South Hampton, PA Columbus, OH Wallace, SC
Brunswick, GA Kalamazoo, MI(1)* South Pointe, OH Detroit, MI Wilmington, IL
Buffalo, NY* Kelso, WA Spartansburg, SC* Dumfries, VA
Calvert City, KY Lafayette, IN St. Albans, WV Elkridge, MD
Carpentersville, IL Lake Charles, LA(1) St. Louis, MO Freeport, TX
Carteret, NJ Lansing, MI Summit, IL* Garden City, GA
Castleton, VT Laredo, TX Syracuse, NY* Gary, IN(1)
Channelview, TX Lima, OH Tonawanda, NY Glenmoore, PA
Charleston, SC(1)* Luling, LA Tucker, GA Grafton, VA
Charleston, WV* Marcus Hook, PA Waterford, NY Greensboro, NC
Chattanooga, TN(3)* Mechanicsburg, PA Wilkes-Barre, PA* Houston, TX
Chesnee, SC* Memphis, TN(1)* Williamsport, PA* Inwood, WV
Chester, SC Midland, MI* Wilmington, NC* Jacksonville, FL
Chicago, IL(2)* Mobile, AL Kansas City, KS
Claymont, DE Morgantown, WV* Canadian Provinces: Lansing, IL
Columbus, GA Mt. Holly, NC ------------------- Leeds, SC
Columbus, OH(1) Nazareth, PA* Coteau-du-Lac, Quebec* Louisville, KY(1)
Concord, NC* Neville Island, PA Montreal, Quebec(1)* Mediapolis, IA
Conroe, TX Newark, NJ(1)* North Bay, Ontario Memphis, TN
Decatur, AL North Haven, CT Oakville, Ontario* New Castle, DE(1)
Detroit, MI* Oshkosh, WI Sarnia, Ontario New Orleans, LA
East Rutherford, NJ* Ozark, AK Quebec City, Quebec Niagara Falls, NY
Ville Becancour, Quebec
</TABLE>
- ------------
(1) Two terminals in this city.
(2) Four terminals in this city.
(3) Three terminals in this city.
* Indicates that the MTL operated terminal is owned by MTL.
14
<PAGE> 16
In August 1996, MTL entered into a modified affiliate relationship
with Transportes Especializados Antonio de la Torre e Hijos, S.A. de C.V. and
operates from its two terminals in Guadalajara and Mexico City, Mexico.
In addition to the properties listed above, MTL also owns three
facilities in the U.S., including: a 6-acre property in Macomb, Mississippi; an
undeveloped, 3-acre lot in Ruskin, Florida; and a tank wash facility in
Philadelphia.
MTL's executive and administrative offices are located in Tampa,
Florida. MTL's former facility, located in Plant City, Florida was sold by
MTL to a former shareholder on December 15, 1998.
ITEM 3. LEGAL PROCEEDINGS
In addition to those items disclosed under "Business - Environmental
Matters," MTL from time to time is involved in routine litigation incidental to
the conduct of its business. MTL believes that no litigation pending against
it, if adversely determined, would have a material adverse effect on its
consolidated financial position or results of operations.
On August 28, 1998, BMI Transportation, Inc., RBM Transport, Inc.
RBM-Va. Transport, Inc. and Bulk Storage, Inc. filed suit against CLC in the
United States Bankruptcy Court for the Southern District of New York. The
plaintiffs allege that CLC owes them $1,104,671.00, plus interest, which
represents the remainder of the $1,500,000.00 hold back of the purchase price
CLC paid in connection with its acquisition of the majority of the assets of
Fleet from the plaintiffs on June 28, 1996. This claim was settled for $850,000
in December 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MTL did not submit any matters to a vote of its security holders during the
fourth quarter of the year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common equity of
MTL.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial information
set forth below is qualified in its entirety by reference to, and
should be read in conjunction with, the Consolidated Financial
Statements and notes thereto of MTL included elsewhere in this report
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The consolidated financial information set forth below for and as of each of
the years in the five-year period ended December 31, 1998 has been derived from
audited consolidated financial statements of MTL.
15
<PAGE> 17
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues......................... $168,290 $190,054 $235,599 $286,047 $397,738
-------- -------- -------- -------- --------
Costs and expenses:
Operating expenses, excluding
depreciation and amortization.......... 145,108 163,396 203,487 247,619 358,129
Option Expense............................. -- -- -- -- 14,678
Depreciation and amortization.............. 8,213 10,156 13,892 17,335 31,043
Interest expense, net...................... 4,172 3,468 3,494 3,175 19,791
Other expenses (income).................... 252 (176) (214) 39 (164)
-------- -------- -------- -------- --------
Total costs and expenses................... 157,745 176,844 220,659 268,168 408,799
-------- -------- -------- -------- --------
Income (loss) before taxes................. 10,545 13,210 14,940 17,879 (11,061)
Provision (benefit) for income taxes....... 4,306 5,408 6,103 7,396 (4,047)
Minority Interest.......................... (74)
-------- -------- -------- -------- --------
Net income (loss) before
extraordinary item..................... $ 6,239 $ 7,802 $ 8,837 $ 10,483 $ (7,088)
======== ======== ======== ======== ========
OTHER DATA:
Net cash provided by used in
operating activities................... $ 17,308 $ 18,090 $ 22,304 $ 33,832 $ 16,854
Net cash used in investing
activities............................. (21,395) (30,089) (21,780) (31,690) (289,533)
Net cash (used in) provided by
financing activities................... 4,366 11,597 (135) (1,503) 271,413
Ratio of earnings to fixed
charges (1)............................ 3.2x 4.4x 4.1x 4.8x --
EBITDA (3)................................ 23,182 26,658 32,112 38,428 39,609
EBITDA without option
expense (2)............................ 23,182 26,658 32,112 38,428 54,287
CAPITAL expenditures....................... 24,341 32,099 20,577 35,121 29,765
Number of terminals at end of period....... 59 66 70 80 194
Number of trailers operated at end
of period.............................. 2,869 3,190 3,728 4,148 8,003
Number of tractors operated at end
of period.............................. 1,196 1,305 1,649 1,915 3,679
CONSOLIDATED BALANCE SHEET DATA
AT PERIOD END:
Total assets............................... $126,219 $145,740 $173,604 $194,036 $583,246
Long-term obligations, including
current portion........................ 40,538 48,844 57,329 55,098 441,331
Stockholders' equity (deficit)............. 52,247 60,058 68,913 79,532 (48,320)
</TABLE>
- -----------------
(1) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and one-third of the rent expense for operating leases, which management
believes is a reasonable approximation of an interest factor. For the year
ended December 31, 1998 earnings were insufficient to cover fixed charges
by $11.1. Excluding the nonrecurring expense related to the vesting of MTL
stock options of $14.7 million, the ratio would have been 1.17x for the
year ended December 31, 1998.
16
<PAGE> 18
(2) During the year ended December 31, 1998, MTL incurred a non-recurring
expense related to the exercise of options of MTL stock in connection with
the MTL Transactions. Excluding this expense, EBITDA would have been $54.3
million for the year ended December 31, 1998.
(3) EBITDA represents earnings before extraordinary items, net interest
expense, income taxes, depreciation and amortization, minority interest
expenses and other operating income (expense). EBITDA is presented because
it is a widely accepted financial indicator used by certain investors and
analysts to analyze and compare companies on a basis of operating
performance. EBITDA is not intended to present cash flows for the period,
nor has it been presented as an alternative to operating income as an
indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles. EBITDA does not
necessarily represent cash flow available for discretionary use by
management due to debt service requirements, functional requirements for
capital replacement and expansion and other commitments and uncertainties.
See the Consolidated Financial Statements and the related notes of MTL
appearing elsewhere in this prospectus.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of MTL should be read in conjunction with MTL's consolidated
financial statements and the related notes included elsewhere in this report.
OVERVIEW
MTL's revenue is principally a function of the volume of shipments for
the bulk chemical industry, MTL's market share as opposed to that of its
competitors and the amount spent on tank truck transportation as opposed to
other modes of transportation such as rail. The volume of shipments of chemical
products are in turn affected by many other industries, including consumer and
industrial products, automotive, paint and coatings, and paper, and tend to
vary with changing economic conditions.
The principal components of MTL's operating costs include purchased
transportation, salaries, wages, benefits, annual tractor and trailer
maintenance costs, insurance and fuel costs. MTL's use of affiliates and
owner-operators provides a more flexible cost structure, increases MTL's asset
utilization and increases return on invested capital.
MTL has historically focused on maximizing cash flow and return on
invested capital. MTL's affiliate program has greatly reduced the amount of
capital needed for MTL to maintain and grow its terminal network. In addition,
the extensive use of owner-operators reduces the amount of capital needed by
MTL to build its fleet of tractors, which have shorter economic lives than
trailers. These factors have allowed MTL to concentrate its capital spending on
its trailer fleet where it can achieve superior returns on invested capital
through MTL's transportation operations and leasing to third parties and
affiliates.
MTL also provides leasing, tank cleaning, logistics and intermodal
services. Revenues from these supplementary services accounted for
approximately 10.7% of MTL's revenues for the year ended December 31, 1998.
MTL pursues a business strategy of growth through acquisitions. In
1996, MTL acquired all of the outstanding stock of Levy Transport Ltd., a
Quebec-based tank truck carrier, for $5.1 million in cash plus the assumption of
debt. Levy services the chemical, petroleum and glass industries with a fleet of
17
<PAGE> 19
over 400 tractors and trailers. MTL intends to continue providing
these services and expand upon existing customer relationships by providing
MTL's supplementary services as well as increasing the fleet size in these
markets. Through its acquisition of CLC in August 1998, MTL was further able to
expand its service capabilities and its geographic coverage.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
Revenues for 1998 were $397.7 million, an increase of $111.7 million
or 39.1%, over 1997 revenues. In 1998, transportation revenues accounted for
approximately 89.3% of revenues while supplementary services including leasing,
tank cleaning, logistics and intermodal services accounted for approximately
10.7% of total revenues. The primary reason for the increase in revenues is the
inclusion of CLC since August 28, 1998. MTL attributes the balance of
its additional increased revenue to sustained strength in chemical industry
shipment volumes nationwide and continued implementation of both its affiliate
and core carrier strategies.
MTL operated 194 terminals at December 31, 1998 compared to 80
terminals at December 31, 1997. MTL approximately doubled the size of its fleet
during this time period, increasing operated trailers from 4,148 to 8,003 and
increasing operated tractors from 1,915 to 3,488. These increases are primarily
attributable to the acquisition of CLC.
Operating expenses, excluding depreciation and amortization totaled
$358.1 million in 1998, an increase of $110.5 million, or 44.6%, from 1997.
Operating expenses as a percentage of operating revenues increased from 92.6%
for 1997, to 97.9% for 1998. This increase in operating expenses as a
percentage of operating revenues was attributable to the $14.7 million pre-tax
cost of payouts to the holders of stock options made in connection with the MTL
Transactions and bonuses paid in connection with the CLC Transactions. The
$109.5 million balance of increased operating expenses was due to the increased
revenue as discussed above and the inclusion of CLC since August 28, 1998,
which has historically operated at a higher operating expense ratio than MTL.
Adjusted for the nonrecurring compensation paid to optionees and employees,
total operating expense was $374.5 million or 94.2% in 1998. The adjusted
operating ratio declined due to the acquisition of CLC which has historically
had a higher operating expense ratio.
Depreciation and amortization expense increased $13.7 million, or
79.1%, in 1998 from 1997 due to the assets acquired from CLC and increases in
the number of terminals and MTL operated trailers and tractors.
Net interest expense increased $16.6 million or 523.3%, in 1998 as a
result of higher average outstanding debt balances during 1998 as compared with
1997. The additional debt was incurred in connection with both the MTL and CLC
Transactions.
18
<PAGE> 20
An income tax benefit of $4.0 million was recorded in 1998, compared
to income tax expense of $7.4 million recorded in the same period in 1997. This
resulted from the pre-tax loss of $11.1 million in 1998 compared to pre-tax
income of $17.9 million in 1997.
MTL's net loss was $10.7 million, after extraordinary loss on early
debt extinguishment in 1998 compared to net income of $10.5 million in 1997.
This decrease of $21.2 million was attributable to the payout to the holders of
stock options and bonuses discussed above and the additional interest expense
associated with increased debt levels.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Revenues for 1997 were $286.0 million, an increase of $50.4 million,
or 21.4%, over 1996 revenues. Transportation revenues increased $48.6 million,
or 22.3%, due to strong internal growth and the impact of a full year of Levy's
operating results. In 1997, transportation revenues accounted for approximately
93.1% of revenues while supplementary services including leasing, tank
cleaning, logistics and intermodal accounted for approximately 6.9% of total
revenues. Revenues from these supplementary services increased $1.9 million, or
10.6%, compared to 1996, primarily as a result of increased equipment rental
income from both affiliates and MTL's customers.
MTL operated 80 terminals at December 31, 1997 compared to 70
terminals at December 31, 1996. MTL also expanded the size of its fleet during
this time period, increasing operated trailers from 3,728 to 4,148, or 11.3%,
and increasing operated tractors from 1,649 to 1,915, or 16.1%.
Operating expenses, excluding depreciation and amortization, totaled
$247.6 million in 1997, an increase of $44.1 million, or 21.7%, from 1996.
Operating expenses as a percentage of operating revenues increased from 86.4%
in 1996 to 86.6% in 1997. This increase in operating expenses as a percentage
of operating revenues was primarily attributable to increases in purchased
transportation expenses, selling and administrative expenses and insurance and
claims expenses, offset by decreases in compensation expense and fuel supplies
and maintenance expenses. This is partially a result of a full year's impact of
the acquisition of Levy, which had higher operating expenses as a percentage of
operating revenues than MTL.
Depreciation and amortization expense increased $3.4 million, or
24.8%, principally due to a higher amount of depreciable assets associated with
increases in the number of terminals and MTL operated trailers and tractors.
Interest expense decreased $0.3 million, or 9.1%, in 1997 as a result
of lower average outstanding debt balances during 1997 as compared with 1996.
An income tax provision of $7.4 million was recorded in 1997, which
was higher than the income tax provision recorded in 1996 by $1.3 million, or
21.2%. The increase resulted from the increase in income before taxes.
MTL's net income was $10.5 million in 1997 compared to net income of
$8.8 million in 1996. This increase of $1.7 million, or 18.6%, was primarily
attributable to the increase in revenues achieved without a proportionate
increase in costs and administrative expenses.
19
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Through its subsidiaries, MTL's primary source of liquidity is cash
flow from operations and availability under the new credit agreement. MTL
generated $22.3 million, $33.8 million and $16.9 million from operating
activities in 1996, 1997 and 1998, respectively. The decrease in cash provided
by operating activities reflects the additional cash charges in 1998 relating
to the MTL Transactions and the CLC Transactions.
Capital expenditures totaled $20.6 million, $35.1 million and $29.8
million in 1996, 1997 and 1998, respectively. In the last three years, MTL has
spent in excess of $50 million to purchase over 1,000 trailers for both
replacement and to facilitate future growth. In addition, MTL has spent $35
million on tractors and other assets. There are no material commitments for
capital expenditures as of December 31, 1998.
Net cash used in investing activities in 1996, 1997 and 1998 was $21.8
million, $31.7 million and $289.5 million, respectively. The large increase in
1998 was the result of the CLC acquisition. Net cash used in financing
activities in 1996 and 1997 showed net cash used of $0.1 million and $1.5
million, respectively. Net cash provided by financing activities in 1998 was
$271.4 million. The large increase in 1998 was due to issuance of debt related
to the MTL Transactions and the CLC Transactions.
In June 1998, MTL underwent a recapitalization, which provided the
necessary capital resources to support future growth opportunities. In August
1998, MTL completed the acquisition of CLC. After giving effect to the MTL
Transactions and CLC Transactions, MTL is capitalized with $140.0 million
principal amount of notes, a $360.0 million new credit agreement, $68.0 million
in equity investments by Apollo and affiliates of two of the initial purchasers
and members of management of MTL, and $31.9 million in preferred and common
equity investments by certain of MTL's and CLC's shareholders, including
Apollo. The notes are unsecured senior subordinated obligations of MTL, ranking
subordinate in right of payment to all existing and future senior debt of MTL.
Upon consummation of the CLC merger, CLC and its subsidiaries became guarantors
of the notes and guarantors under the new credit agreement. The new credit
agreement provides for a term-loan facility consisting of a $90.0 million
Tranche A Term Loan maturing on June 9, 2004, a seven-year $105.0 million
Tranche B Term Loan, an eight-year $90.0 million Tranche C Term Loan and a
$75.0 million revolving credit facility available until June 9, 2004. As of
December 31, 1998, MTL's long-term debt, including current maturities, was
$441.3 million.
MTL's primary cash needs consist of capital expenditures and debt
service. MTL incurs capital expenditures for the purpose of maintaining its
fleet of owned tractors and trailers, replacing older tractors and trailers,
purchasing new tractors and trailers, and maintaining and improving
infrastructure, including the integration of the information technology system.
MTL and CLC have historically sought to acquire smaller local
operators as part of their programs of strategic growth. Following the CLC
merger, both companies continue to evaluate potential acquisitions in order to
capitalize on the consolidation occurring in the industry and expect to fund
such acquisitions from available sources of liquidity, including borrowings
under the revolving credit facility.
While uncertainties relating to environmental, labor and regulatory
matters exist within the trucking industry, management is not aware of any
trends or events likely to have a material effect on liquidity or the
accompanying financial statements. MTL believes that after giving effect to the
MTL Transactions and the CLC Transactions and the incurrence of indebtedness
related thereto, based on current levels of operations and anticipated growth,
on a consolidated basis, MTL's cash flow from operations, together with
available sources of liquidity,
20
<PAGE> 22
including borrowings under the revolving credit facility, will be sufficient
over the next several years to fund anticipated capital expenditures and make
required payments of principal and interest on its debt, including payments due
on the notes and obligations under the new credit agreement.
YEAR 2000
Some of MTL's older computer programs and systems were written using
two digits rather than four to define the applicable year. As a result, those
computer programs have time sensitive software that recognizes a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
MTL has developed a plan to ensure that its systems are compliant with
the requirements to process transactions in the year 2000. Most of MTL's
combined systems implementation effort is now directed toward the migration of
the CLC billing, settlement and financial reporting systems from mainframe
based systems which are not Year 2000 compliant. The target completion date for
change over of the critical systems is September 30, 1999. The estimated cost
of MTL's completed and remaining replacement and modification for the Year 2000
issue is not expected to be material to MTL's earnings or financial position.
Due to cost considerations and MTL's belief that its critical systems will be
compliant by the end of the Third quarter of 1999, MTL has determined not to
develop or maintain a contingency plan.
MTL has also done an assessment of its non-IT systems. MTL has
determined that it currently owns approximately 300 Qualcom units, which are
located in its trucks and deal with the communication to the trucks, which have
embedded chips that are not Year 2000 compliant. These units are not an
integral piece of the operation of MTL's business. These units have been
earmarked to be replaced over the next year and MTL does not expect the costs
of such units to be material. In addition to assessing its own Year 2000
compliance, MTL has had discussions with many of its major vendors and
suppliers regarding their Year 2000 compliance. MTL has already received
letters of compliance from many of its material partners and is in the process
of collecting such letters from others.
There can be no assurance that MTL's timetable will be met, that the
programming changes required to accommodate current billing and driver
settlement requirements will be completed in this time frame, or that such
changes will not negatively impact MTL's ability to meet its customers or its
drivers requirements or that MTL's failure to maintain a contingency plan will
not have a material adverse effect on MTL.
FORWARD LOOKING STATEMENTS
Some of the statements contained in this report discuss future
expectations, contain projections or results of operation or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions. Important factors that could cause our
actual results to be materially different from the forward-looking statements
include general economic conditions, cost and availability of diesel fuel,
adverse weather conditions and competitive rate fluctuations. Future financial
and operating results of MTL may fluctuate as a result of these and other risk
factors as detailed from time to time in company filings with the Securities
and Exchange Commission.
21
<PAGE> 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivatives
The Company utilizes derivative financial instruments to reduce its
exposure to market risks from changes in interest rates and foreign exchange
rates. The instruments primarily used to mitigate these risks are interest rate
swaps and foreign exchange contracts. All derivative instruments held by the
Company are designated as hedges and accordingly, the gains and losses from
changes in derivative fair values are deferred. Gains and losses upon
settlement are recognized in the statement of operations or recorded as part of
the underlying asset or liability as appropriate. The Company is exposed to
credit related losses in the event of nonperformance by counterparties to these
financial instruments; however, counterparties to these agreements are major
financial institutions; and the risk of loss due to nonperformance is
considered by management, to be minimal. The Company does not hold or issue
interest rate swaps or foreign exchange contracts for trading purposes.
The Company currently has approximately $340 million of variable
interest debt. The Company has entered into interest rate swap agreements
designated as a partial hedge of the Company's portfolio of variable rate debt.
The purpose of these swaps is to fix interest rates on variable rate debt and
reduce certain exposures to interest rate fluctuation. At December 31, 1998,
the Company had interest rate swaps with a notional amount of $100 million
(none at December 31, 1997). The notional amounts do not represent a measure of
exposure of the Company. The Company will pay the counterparties interest at a
fixed rate ranging from 5.41% to 5.48%, and the counterparties will pay the
Company interest at a variable rate equal to LIBOR. The LIBOR rate applicable
to these agreements at December 31, 1998 was 5.28%. These agreements mature and
renew every three months and expire on September 2, 2001. A 10% fluctuation in
interest rates would have a $1.9 million impact net of interest rate swap
agreements, on future annual earnings.
The Company has entered into short-term foreign currency agreements to
exchange US dollars (US$1,300) for Canadian dollars (CN $2,004). The purpose of
these agreements are to hedge against fluctuations in foreign currency exchange
rates. The Company is required to make US dollar payments at fixed exchange
rates ranging from 1.5398 to 1.545, and as such the market risk based upon a
10% fluctuation in the exchange rate is immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial statements and exhibits filed under this item are listed
in the index appearing in Item 14 of this report.
(b) Quarterly financial information (in thousands except per share
amounts).
22
<PAGE> 24
<TABLE>
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Operating revenues.............................. $72,379 $76,243 $106,843 $142,273
Operating income or (loss)...................... 5,354 (7,408) 5,282 5,338
Income or (loss) before taxes................... 4,593 (9,936) (1,302) (4,416)
Net income or (loss) attributable to
common stockholders........................... 2,709 (6,416) (3,397) (3,642)
Diluted Net income or (loss) per common share... .57 (1.67) (.97) (1.82)
1997
Operating revenues.............................. $67,384 $71,805 $73,944 $72,914
Operating income................................ 4,687 5,516 5,734 5,156
Income before taxes............................. 3,960 4,707 4,943 4,270
Net income attributable to common stockholders.. 2,334 2,755 2,928 2,466
Diluted Net income per common share............. .50 .59 .62 .52
1996
Operating revenues.............................. $51,020 $58,804 $62,987 $62,788
Operating income................................ 4,162 4,719 5,102 4,237
Income before taxes............................. 3,426 3,903 4,137 3,474
Net income attributable to common stockholders.. 2,036 2,288 2,445 2,068
Diluted Net income per common share............. .45 .50 .53 .45
</TABLE>
Fluctuations in the second, third and fourth quarters of 1998 are
primarily due to the MTL recapitalization on June 9, 1998 and acquisition of
CLC on August 28, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the directors and
executive officers of MTL as of December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MTL
- -------------------------------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Charles J. O'Brien...................................... 61 Director, Chairman of the Board, President and
Chief Executive Officer
Richard J. Brandewie.................................... 44 Director, Senior Vice President, Treasurer and Chief
Financial Officer
Marvin E. Sexton........................................ 54 Director, President of Montgomery Tank Lines
Joshua J. Harris........................................ 34 Director
Michael D. Weiner....................................... 46 Director
Robert A. Katz.......................................... 31 Director
Marc J. Rowan........................................... 35 Director
John H. Kissick......................................... 56 Director
Philip J. Ringo......................................... 56 Director
</TABLE>
The directors hold office until the next annual meeting of
shareholders or until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors.
23
<PAGE> 25
CHARLES J. O'BRIEN, JR. joined MTL in 1989 in connection with the
acquisition of Quality-O'Boyle, Inc., at which time he was appointed as MTL's
Chief Operating Officer and elected to the Board of Directors. Since 1991, he
has served as MTL's President and Chief Executive Officer. On September 30,
1998, he was appointed as MTL's Chairman of the Board. Prior to joining MTL, he
was a controlling shareholder of Quality-O'Boyle, Inc. from January 1977 to
February 1989. Prior to his association with Quality-O'Boyle, Inc., he held
various positions with Matlack Systems, Inc. from April 1962 through December
1976. He served as Matlack's Chief Executive Officer from 1969 to 1976 and
served as a director of Rollins International, Inc., Matlack's parent company.
RICHARD J. BRANDEWIE has been employed by MTL since June 1992 as Chief
Financial Officer and Treasurer, and in 1996 he was appointed Senior Vice
President of Finance. He served as a director of MTL from 1988 to 1992. Prior
to joining MTL, he served as a General Partner of South Atlantic Venture Fund I
& II, Limited Partnerships where he was employed from November 1985 through
June 1992. From June 1980 through November 1985, he served concurrently as Vice
President of Doan Resources Venture Fund and as General Partner of Michigan
Investment Fund and MBW Venture Partners. Prior to his venture capital
experience, he served as an accountant and financial analyst for the Ford Motor
Company from 1977 to 1979. Mr. Brandewie became a director of MTL in June 1998.
MARVIN E. SEXTON joined MTL in September 1996 as President of
Montgomery Tank Lines, one of MTL's principal operating subsidiaries. Mr.
Sexton joined MTL from BET plc., the former parent company of United Transport
America, where he served as the Sector Director/Distribution North America. Mr.
Sexton was formerly President of United Transport America. The United Transport
group of companies includes: DSI Transport, Redwing Carriers and Ward
Transport. He joined DSI Transport in 1974 and subsequently became its
President and Chief Executive Officer in 1985. He currently serves as the
Chairman of the Board of Directors of the National Tank Truck Carriers, Inc.
and is a member of the Association of the Chemical Industry of Texas and the
National Council of Physical Distribution. Mr. Sexton became a director of MTL
in June 1998.
JOSHUA J. HARRIS is a principal of Apollo and has served as a Vice
President of Apollo Management and Apollo Advisors, LP, an affiliated
investment manager ("Apollo Advisors"), since 1990. Prior to that time, Mr.
Harris was a member of the Mergers and Acquisitions Department of Drexel
Burnham Lambert Incorporated. Mr. Harris is also a director of Converse Inc.,
Florsheim Group Inc., NRT, Incorporated, SMT Health Services Inc., Breuners
Home Furnishings Corporation and Alliance Imaging, Inc. Mr. Harris became a
director of MTL in June 1998.
MICHAEL D. WEINER is a principal of Apollo and has served as a Vice
President and general counsel of Apollo Management and Apollo Advisors, since
1992. Prior to 1992, Mr. Weiner was a partner in the law firm of Morgan, Lewis
& Bockius LLP, specializing in securities law, public and private financings,
and corporate and commercial transactions. Mr. Weiner is also a director of
Converse Inc., Alliance Imaging, Inc., NRT, Incorporated, Continental Graphics
Holdings, Inc. and Florsheim Group Inc. Mr. Weiner became a director of MTL in
June 1998.
ROBERT A. KATZ is a principal of Apollo and has served as a Vice
President of Apollo Management and Apollo Advisors since 1990. Prior to that
time, Mr. Katz was associated with the Special Restructuring Group of Smith
Barney Harris & Upham Inc. and was a member of the Mergers & Acquisitions
Department of Drexel Burnham Lambert Incorporated. Mr. Katz is also a director
of Vail Resorts, Inc., Aris Industries, Inc. and Alliance Imaging, Inc. Mr.
Katz became a director of MTL in June 1998.
MARC J. ROWAN is a principal of Apollo and has served as a Vice
President of Apollo Management and Apollo Advisors since 1990. From 1985 until
1990, Mr. Rowan was with Drexel
24
<PAGE> 26
Burnham Lambert Incorporated, most recently as Vice President with
responsibilities in high yield financing, transaction idea generation and
merger structure and negotiation. Mr. Rowan is also a director of Vail Resorts,
Inc. and NRT, Incorporated. Mr. Rowan became a director of MTL in June 1998.
JOHN H. KISSICK is a principal of Apollo and has served as a Vice
President of Apollo Management and Apollo Advisors since 1991. From 1990 to
1991, Mr. Kissick was a consultant with Kissick & Associates, an investment
advisory firm. Prior to 1990, Mr. Kissick served as a Senior Executive Vice
President of Drexel Burnham Lambert Incorporated, where he began work in 1975,
heading its Corporate Finance and High Yield Bond Departments. Mr. Kissick is
also a director of Mariner Post Acute Network, Inc., Continental Graphics
Holdings Inc., Converse Inc. and Florsheim Group, Inc. Mr. Kissick became a
director in June 1998.
PHILIP J. RINGO joined MTL in 1998 following the CLC merger, at which
time he was appointed as Chairman and Chief Executive Officer of CLC. On
November 24, 1998, he was elected to the Board of Directors of MTL. Prior to
joining MTL, from 1995 through August 28, 1998, he was the President and Chief
Executive Officer of Chemical Leaman Tank Lines and a director of CLC. From
1992 through 1995, Mr. Ringo served as President of The Morgan Group, Inc. and
Chief Executive Officer of Morgan Drive Away, Inc., Elkhart, Indiana. He has
served as a director of Genessee and Wyoming Industries since 1978.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid by MTL for
services rendered during the year ended December 31, 1998, by the President and
Chief Executive Officer, the Chairman of the Board and the Chief Financial
Officer of MTL (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL SECURITIES ALL
COMPENSATION UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMP.(2)
- --------------------------- ---- ----------- ----- ------------ --------
<S> <C> <C> <C> <C> <C>
Charles J. O'Brien, Jr.
President and Chief Executive Officer............. 1998 $201,119 $111,499 22,000 $726,964
1997 193,937 74,446 -- 8,696
1996 188,262 71,362 -- 9,913
Elton E. Babbitt (1)
Chairman of the Board............................. 1998 10,873 -- -- --
1997 188,353 71,335 -- 3,946
1996 182,885 71,093 -- 4,112
Richard J. Brandewie
Senior Vice President, Treasurer and Chief
Financial Officer................................. 1998 178,555 116,002 22,000 3,903,829
1997 145,402 55,332 -- 8,696
1996 122,489 44,187 100,000 9,913
Marvin E. Sexton
President, Montgomery Tank Lines.................. 1998 185,859 111,499 22,000 1,944,214
1997 133,904 58,500 -- 8,696
1996 -- -- 100,000 --
</TABLE>
- --------------
(1) Elton E. Babbitt retired as Chairman of the Board of MTL on September 30,
1998.
(2) Amount shown represents contributions by MTL to MTL's profit sharing plan
on behalf of such officers and payments for cancellation of stock options
in the MTL transaction.
25
<PAGE> 27
MTL maintains various employee benefit and compensation plans,
including an incentive bonus plan and 401(k) savings plan.
DIRECTOR'S COMPENSATION
Directors of MTL are not compensated for their service as directors.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on options to purchase
Company common stock granted in 1998 to the Named Executive Officers under the
New Stock Option Plan.
OPTION SHARES IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL OPTION EXERCISE OR
SECURITIES SHARES GRANTED BASE PRICE GRANT DATE
UNDERLYING TO EMPLOYEES IN PER EXPIRATION PRESENT
NAME OPTIONS GRANTED FISCAL YEAR SHARE DATE VALUE
- ---- --------------- ----------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Charles J. O'Brien, Jr............ 22,000 10.48 $40.00 8/12/08 $323,620
Richard J. Brandewie.............. 22,000 10.48 40.00 8/12/08 323,620
Marvin E. Sexton.................. 22,000 10.48 40.00 8/12/08 323,620
</TABLE>
- ---------------
(1) The Company's stock plan does not provide for stock appreciation rights.
Accordingly, none were granted in 1998.
YEAR-END OPTION VALUES
The following sets forth information concerning the value of stock
options in 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles J. O'Brien, Jr............................. 0 $22,000 0 0
Richard J. Brandewie............................... 0 22,000 0 0
Marvin E. Sexton................................... 0 22,000 0 0
</TABLE>
EMPLOYMENT AND RELATED AGREEMENTS
Employment Agreements. Montgomery Tank Lines, which, prior to the CLC
Merger was the principal operating subsidiary of MTL, entered into employment
agreements with the following executive officers: Charles J. O'Brien, Jr.,
Richard J. Brandewie and Marvin Sexton. Each employment agreement provides for
a two-year term of service, with an automatic one-year extension on each June
9th, unless Montgomery Tank Lines or the executive officer gives notice that
the term will not be so extended. The employment agreements provide to each of
the executive officers an annual base salary of not less than $192,238.80 and
permit each executive to earn an annual bonus of up to 42.0% of his annual base
salary if certain performance standards are achieved, and an additional bonus
of up to 18.0% of his annual base salary relating to extraordinary performance
by MTL and such executive. Such bonus plan will be administered by MTL'S
compensation committee.
26
<PAGE> 28
The employment agreements also provide for certain severance payments
to be made if the employment of any of such executives is terminated without
"cause" or if such executive resigns for a "good reason," such as after the
occurrence of one of a number of specified changes in such executive's
employment, including
o a material diminution by Montgomery Tank Lines of the executive's
duties and responsibilities,
o a material breach by Montgomery Tank Lines of its compensation and
benefit obligations, or
o an involuntary relocation by more than 50 miles from Plant City,
Florida.
Under such circumstances, such executive would be entitled to receive his base
salary for the remainder of the term of his employment, a pro rated bonus and
continued medical and other benefits. In addition, each of the employment
agreements grants to each such executive options to purchase 22,000 shares of
MTL common stock under the new stock option plan.
Shareholders' Agreement. Elton E. Babbitt, Charles J. O'Brien, Jr.,
Richard J. Brandewie and Marvin E. Sexton have entered into a shareholders'
agreement with Apollo governing certain aspects of the relationship among such
shareholders and MTL. The shareholders' agreement contains, among other
matters,
(1) a provision restricting the rights of Elton E. Babbitt to
transfer his shares of MTL common stock, subject to certain
permitted or required transfers and a right of first refusal in
favor of Apollo;
(2) certain registration rights in the event MTL effects a
registration of its securities;
(3) certain preemptive rights with respect to the sale of MTL common
stock and equity securities convertible into MTL common stock;
and
(4) certain rights of Charles J. O'Brien, Jr., if he is employed by
MTL at the fourth anniversary of the Effective Time, to cause MTL
to purchase from him such number of shares with a value equal to
the implied value of his investment in MTL common stock at the
Effective Time.
The shareholders' agreement became effective on June 9, 1998 and will terminate
upon the earlier of
(a) the tenth anniversary thereof and
(b) such time as MTL is a public company with equity securities
listed on a national securities exchange or publicly traded in
the over-the-counter market; provided, however, that certain
transfer restrictions and registration rights will survive
notwithstanding MTL being a public company.
Pursuant to the shareholders' agreement, Apollo Management is entitled
to a transaction fee of up to 1.0% of the value of each transaction entered
into by MTL, as determined in the sole discretion of Apollo Management. Such
fee is in addition to the management fees payable to Apollo Management as set
forth in the management agreement between Apollo Management and MTL described
below.
Non-Competition Agreements. Each of Elton E. Babbitt and Gordon
Babbitt, a shareholder holding an 8.25% interest in MTL, has entered into a
non-competition agreement with MTL that contains, among other things, a
covenant not to compete with MTL. Pursuant to such covenant, Elton E. Babbitt
27
<PAGE> 29
has agreed that he will not, for a period of five years from the Effective
Time, engage in the bulk transportation services business or in any related
business (the "BTS Business") within any geographic area in which any member of
the MTL Group (as defined in the non-competition agreement) conducts its
business. Ownership of up to 2.0% of a publicly traded enterprise engaged in a
BTS Business, without otherwise participating in such enterprise, would not be
a violation of such covenant not to compete. Gordon Babbitt has agreed that he
will not, for a period of three years from June 9, 1998, engage in the
for-hire, common carrier tank truck transportation business within the United
States and Canada. Ownership of up to 2.0% of a publicly traded enterprise
engaged in such business, without otherwise participating in such enterprise,
would not be a violation of such covenant not to compete.
In addition, Elton E. Babbitt and Gordon Babbitt have each agreed, for
a period of five years from the Effective Time with respect to Elton E.
Babbitt, and for a period of three years from the Effective Time with respect
to Gordon Babbitt, not to request, induce, attempt to influence or have any
other business contact with
(1) any distributor or supplier of goods or services to any member of
the MTL Group to curtail or cancel any business they may transact
with any member of the MTL Group,
(2) any customers of any member of the MTL Group that have done
business with or potential customers which have been in contact
with any member of the MTL Group to curtail or cancel any
business they may transact with any member of the MTL Group,
(3) any employee of any member of the MTL Group to terminate his
employment with such member of the MTL Group or
(4) any governmental entity or regulatory authority to terminate,
revoke or materially and adversely alter or impair any license,
authority or permit held, owned, used or reserved for the MTL
Group.
Management Agreement between Apollo Management and MTL. MTL and Apollo
Management have entered into a management agreement whereby MTL appointed
Apollo Management following the consummation of the merger to provide financial
and strategic advice to MTL. Pursuant to the terms of the management agreement,
Apollo Management has agreed at such time to provide financial and strategic
services to MTL as reasonably requested by MTL's Board of Directors. As
consideration for services to be rendered under the management agreement,
Apollo Management received an initial fee of $2.0 million on June 9, 1998 and
thereafter will receive an annual fee of $500,000 until termination of the
management agreement. The management agreement may be terminated upon 30 days'
written notice by Apollo Management or MTL to the other party thereto.
Marvin Sexton Limited Recourse Secured Promissory Note and Pledge
Agreement. In connection with the completion of the MTL Transactions, MTL made
a limited recourse secured loan to Marvin Sexton in the amount of $400,000. The
loan is secured by a pledge by Mr. Sexton of all of his MTL common stock and
options to purchase MTL common stock. The principal amount of the loan is due
on June 9, 2006, with mandatory pre-payments due upon, and to the extent of,
the receipt of after-tax proceeds from the sale of Mr. Sexton's pledged
securities.
The foregoing discussion of employment and related agreements
highlights the material terms of such agreements, but does not purport to be
complete. Reference is made to all of the terms of such agreements, each of
which has been filed with the Securities and Exchange Commission.
28
<PAGE> 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the MTL common stock as of February 28, 1999, by each
person known by MTL to be a beneficial owner of more than 5.0% of the
outstanding MTL common stock, beneficial ownership of MTL common stock by each
director and named executive officer and all directors and executive officers
as a group:
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE
NAME OF BENEFICIAL OWNER COMMON STOCK OF CLASS
- ------------------------ ------------ ----------
<S> <C> <C>
Elton E. Babbitt(1)................................................... 66,892 3.3%
Richard J. Brandewie(1)............................................... 40,541 2.0%
Charles J. O'Brien, Jr.(1)............................................ 30,239 1.5%
Marvin Sexton(1)...................................................... 35,135 1.8%
Joshua J. Harris(2)(3)................................................ -- --
Michael D. Weiner(2)(3)............................................... -- --
Robert A. Katz(2)(3).................................................. -- --
Marc J. Rowan(2)(3)................................................... -- --
John H. Kissick(2)(3)................................................. -- --
Philip J. Ringo(1).................................................... 4,000 *
All executive officers and directors as a group (10 persons).......... 176,807 8.6%
Apollo Investment Fund III, L.P.(4)................................... 1,714,470 85.7%
c/o Apollo Advisors II, L.P...........................................
Two Manhattanville Road
Purchase, New York 10577
</TABLE>
- ------------
* Less than 1.0%.
(1) The business address for Messrs. Babbitt, Brandewie, O'Brien and Sexton is
MTL Inc., 3108 Central Drive, Plant City, FL 33567 and the business address
for Mr. Ringo is Chemical Leaman Corporation, 102 Pickering Way, Exton, PA
19341-0200.
(2) The business address for Messrs. Harris, Weiner, Katz, Rowan and Kissick is
Apollo Management, L.P., 1301 Avenue of the Americas, New York, NY 10019.
(3) Messrs. Harris, Weiner, Katz, Rowan and Kissick are each principals and
officers of certain affiliates of Apollo. Although each of Messrs. Harris,
Weiner, Katz, Rowan and Kissick may be deemed to beneficially own shares
owned by Apollo, each such person disclaims beneficial ownership of any
such shares.
(4) Includes shares owned by Apollo Overseas Partners III, L.P., a Delaware
limited partnership, and Apollo (U.K.) Partners III, L.P., a limited
partnership organized under the laws of the United Kingdom.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 15, 1998, the Company sold its corporate headquarters and
the adjoining trailer manufacturing facility to a former shareholder for
approximately $.75 million. The Company purchased tank trailers for $5,138,000,
$6,587,000 and $4,442,000 in 1996, 1997 and 1998, respectively, from a tank
trailer manufacturing company owned by the former shareholder and has
commitments to purchase additional tank trailers costing approximately $58,000
as of December 31, 1998. Also, the related company provided repair,
maintenance, design, engineering, transloading, intermodal and other services
to the Company totaling $572,000, $347,000 and $367,000 during the years ended
December 31, 1996, 1997 and 1998, respectively.
29
<PAGE> 31
In addition to the purchase of trailers and repair work, MTL and the
Related Corporation have engaged in various transactions involving tire
purchases and facility rentals. Because of its ability to buy tires in volume,
MTL included in its purchase orders tires on behalf of the Related Corporation.
As a result of these transactions, during the year ended December 31, 1998, the
amount owed to MTL by the Related Corporation ranged from a high of $82,600 in
January to a low of $0 in November. At December 31, 1998, there was $55,000
owed to MTL by the Related Corporation. Upon consummation of the MTL
Transactions, MTL became subject to limitations under the indenture with
respect to these transactions.
MTL and Apollo Management have entered into a management agreement
whereby MTL retained Apollo Management to provide financial and strategic
advice to MTL. Pursuant to the terms of the management agreement, Apollo
Management has agreed at such time to provide financial and strategic services
to MTL as reasonably requested by MTL's Board of Directors. As consideration
for services to be rendered under the management agreement, Apollo Management
received an initial fee of $2.0 million on June 9, 1998 and thereafter will
receive an annual fee of $500,000 until termination of the management
agreement. The management agreement may be terminated upon 30 days written
notice by Apollo Management or MTL to the other party thereto. Under this
agreement MTL recognized $294,000 in selling and administrative expense in
1998.
For a description of certain management and other agreements in
connection with the MTL Transactions and the CLC Transactions, see Item 11.
Executive Compensation--Employment and Related Agreements.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
(b) Financial Statements Schedules None
(c) Exhibits
30
<PAGE> 32
MTL INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public
Accountants........................................................................................................ 32
Report of Independent Certified Public Accountants................................................................. 33
Consolidated Balance Sheets as of December 31, 1997 and 1998....................................................... 34
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998......................... 35
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997
and 1998........................................................................................................ 36
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998......................... 37
Notes to Consolidated Financial Statements......................................................................... 38
</TABLE>
31
<PAGE> 33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of MTL Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of MTL Inc.,
and its subsidiaries at December 31, 1998, and the results of their operations
and their cash flows for the year ended December 31, 1998 in conformity with
generally accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Tampa, Florida,
March 19, 1999
32
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
MTL Inc.:
We have audited the accompanying consolidated balance sheet of MTL Inc. (a
Florida corporation) and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MTL Inc. and subsidiaries as
of December 31, 1997, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tampa, Florida,
February 27, 1998 (except with respect to the
matter discussed in Note 17, as to
which the date is June 9, 1998.)
33
<PAGE> 35
MTL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
<TABLE>
<CAPTION>
1997 1998
----- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 1,377 $ 85
Restricted cash .......................................... -- 10,867
Accounts receivable, net ................................. 38,172 88,898
Current maturities of other receivables .................. 1,163 1,260
Notes receivable ......................................... 547 784
Inventories .............................................. 958 2,001
Prepaid expenses ......................................... 2,822 7,751
Prepaid tires ............................................ 4,324 7,364
Income tax recoverable ................................... -- 4,940
Deferred income taxes .................................... 2,686 11,559
Other .................................................... 127 3,793
--------- ---------
Total current assets ................................ 52,176 139,302
Property and equipment, net ................................... 136,510 233,222
Other receivables, less current maturities .................... 1,987 885
Goodwill, net ................................................. 2,003 137,352
Insurance and other environmental receivables ................. -- 45,916
Deferred income taxes ......................................... -- 7,869
Other assets .................................................. 1,360 18,700
--------- ---------
$ 194,036 $ 583,246
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of indebtedness ....................... $ 2,307 $ 3,461
Accounts payable ......................................... 4,389 7,643
Affiliates and independent owner-operators payable ....... 6,432 8,339
Accrued expenses ......................................... 15,718 67,469
Income taxes payable ..................................... 798 1,546
--------- ---------
Total current liabilities ........................... 29,644 88,458
Long-Term indebtedness, less current maturities ............... 52,791 437,870
Accrued loss and damage claims ................................ 5,065 3,290
Environmental liabilities ..................................... -- 69,956
Other long-term liabilities ................................... -- 9,963
Deferred income taxes ......................................... 27,004 --
--------- ---------
Total liabilities ................................... 114,504 609,537
--------- ---------
Mandatorily redeemable common stock (30 shares) ............... -- 1,210
Mandatorily redeemable preferred stock ........................ -- 15,994
Minority interest in subsidiary ............................... -- 4,825
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock, $.01 par value; 15,000 shares authorized ... 45 20
Additional paid-in capital ............................... 30,459 104,807
Retained earnings ........................................ 49,241 38,495
Stock recapitalization ................................... -- (189,589)
Cumulative translation adjustment ........................ (213) (655)
Note receivable .......................................... -- (1,398)
--------- ---------
Total stockholders' equity (deficit) ................ 79,532 (48,320)
--------- ---------
$ 194,036 $ 583,246
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
34
<PAGE> 36
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Operating revenues:
Transportation ............................................. $ 217,812 $ 266,369 $ 355,022
Other ...................................................... 17,787 19,678 42,716
--------- --------- ---------
Total operating revenues .............................. 235,599 286,047 397,738
--------- --------- ---------
Operating expenses:
Purchased transportation ................................... 145,895 178,117 225,633
Compensation ............................................... 26,201 31,566 54,678
Option expense ............................................. -- -- 14,678
Fuel, supplies and maintenance ............................. 17,957 20,392 35,908
Depreciation and amortization .............................. 13,892 17,335 31,043
Selling and administrative ................................. 6,015 7,421 10,865
Insurance and claims ....................................... 4,366 6,455 7,185
Taxes and licenses ......................................... 1,655 1,900 3,437
Communication and utilities ................................ 1,378 1,805 4,758
(Gain) loss on sale of property and equipment .............. 20 (37) 987
--------- --------- ---------
Total operating expenses .............................. 217,379 264,954 389,172
--------- --------- ---------
Net operating income .................................. 18,220 21,093 8,566
Interest (expense), net ......................................... (3,494) (3,175) (19,791)
Other income (expense) .......................................... 215 (39) 164
--------- --------- ---------
Income before provision for income taxes .............. 14,941 17,879 (11,061)
Benefit (provision) for income taxes ............................ (6,104) (7,396) 4,047
Minority interest ............................................... -- -- (74)
--------- --------- ---------
Income (loss) before extraordinary item ......................... 8,837 10,483 (7,088)
Extraordinary item, net of taxes of $1,643 ...................... -- -- (3,077)
--------- --------- ---------
Net income (loss) ............................................... 8,837 10,483 (10,165)
Preferred stock dividends and accretions ........................ -- -- (581)
--------- --------- ---------
Net income (loss) attributable to common stockholders ........... $ 8,837 $ 10,483 ($ 10,746)
========= ========= =========
Per share data:
Basic -
Net income (loss) before extraordinary item ............. $ 1.95 $ 2.31 $ (2.41)
Extraordinary item ...................................... -- -- (.97)
--------- --------- ---------
Net income (loss) attributable to common stockholders ... $ 1.95 $ 2.31 $ (3.38)
========= ========= =========
Diluted -
Net income before extraordinary item .................... $ 1.92 $ 2.23 $ (2.41)
Extraordinary item .................................. -- -- (.97)
--------- --------- ---------
Net income (loss) attributable to common stockholders $ 1.92 $ 2.23 $ (3.38)
========= ========= =========
Weighted average number of common shares--basic ............ 4,521 4,536 3,178
Weighted average number of common and common
equivalent shares--diluted .............................. 4,600 4,711 3,178
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
35
<PAGE> 37
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN 000'S)
<TABLE>
<CAPTION>
ADDITIONAL STOCK CUMULATIVE STOCK TOTAL
COMPREHENSIVE COMMON PAID-IN RETAINED RECAPITAL- TRANSLATION SUBSCRIPTION STOCKHOLDERS'
INCOME (LOSS) STOCK CAPITAL EARNINGS IZATION ADJUSTMENT RECEIVABLE EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1995 ................... $ 45 $ 30,092 $ 29,921 -- -- -- $ 60,058
Issuance of common stock .. -- 48 -- -- -- -- 48
Net income ................ $ 8,837 -- -- 8,837 -- -- -- 8,837
Translation adjustment .... (29) -- -- -- -- $ (29) -- (29)
-------- ----- -------- -------- --------- ----- ------- ---------
BALANCE, December 31,
1996 ................... $ 8,808 45 30,140 38,758 -- (29) -- 68,914
========
Issuance of common stock .. -- 319 -- -- -- -- 319
Net income ................ $ 10,483 -- -- 10,483 -- -- -- 10,483
Translation adjustment..... (184) -- -- -- -- (184) -- (184)
-------- ----- -------- -------- --------- ----- ------- ---------
BALANCE, December 31,
1997 ................... $ 10,299 45 30,459 49,241 -- (213) -- 79,532
========
Recapitalization of
common stock .............. (28) 62,333 -- $(188,379) -- $(1,398) (127,472)
Mandatorily redeemable
Common stock .............. -- -- -- (1,210) -- -- (1,210)
Issuance of common stock .. 3 12,015 -- -- -- -- 12,018
Net (loss) ................ $(10,165) -- -- (10,165) -- -- -- (10,165)
Preferred stock dividend .. -- -- (581) -- -- -- (581)
Translation adjustment .... (442) -- -- -- -- (442) -- (442)
-------- ----- -------- -------- --------- ----- ------- ---------
BALANCE, December 31,
1998 ................... $(10,607) $ 20 $104,807 $ 38,495 $(189,589) $(655) $(1,398) $ (48,320)
======== ===== ======== ======== ========= ===== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
36
<PAGE> 38
MTL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................................. $ 8,837 $ 10,483 $ (10,165)
Adjustments to reconcile to net cash and cash equivalents provided by operating
Activities--
Deferred income taxes.......................................................... 3,322 3,388 (5,230)
Depreciation and amortization.................................................. 13,892 17,335 31,043
Extraordinary item, net of taxes............................................... --- --- 3,077
Equity in income from investments.............................................. (138) (49) (5)
(Gain) loss on sale of property and equipment.................................. 20 (37) 987
Minority interest.............................................................. --- --- 74
Changes in assets and liabilities--
(Increase) decrease in accounts and notes receivable........................... (4,629) (6,038) 2,930
Increase in inventories........................................................ (211) (93) (43)
Decrease (increase) in prepaid expenses........................................ (1,386) 550 (1,951)
Increase in prepaid tires...................................................... (250) (377) (123)
(Increase) decrease in other assets............................................ (399) 311 (16,937)
Increase in accounts payable and accrued expenses.............................. 314 4,799 6,251
Increase (decrease) in affiliates and independent owner-operators payable...... 1,500 1,331 (1,092)
Increase in accrued loss and damage claims..................................... 845 1,644 7,290
Increase in current income taxes............................................... 587 585 748
------- ------- ---------
Net cash and cash equivalents provided by operating activities............. 22,304 33,832 16,854
------- ------- ---------
Cash flows from investing activities:
Capital expenditures............................................................... (20,577) (35,121) (29,765)
Acquisition of businesses, net of cash received.................................... (4,725) --- (264,016)
Payments received on other receivables............................................. 1,026 1,197 (258)
Repayment of loan to barge tank operation.......................................... 263 93 ---
Proceeds from sales of property and equipment...................................... 2,233 2,141 4,506
------- ------- ---------
Net cash and cash equivalents used in investing activities................. (21,780) (31,690) (289,533)
------- ------- ---------
Cash flows from financing activities:
Proceeds from sale of lease receivables............................................ 1,181 --- ---
Proceeds from issuance of long-term debt and capital lease obligations............. 35,044 4,345 442,807
Principal payments on long-term debt and capital lease obligations................. (36,408) (6,168) (57,177)
Issuance of common stock........................................................... 48 320 74,323
Recapitalization expenditures, net................................................. --- --- (188,379)
Distribution to minority interest.................................................. --- (161)
------- -------- ---------
Net cash and cash equivalents provided by (used in) financing activities... (135) (1,503) 271,413
------- -------- ---------
Net (decrease) increase in cash and cash equivalents................................... 389 639 (1,266)
Translation adjustment................................................................. (16) 43 (26)
Cash and cash equivalents, beginning of year........................................... 322 695 1,377
------- -------- ---------
Cash and cash equivalents, end of year................................................. $ 695 $ 1,377 $ 85
======= ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for--
Interest....................................................................... $ 3,912 $ 4,043 $ 24,600
Income taxes................................................................... $ 2,308 $ 3,249 $ 2,056
Supplemental disclosures of noncash investing and financing activities:
Note payable issued for purchase of Levy Transport, Ltd............................ $ 366 $ --- $ ---
Receivable from tractors and trailors leased under a capital lease................. $ 1,807 $ --- $ ---
Tractors and trailors acquired by capital lease.................................... $ --- $ 369 $ ---
Preferred shares issued in connection with acquisition............................. $ --- $ --- $ 15,500
Accretion of dividends on preferred stock.......................................... $ --- $ --- $ 581
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
37
<PAGE> 39
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN 000'S, EXCEPT PER SHARE DATA)
1--BUSINESS ORGANIZATION:
Nature of Operations
MTL Inc. and subsidiaries (the "Company") is engaged primarily in truckload
transportation of bulk liquids in North America. The Company conducts a portion
of its business through a network of affiliates and independent owner-operators.
Affiliates are independent corporations, which enter into renewable one-year
contracts with the Company. Affiliates are responsible for paying for their own
equipment (including debt service), fuel and other operating costs. Independent
owner-operators are independent contractors, which, through a contract with the
Company, supply one or more tractors and drivers for the Company's use.
Contracts with independent owner-operators may be terminated by either party on
short notice. The Company also charges affiliates and third parties for the use
of tractors and trailers as necessary. In exchange for the services rendered,
affiliates and independent owner-operators are generally paid 85 percent and 63
percent, respectively, of the revenues generated for each load hauled.
Recapitalization
On June 9, 1998, the Company completed a recapitalization with Sombrero
Acquisition Corporation ("Sombrero"), an affiliate of Apollo Management, L.P.
("Apollo"), pursuant to which Sombrero merged with and into the Company.
According to the terms of the merger agreement, the stockholders of the Company
(other than certain management shareholders) received $40.00 per share in cash.
As a result of the recapitalization, Apollo (through three affiliated limited
partnerships) controls approximately 85% of the common stock outstanding.
The transaction was accounted for as a leveraged recapitalization.
Recapitalization expenditures charged to equity were $189.6 million. $140.0
million of senior subordinated debt was used to finance the acquisition along
with $60.0 million of senior secured bank debt.
The following table is intended to show the sources and uses of funds for
the recapitalization (dollars in table in millions):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Revolving Credit Facility (Sublimit).............................................................. $ 10.0
Term Loan Facility................................................................................ 50.0
Notes............................................................................................. 140.0
Equity Investment................................................................................. 68.0(a)
------
Total Sources..................................................................................... $268.0
======
USES OF FUNDS:
Payment of consideration in the merger............................................................ $195.0(a)
Repayment of long term debt, net.................................................................. 54.3(b)
Fees and expenses................................................................................. 18.7
------
Total Uses........................................................................................ $268.0
======
</TABLE>
(a) Includes $5.7 million implied value of 142 shares of common stock at $40
per share retained by management.
(b) Represents the repayment of $55.8 million of long term debt, net of
available cash of $1.5 million.
Chemical Leaman Corporation Acquisition
On August 28, 1998, the Company completed its agreement and plan of merger
with Chemical Leaman Corporation ("CLC") and the shareholders of CLC in a
transaction accounted for as a purchase.
38
<PAGE> 40
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
The following table is intended to show the sources and uses of funds for
the acquisition of CLC and the related transactions (dollars in table in
millions):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Incremental Term Loans............................................................................ $235.0
Preferred Equity.................................................................................. 19.9
Common Equity..................................................................................... 12.0
------
Total Sources..................................................................................... $266.9
======
USES OF FUNDS:
Payment of consideration in the transactions relating to the acquisition
of CLC......................................................................................... $ 69.8
Transaction Bonuses/Payments...................................................................... 1.9
Management Loans.................................................................................. 1.1
MTL Preferred Stock to CLC Shareholders........................................................... 5.0
CLC Preferred Stock Retained...................................................................... 4.4
CLC Debt Refinancing (including Tender Offer)..................................................... 170.7
Fees and expenses................................................................................. 14.0
------
Total Uses........................................................................................ $266.9
======
</TABLE>
Approximately $136 million of the purchase price has been allocated to goodwill
which is being amortized over a period of 40 years. While the allocation of the
purchase price is not finalized due to the existence of certain contingencies
at the effective date of the acquisition of CLC, management feels the final
allocation will not differ materially from the allocation at December 31, 1998.
Included in the accompanying financial statements are approximately $10.9
million of accrued purchase price and approximately $5 million of outstanding
redeemable preferred stock which are subject to finalization based upon the
outcome of certain environmental and other indemnifications. See Note 16 for
subsequent event related to final settlement of indemnifications.
In connection with the acquisition, $4.4 million of CLC preferred stock
remained outstanding, and certain employees of Leaman Logistics acquired 5% of
the equity (valued at approximately $.4 million) of Leaman Logistics through a
rollover of CLC common stock held by certain CLC shareholders. These amounts
have been reflected in the accompanying financial statements as minority
interest in subsidiaries.
The Company has formulated a preliminary plan of integration including
termination and relocation of certain personnel of CLC. The preliminary plan was
prepared from an assessment performed by function and includes all regional and
national administration and operational departments. Management has begun to
implement the preliminary plan and expects to finalize and communicate plans to
all affected employees within one year of the consummation of the acquisition.
Some uncertainties exist which may change the plan during the initial
implementation, although management does not believe the final costs will differ
materially from the reserve estimate at December 31, 1998. Management also
expects to substantially complete the integration by the end of 1999.
Giving effect to the acquisition between the Company and CLC as if CLC had
been acquired January 1, 1997, presented pro forma revenues for the years ended
December 31, 1997 and 1998 were $606.1 million and $620.2 million,
respectively. Pro forma net losses before extraordinary items for the years
ended December 31, 1997 and 1998 were ($10.4 million) and ($14.2 million),
respectively. Pro forma basic and diluted loss per common share were ($4.50)
and ($6.01) for the years ended December 31, 1997 and 1998, respectively.
Purchase of Levy Transport, Ltd.
On June 11, 1996, the Company acquired all the outstanding stock of Levy
Transport, Ltd. (Levy), a Quebec-based tank truck carrier servicing the
chemical, petroleum and glass industries, from Les Placements Marlin, Ltd for
$5,148. The purchase price was determined based upon the fair market value of
the net assets acquired. The transaction was accounted for as a purchase
effective May 1, 1996, the date when control of Levy was transferred to the
Company. Goodwill in the amount of $1,616 was recorded as a result of the
acquisition. The Company is amortizing the goodwill over 15 years on a
straight-line basis.
39
<PAGE> 41
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
2--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of MTL Inc. and
its subsidiaries, Montgomery Tank Lines, Quality Carriers, Levy Transport, CLC
Chemical Leaman Holding, Lake Shore Leasing, MTL of Nevada, MTL Investments,
Inc., Mexico Investments, Inc., Transplastics, Inc., Core Logistics, Enviro
Power, Power Purchasing, Chemical Leaman Tank Lines, Fleet Transport, Quala
Systems, Leaman Logistics, American Trans Insurance, CSI Services, Chemical
Properties, Inc., Capacity Management, Pickering Way Funding and CLT Services.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Minority interest reflects outstanding preferred stock of
Chemical Leaman and common stock of Leaman Logistics.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
Restricted Cash
Included in restricted cash is approximately $10.9 million of amounts held
on deposit relating to the purchase price of CLC. See Note 1 for description of
contingent purchase price.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of tires, parts, materials and supplies for
servicing the Company's revenue equipment.
Prepaid Tires
The cost of tires purchased with new equipment, as well as replacement
tires, are accounted for as prepaid tires and amortized on a straight-line basis
over their estimated useful lives, which approximates one year.
Property and Equipment
Property and equipment are stated at cost. Tractors and trailers under
capital leases are stated at the present value of the minimum lease payments at
the inception of the lease. Depreciation, including amortization of tractors and
trailors under capital leases, is computed on a straight-line basis over the
estimated useful lives of the assets or the lease terms, whichever is shorter.
The estimated useful lives are 10-25 years for buildings and improvements, 5-15
years for tractors and trailers, 7 years for terminal equipment, 3-5 years for
furniture and fixtures, and 5-10 years for other equipment. Maintenance and
repairs are charged to operating expense when incurred. Major improvements which
extend the lives of the assets are capitalized. When assets are disposed of, the
cost and related accumulated depreciation are removed from the accounts, and any
gains or losses are reflected in operating expenses.
Goodwill
Goodwill represents the excess of cost over the fair value of tangible net
assets acquired and is being amortized on a straight-line basis over its
estimated useful life which ranges from 15 to 40 years. Accumulated
amortization was $419 and $1,478 at December 31, 1997 and 1998, respectively.
Other Assets
Other assets consist primarily of an investment in a barge tank operation
and deferred loan costs. The Company is a one-third partner in the barge tank
operation, and one of the other partners is a former shareholder of the Company.
The partnership was organized to transport bulk liquids by barge tank from
Florida to Puerto Rico. The Company's investment in the partnership is accounted
for using the equity method. The Company's investment, including loans made (net
of loan repayments) to the partnership, was $475 and $538 as of December 31,
1997 and 1998, respectively.
40
<PAGE> 42
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
Deferred loan costs of approximately $10,000 at December 31, 1998
(approximately $398 at December 31, 1997) are being amortized over two to seven
years, the estimated lives of the related long-term debt.
Impairment of Long-Lived Assets
At each balance sheet date, the Company evaluates the realizability of
long-lived assets based upon expectations of non-discounted cash flows and
operating income. Based on the most recent analysis, the Company believes no
material impairment exists at December 31, 1998.
Accrued Loss and Damage Claims
Effective September 1998, MTL maintains liability insurance for bodily
injury and property damage in the amount of $100.0 million per incident, having
no deductible. There is no aggregate limit on this coverage. MTL currently
maintains first dollar workers' compensation insurance coverage. MTL is
self-insured for damage or loss to the equipment it owns or leases, and for
cargo losses.
Prior to September 1998, the Company retained liability up to $75 per
health claim and is self-insured for cargo claims. For automotive liability, the
Company had deductibles ranging from $150 to $500 per occurrence. Prior to
September 1994, the Company retained liability for workers' compensation of up
to $250 per occurrence. Subsequent to this date, all workers' compensation
claims are fully insured. The Company has accrued for the estimated cost of open
claims based upon losses and claims reported and an estimate of losses incurred
but not reported.
The Company transports chemicals and hazardous materials and operates tank
wash facilities. As such, the Company's operations are subject to various
environmental laws and regulations. The Company has been involved in various
litigation and environmental matters arising from these operations. Reserves
have been recognized for probable losses which can be estimated. Recoverable
environmental costs consist principally of recoverable costs under various
insurance policies related to environmental matters at the Bridgeport Site (see
Note 13).
Derivatives
The Company utilizes derivative financial instruments to reduce its
exposure to market risks from changes in interest rates and foreign exchange
rates. The instruments primarily used are interest rate swaps and foreign
exchange contracts. All derivative instruments held by the Company are
designated as hedges and accordingly, the gains and losses from changes in
derivative fair values are deferred. Gains and losses upon settlement are
recognized in the statement of operations or recorded as part of the underlying
asset or liability as appropriate. The Company is exposed to credit related
losses in the event of nonperformance by counterparties to these financial
instruments; however, counterparties to these agreements are major financial
institutions; and the risk of loss due to nonperformance is considered by
management, to be minimal. The Company does not hold or issue interest rate
swaps or foreign exchange contracts for trading purposes.
The Company has entered into interest rate swap agreements designated as a
partial hedge of the Company's portfolio of variable rate debt. The purpose of
these swaps is to fix interest rates on variable rate debt and reduce certain
exposures to interest rate fluctuation. At December 31, 1998, the Company had
interest rate swaps with a notional amount of $100 million (none at December 31,
1997). The notional amounts do not represent a measure of exposure of the
Company. The Company will pay the counterparties interest at a fixed rates
ranging from 5.41% to 5.48%, and the counterparties will pay the Company
interest at a variable rate equal to LIBOR. The LIBOR rate applicable to these
agreements at December 31, 1998 was 5.28%. These agreements mature and renew
every three months and expire on September 2, 2001.
The Company has entered into short-term foreign currency agreements to
exchange US dollars (US$1,300) for Canadian dollars (CN $2,004). The purpose of
these agreements are to hedge against fluctuations in foreign currency exchange
rates. The Company is required to make US dollar payments at fixed exchange
rates ranging from 1.5398 to 1.545.
The Financial Accounting Standards Board ("FASB") issued FAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for the Company's fiscal year beginning December 31, 1999. This
Statement requires that derivative instruments be recognized as assets or
liabilities and measured at fair value. The Company does not anticipate a
material effect upon adoption of this standard.
41
<PAGE> 43
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying balance sheets for cash,
accounts receivable, and accounts payable approximate fair value because of the
immediate or short-term maturities of these financial instruments.
The fair value of the Company's debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The book value of the
Company's debt approximates fair market value. The fair value of derivative
financial instruments at December 31, 1998 results in a liability of 946.
Revenue Recognition
Transportation revenues and related costs are recognized on the date
freight is delivered. Other operating revenues, consisting primarily of lease
revenues from affiliates, independent owner-operators and third parties, are
recognized as earned.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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 from those estimates.
Foreign Currency Translation
The functional currency for Levy is Canadian dollars. The translation from
Canadian dollars to U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate in effect during the
period. The gains or losses, net of income taxes, resulting from such
translation are included in stockholders' equity. Gains or losses from foreign
currency transactions are included in other income (expense).
Income Taxes
The Company follows the income tax policy provided by Statement of
financial Accounting Standards No. 109, "Accounting for Income Taxes." This
Statement provides for a liability approach under which deferred income taxes
are provided for based upon enacted tax laws and rates applicable to the periods
in which the taxes become payable. These differences result from items reported
differently for financial reporting and income tax purposes, primarily
depreciation and accruals.
Earnings Per Share
The reconciliation of basic EPS and diluted EPS is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Basic weighted average number of common shares...................................... 4,521 4,536 3,178
Diluted effect of options outstanding............................................... 79 175 --
----- ----- -----
Diluted weighted average number of common and common equivalent shares.............. 4,600 4,711 3,178
===== ===== =====
</TABLE>
3--ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Trade accounts receivable...................................................... $35,538 $85,518
Affiliate and independent owner-operator receivables........................... 2,963 3,164
Employee receivables........................................................... 128 309
</TABLE>
42
<PAGE> 44
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
<TABLE>
<S> <C> <C>
Other receivables.............................................................. 1,523 3,842
--------- -------
Total receivables......................................................... 40,152 92,833
Less--Allowance for doubtful accounts........................................... (1,980) (3,935)
------- -------
Accounts receivable, net.................................................. $38,172 $88,898
======= =======
</TABLE>
The activity in the allowance for doubtful accounts for each of the three
years in the period ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of period......................................... $1,019 $1,397 $1,980
Additions charged to operating expenses.............................. 475 1,146 2,047
Write-off of bad debts............................................... (97) (563) (92)
------ ------ ------
Balance, end of period............................................... $1,397 $1,980 $3,935
====== ====== ======
</TABLE>
As of December 31, 1998, approximately 85 percent and 15 percent of trade
accounts receivable were due from companies in the chemical and bulk food
products industries, respectively. No single customer accounted for over 5.1
percent of the Company's operating revenues. Included in accounts and notes
receivable are $40 of receivables as of December 31, 1997 and 1998, which are
due from other companies owned by former shareholders.
4--OTHER RECEIVABLES:
Other receivables include the minimum lease payments due to the Company
from third parties for tractors and trailers leased under capital leases.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999................................................................................... $ 1,402
2000................................................................................... 916
-------
Total minimum lease payments........................................................... 2,318
Less -- Unearned financing income...................................................... (173)
-------
Present value of minimum capital lease payments........................................ 2,145
Less -- Current maturities of other receivables........................................ (1,260)
-------
Other receivables, less current maturities............................................. $ 885
=======
</TABLE>
5--FIXED ASSETS:
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Land and improvements .......................................... $ 4,809 $ 9,159
Buildings and improvements ..................................... 12,458 14,556
Revenue equipment .............................................. 182,407 246,438
Other equipment ................................................ 11,856 57,343
Accumulated depreciation ....................................... (75,020) (94,274)
-------- --------
Property and equipment, net .................................... $136,510 $233,222
======== ========
</TABLE>
Depreciation expense was $13,578, $17,095 and $29,565 for the periods
ending December 31, 1996, 1997 and 1998, respectively. During 1998, the Company
agreed to sell a warehouse facility for approximately $1.4 million, which
resulted in a loss of approximately $1 million.
43
<PAGE> 45
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
The capitalized cost of equipment under capital leases, which is included
in tractors and trailors in the accompanying consolidated balance sheets, was as
follows at December 31:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Tractors and trailers.......................................................... $1,674 $377
Less--Accumulated amortization................................................. (657) (108)
------ ----
$1,017 $269
====== ====
</TABLE>
6--ACCRUED EXPENSES:
Accrued expenses include the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Outstanding checks........................................................... $ -- $ 6,904
Loss and damage claims ...................................................... 3,757 10,362
Environmental liabilities ................................................... 1,149 999
Severance, relocation and integration ....................................... -- 15,687
Salary, wage and benefits.................................................... 2,040 5,552
Contingent CLC purchase price (Note 1) ...................................... -- 10,867
Other ....................................................................... 8,772 17,098
------- -------
$15,718 $67,469
======= =======
</TABLE>
In connection with the acquisition of CLC, $17.5 million of restructuring
related costs were recorded as part of purchase accounting. These costs
included, $14.0 million of severance, bonuses and other termination-related
costs to be incurred in connection with identified staff reductions, $.5 million
costs in connection with the disposition (closure) of certain facilities and
$3.0 million of other costs. The Company's plan calls for the payment of
substantially all these costs within one year of the acquisition.
7--LONG-TERM INDEBTEDNESS:
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Unsecured notes payable with a fixed interest rate of 6.97%.
Interest is payable semi-annually and seven equal principal payments are to be
Made annually beginning January 2000................................................. $25,000 --
Unsecured notes payable under a $50,000 revolving line of credit with
Interest rates of LIBOR plus an incremental percentage based on the ratio of
Funded debt to earnings before interest, income taxes, depreciation and
amortization. Interest is payable at varying dates, and all outstanding
principal is due May 31, 2000, subject to renewal. Letters of credit of $325
were issued as of December 31, 1997, and reduced the borrowings available.
Additional advances of $33,694 were available and unused at December 31, 1997........ 15,981 --
</TABLE>
44
<PAGE> 46
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
<TABLE>
<S> <C> <C>
Unsecured notes payable under a $16,429 revolving line of credit with interest
rates based on the ratio of funded debt to earnings before interest, income
taxes, depreciation and amortization and Canadian lender's prime (6% at
December 31, 1997). Interest is payable at varying dates, and all outstanding
principal is due May 31, 2000, subject to renewal. Additional advances of
$5,942 were available and unused at December 31, 1997..................................... 10,486 --
6.5% to 11.65% fixed rate notes payable, due in varying monthly installments
with maturity dates through 1999, secured by tractors and trailers........................ 2,492 --
5% unsecured note payable to employee, due in annual installments of $70 through 2001........ 280 $ 196
Capitalized equipment leases, interest rates ranging from 6.75% to 11.65%.................... 859 1,140
Series B senior subordinated notes, principal due in 2006, interest payable semi-annually at
10% per annum............................................................................. -- 100,000
Series B floating interest rate subordinated term notes, principal due in 2006, interest
payable semi-annually at LIBOR plus 4.81%................................................. -- 40,000
Tranche A term loan, principal of $225 due quarterly with the balance due in 2004............ -- 89,550
Tranche B term loan, principal of $263 due quarterly with the balance due in 2005............ -- 104,475
Tranche C term loan, principal of $225 due quarterly with the balance due in 2006............ -- 89,550
Revolving credit facility.................................................................... 16,420
Less--Current maturities of long-term debt................................................... (2,307) (3,461)
-------- --------
Long-term debt, less current maturities...................................................... $ 52,791 $437,870
======== ========
</TABLE>
Series B Notes
The Series B Notes are guaranteed on a senior subordinated basis by all
of the Company's direct and indirect domestic subsidiaries. The guarantees are
full, unconditional, joint and several obligations of the guarantors. MTL is
obligated to pay additional interest in the amount of .25% per annum on the
notes if the Notes are not registered with the Securities and Exchange
Commission (SEC) within 210 days after the date of the private offering. If MTL
does not complete the exchange offer, an additional .25% per year at the
beginning of each subsequent 90-day period up to a maximum of 1.0% in the
aggregate is incurred. The subordinated floating interest rate Series B Notes
interest rate was 10.31% at December 31, 1998. In February 1999, these notes
were registered with the SEC.
At any time, or from time to time, on or prior to June 15, 2001, MTL may,
at its option, use the net cash proceeds of one or more Equity Offerings to
redeem up to 35% of the aggregate principal amount of the fixed rate notes
originally issued at a redemption price equal to 110% of the principal amount
thereof; plus accrued and unpaid interest thereon, if any, to the date of
redemption provided certain conditions are met.
45
<PAGE> 47
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
MTL may redeem the Series B fixed rate notes, in whole at any time or in
part from time to time, on and after June 15, 2002, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices, expressed as
percentages of the principal amount thereof, if redeemed during the twelve-month
period commencing on June 15 of the year set forth below, plus, in each case,
accrued and unpaid interest thereon, if any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002..................................................................... 105.0%
2003..................................................................... 102.5%
2004 and thereafter...................................................... 100.0%
</TABLE>
MTL may redeem the Series B floating rate notes, in whole or in part from
time to time, upon not less than 30 nor more than 60 days notice at the
following redemption prices, expressed as percentages of the principal amount
thereof, if redeemed during the twelve-month period commencing on June 15 of the
year set forth below, plus, in each case, accrued and unpaid interest thereon,
if any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1998..................................................................... 105.0%
1999..................................................................... 104.0%
2000..................................................................... 103.0%
2001..................................................................... 102.0%
2002..................................................................... 101.0%
2003 and thereafter ..................................................... 100.0%
</TABLE>
Tranche A,B and C Term Loans
Tranche A Term Loans bear interest at the option of MTL at (a) .75% in
excess of the base rate equal to the higher of 1/2 of 1.0% in excess of the
federal funds rate or the rate that CSFB as the administrative agent announces
from time to time as its prime lending rate, as in effect from time to time (the
"Base Rate"), or (b) 1.75% in excess of the Eurodollar rate for Eurodollar
Loans, in each case, subject to adjustment based upon the achievement of certain
financial ratios (7.26% at December 31, 1998).
Tranche B Term Loans bear interest at the option of MTL at (a) 1.25% in
excess of the Base Rate and (b) 2.25% in excess of the Eurodollar rate for
Eurodollar Loans, in each case, subject to adjustment based upon the achievement
of certain financial ratios (7.52% at December 31, 1998).
Tranche C Term Loans bear interest at the option of MTL at (a) 1.50% in
excess of the Base Rate and (b) 2.50% in excess of the Eurodollar rate for
Eurodollar Loans, in each case, subject to adjustment based upon the achievement
of certain financial ratios (7.76% at December 31, 1998).
Revolving Credit Facility
MTL has available a $75.0 million revolving credit facility, which may
include letters of credit, available until June 9, 2004 to be used for, among
other things, working capital and general corporate purposes of MTL and its
subsidiaries, including permitted acquisitions. The revolving credit facility
further provides for a $15,000 sublimit to be made available to Levy, an
indirect wholly-owned subsidiary of MTL. Amounts drawn under the sublimit will
be drawn in Canadian dollars.
Permanent reductions to the revolving credit facility are required in an
amount equal to,
(1) 100.0%, or 75.0%, if the Leverage Ratio (as defined) is less than
4.0:1.0, of the net cash proceeds of all asset sales and dispositions by MTL and
its subsidiaries, subject to certain exceptions,
(2) 100.0%, or 75.0%, if the Leverage Ratio is less than 4.0:1.0, of the
net cash proceeds of issuances of certain debt obligations and certain preferred
stock by MTL and its subsidiaries, subject to certain exceptions,
(3) 50.0%, or 0%, if the Leverage Ratio is less than 4.0:1.0, of the net
proceeds from common equity and certain preferred stock issuances by MTL and its
subsidiaries, subject to certain exceptions, including permitted acquisitions,
46
<PAGE> 48
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
(4) 75.0%, or 50.0%, if the Leverage Ratio is less than 4.0:1.0, of
annual Excess Cash Flow, and
(5) 100.0% of certain insurance proceeds, subject to certain exceptions.
Such mandatory prepayments and permanent reductions will be allocated first, to
the Term Loans and second, to the revolving credit facility.
Voluntary prepayments and commitment reductions will be permitted in
whole or in part, subject to minimum prepayment or reduction requirements,
without premium or penalty; provided that voluntary prepayments of Eurodollar
Loans on a date other than the last day of the relevant interest period will be
subject to payment of customary breakage costs, if any.
Interest on the Revolving Credit Facility is, at the option of MTL, (a)
.75% in excess of the Base Rate and (b) 1.75% in excess of the Eurodollar rate
for Eurodollar Loans, in each case, subject to adjustments based upon the
achievement of certain financial ratios. The interest rate on the Sublimit will
be based on Canadian dollar bankers' acceptances and the Canadian prime rate
(7.76% at December 31, 1998).
The new credit agreement provides for payment by MTL in respect of
outstanding letters of credit of an annual fee equal to the spread over the
Eurodollar rate for Eurodollar Loans under the revolving credit facility from
time to time in effect on the aggregate outstanding stated amounts of such
letters of credit, or a fronting fee equal to 1/4 of 1.0% on the aggregate
outstanding stated amounts of such letters of credit.
Levy will pay an acceptance fee equal to the Applicable Margin that would
be payable on Eurodollar Loans under the revolving credit facility on the
drawing date of each loan drawn under the sublimit.
MTL will pay a commitment fee equal to a percentage equal to 1/2 of 1.0%
per annum on the undrawn portion of the available commitment under the revolving
credit facility, subject to decreases based on the achievement of certain
financial ratios.
Collateral and Guarantees
The loans and letters of credit under the new revolving credit agreement
will be guaranteed by all of MTL's existing and future direct and indirect
domestic subsidiaries (collectively, the "Bank Guarantors"). The obligations of
MTL and the Bank Guarantors will be secured by a first priority perfected lien
on substantially all of the properties and assets of MTL and the Bank
Guarantors, now owned or subsequently acquired, including a pledge of all
capital stock and notes owned by MTL and the Bank Guarantors, subject to certain
exceptions; provided that, in certain cases, no more than 65.0% of the stock of
foreign subsidiaries of MTL will be required to be pledged.
Debt Retirement and Extraordinary Item
Substantially all the outstanding indebtedness of the Company was
extinguished and refinanced in connection with the leverage recapitalization and
the acquisition of CLC. As a result of these early extinguishments, the Company
incurred additional charges of approximately $3 million, net of tax, which is
included as an extraordinary item in the accompanying statements of operations.
In connection with the CLC Merger, on July 28, 1998, the Company
commenced a Tender Offer for the $100 million principal amount of outstanding
10-3/8% Senior Notes due 2005 issued by CLC. The Tender Offer was subject to the
consummation of the CLC Merger. The Company accepted 100% of the outstanding CLC
Notes for payment and paid to the holders the tender offer consideration and a
related consent payment. The Company paid approximately $117 million for the
acquisition of the outstanding debt which was included as part of the purchase
price of CLC (see Note 1).
Under the terms of the Company's debt agreements, the Company is required
to maintain, among other restrictions, minimum net worth levels, debt to net
worth ratios and debt service coverage ratios. In addition, the agreements
contain restrictions on asset dispositions and the payment of dividends. At
December 31, 1998, the Company was in compliance with the terms and covenants of
its debt agreements.
47
<PAGE> 49
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
Scheduled maturities of long-term debt and capital lease obligations for
the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------
<S> <C>
1999................................................................................... $ 3,460
2000................................................................................... 3,576
2001................................................................................... 2,850
2002................................................................................... 2,850
2003................................................................................... 2,850
Thereafter............................................................................. 425,745
--------
$441,331
========
</TABLE>
8--INCOME TAXES:
Income taxes from continuing operations consisted of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Current taxes:
Federal.......................................................... $2,007 $2,946 $ 17
Foreign.......................................................... -- -- 261
State............................................................ 774 1,062 905
------ ------ -------
2,781 4,008 1,183
------ ------ -------
Deferred taxes:
Federal.......................................................... 2,912 2,447 (2,661)
Foreign.......................................................... 402
State............................................................ 411 941 (2,971)
------ ------ -------
3,323 3,388 (5,230)
------ ------ -------
Provision (benefit) for income taxes.................................. $6,104 $7,396 $(4,047)
====== ====== =======
</TABLE>
The net deferred tax asset (liability) consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Environmental reserve, net....................................................... -- $ 6,281
Reserves for guarantee of lease obligations...................................... $ 246 --
Capital leases treated as operating leases for tax purposes as lessee............ 221 324
Tax credit carryforwards......................................................... 113 3,942
Self-insurance reserves.......................................................... 3,865 5,803
Allowance for doubtful accounts.................................................. 619 1,338
Investment basis difference...................................................... 217 217
Accrued vacation pay............................................................. 162 497
Pension.......................................................................... -- 3,332
Net operating loss carryforwards................................................. -- 15,668
Restructuring accruals........................................................... -- 6,388
Other accruals................................................................... -- 2,716
State taxes, net ................................................................ -- 5,204
Other............................................................................ 175 281
------- -------
5,618 51,991
Less: valuation allowance ...................................................... -- (1,398)
------- -------
5,618 50,593
------- -------
</TABLE>
48
<PAGE> 50
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Property and equipment basis difference.......................................... (23,799) (29,113)
State taxes, net ................................................................ (4,562) --
Capital leases treated as operating leases for tax purposes as lessor............ (1,132) (2,052)
Other............................................................................ (443) --
-------- -------
(29,936) (31,165)
-------- -------
Net deferred tax asset (liability).......................................... (24,318) 19,428
Less: current net deferred tax asset (liability)........................... 2,686 11,559
-------- -------
Long-term net deferred tax asset (liability)................................ $(27,004) $ 7,869
-------- -------
</TABLE>
The change from a net deferred tax liability at December 31, 1997 to a net
deferred tax asset at December 31, 1998 was primarily due to the acquisition of
Chemical Leaman Corporation during 1998 and the related deferred tax assets
which arose as a result of the acquisition.
The Company's effective tax rates differ from the federal statutory rate of
34 percent. The reasons for those differences are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Tax expense (benefit) at the statutory rate.......................... $5,080 $6,079 $(3,761)
State income taxes, net of federal benefit........................... 782 1,322 (1,364)
Amortization of goodwill............................................. -- -- 386
Foreign taxes........................................................ -- -- 663
Other ............................................................. 242 (5) 29
------ ------ -------
Provision (benefit) for income taxes............................ $6,104 $7,396 $(4,047)
====== ====== =======
</TABLE>
At December 31, 1998, the Company has approximately $46 million in net
operating loss carryforwards and $3.9 million in alternative minimum tax credit
carryforwards. The net operating loss carryforwards will expire in the years
2011 through 2018 while the alternative minimum tax credits may be carried
forward indefinitely. Approximately $28.7 million of net operating loss
carryforwards and $1.9 of alternative minimum tax credit carryforwards were
generated by Chemical Leaman Corporation prior to their acquisition. The use of
pre-acquisition operating losses and tax credit carryforwards is subject to
limitations imposed by the Internal Revenue Code. The Company does not
anticipate that these limitations will affect the utilization of the
carryforwards prior to their expiration. The Company has state net operating
loss carryforwards which expire over the next 2 to 20 years.
The Company has provided a valuation allowance against certain state NOL
carryforwards. The Company believes that it is more likely than not that the
remaining net deferred tax asset of $19.4 million will be realized in the
future through sufficient taxable income from operations and the reversal of
deferred tax liabilities. Through the carryback of current year losses, the
Company generated a $4,940 of recoverable income taxes.
9--EMPLOYEE BENEFIT PLANS:
As a result of the acquisition of Chemical Leaman, the Company maintains
two noncontributory defined benefit plans that cover full-time CLC salaried
employees and certain other CLC employees under a collective bargaining
agreement. Retirement benefits for employees covered by the salaried plan are
based on years of service and compensation levels. The monthly benefit for
employees under the collective bargaining agreement plan is based on years of
service multiplied by a monthly benefit factor. Assets of the plans are invested
primarily in equity securities and fixed income investments. Pension costs are
funded in accordance with the provisions of the applicable law.
49
<PAGE> 51
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
The components of net periodic pension cost for the year ended December 31,
1998 are as follows:
<TABLE>
<CAPTION>
1998
------
<S> <C>
Service cost.................................................................... $ 429
Interest cost................................................................... 870
Return on plan assets........................................................... (771)
-----
$ 528
=====
</TABLE>
The actuarial assumptions used in accounting for the plans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Discount rates........................................................... 6.75%
Rate of assumed compensation increase.................................... 5.00%
Expected long-term rates of return on plan assets........................ 8.00%
</TABLE>
The following table sets forth the funded status of the two plans and the
amount recognized in the Company's consolidated balance sheets at December 31,
1998:
<TABLE>
<CAPTION>
ACCUMULATED
BENEFITS
EXCEED
ASSETS
-------------
<S> <C>
Actuarial present value of benefit obligations:
Benefit obligations.................................... $40,746
Plan assets at market value............................ 30,435
-------
Projected benefit obligation in excess of
plan assets......................................... 10,311
Unrecognized actuarial (loss) ......................... (348)
-------
Accrued pension liability, included in other
Noncurrent liabilities.............................. $ 9,963
=======
</TABLE>
The Company charged to operations payments to multiemployer pension plans
required by collective bargaining agreements of $267 for the year ended December
31, 1998. These defined benefit plans cover substantially all of the Company's
union employees not covered under the Company's plan. The actuarial present
value of accumulated plan benefits and net assets available for benefits to
employees under these multiemployer plans is not readily available.
Profit Sharing Plans
The Company has a profit sharing plan for substantially all employees.
Contributions are made at the discretion of the Board of Directors. A $300
contribution was made for 1996 and 1997. A $350 contribution was approved for
1998.
10 - PREFERRED STOCK:
MTL has authorized 5,000 shares, par value, $.01 per share, of "preferred
stock." Shares of preferred stock may be issued from time to time, in one or
more series, with such designation, assigned values, preferences and relative,
participating, optional or other rights, qualifications, limitations or
restrictions thereof as the Board of Directors of the Company from time to time
may adopt by resolution.
No holder of preferred shares of the Company shall have any preferential or
preemptive right to subscribe for, purchase or receive any share of stock, any
options or warrants for such shares, any rights to subscribe to or purchase such
shares or any securities which may at any time or from time to time be issued,
sold or offered for sale.
50
<PAGE> 52
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
The Board of Directors has authorized the issuance of two series of
preferred stock, 8% Redeemable Preferred Stock and 13.75% Senior Exchangeable
Preferred Stock. The designation assigned values, preferences and relative,
participating, optional or other rights, qualifications, limitations or
restrictions on such preferred stock are summarized as follows.
13.75% Mandatorily Redeemable Preferred Stock
In 1998, the Company issued 105 shares of 13.75% non-voting Senior
Exchangeable Preferred Stock with a liquidation preference of $100. Dividends
are payable quarterly commencing December 15, 1998 and are cumulative. Any
dividends not paid in cash prior to September 15, 2001 may be paid in additional
shares of Senior Exchangeable Preferred Stock. All shares are mandatorily
redeemable on September 15, 2006 at 100% of liquidation preference plus all
accrued dividends.
At its option, the Company may redeem the Senior Exchangeable Preferred
Stock after September 15, 2003 for a percentage of liquidation preference in
2003 at 106.88%, 2004 at 103.44%, 2005 and thereafter at 100%. Prior to
September 15, 2003, the Company may retire this stock from the proceeds of an
initial public offering for 113.75% of liquidation preference.
8% Mandatorily Redeemable Preferred Stock
In connection with the CLC acquisition on August 28, 1998, the Company
issued 50 shares of "8% Redeemable Preferred Stock" with a liquidation
preference of $100. These shares are convertible by the Company into debentures
with comparable dividend and maturity dates and are mandatorily redeemable in
2007. See Note 16 related to the subsequent liquidation of these shares.
11--COMMON STOCK:
The Company has 15,000 shares $.01 par value of common stock authorized,
and had 4,523, 4,549 and 2,000 shares outstanding at December 31, 1996, 1997 and
1998, respectively. One shareholder has the right to "put" 30 shares to the
Company in 2003 for $40 per share. Accordingly, these shares are classified as
mandatorily redeemable.
In connection with the recapitalization, MTL made a limited recourse
secured loans to shareholders in the amount of $1,398 which bears interest at
LIBOR plus 2% (7.5% at December 31, 1998). The loans are secured by a pledge of
approximately 100 shares of MTL common stock and options to purchase 210 shares
of MTL common stock. The principal amount of the loan is due on June 9, 2006,
with mandatory pre-payments due upon, and to the extent of, the receipt of
after-tax proceeds from the sale of the pledged securities.
51
<PAGE> 53
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
12--INCENTIVE STOCK OPTION PLANS:
Old Stock Option Plan
In 1992, an incentive stock option plan (the Old Plan) was adopted which
allowed for 100 options to be granted to eligible employees. During 1994, the
Company's Board of Directors elected to adopt a new incentive stock option plan
(the Plan). The Plan absorbed the options granted under the Old Plan, and an
additional 200 options were approved for granting at an exercise price not to be
less than the market price of the common stock at the date of grant. During
1996, an additional 400 shares were approved for granting under the Plan.
Options are granted at the discretion of the Board of Directors and are
exercisable for shares of unissued common stock or treasury stock. Options vest
20 percent each year, other than 11 options granted in 1994 and 100 options
granted in 1996, which vested immediately. Substantially all employees, officers
and directors are eligible for participation in the Plan.
As part of the recapitalization in 1998, MTL paid $14,678 to employees
for the cancellation of all outstanding options.
Combined stock option activity for the old Plan for the years ended December 31,
1996, through December 31, 1998, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE
NUMBER OF OPTION EXERCISE SHARES EXPIRATION
SHARES PRICES PRICE VESTED DATE
--------- ----------- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
Options outstanding at December 31, 1995....................... 277 6.25-15.50 12.26 94 2002-2005
1996 option activity:
Vesting of prior-year options............................. ----- 6.25-15.50 -- 59 2002-2005
Granted................................................... 320 15.00-18.25 17.68 100 2006
Exercised................................................. (6) 6.25-15.00 7.33 (6) 2002-2004
Canceled.................................................. (14) 6.25-16.00 15.07 (2) 2002-2006
----- ----
Options outstanding at December 31, 1996....................... 577 6.25-18.25 15.24 245 2002-2006
1997 option activity:
Vesting of prior-year options............................. -- 6.25-18.25 -- 82 2002-2006
Exercised................................................. (26) 6.25-15.50 11.95 (26) 2002-2006
Canceled.................................................. (14) 6.25-15.50 14.60 (1) 2002-2006
----- ----
Options outstanding at December 31, 1997....................... 537 6.25-18.25 15.42 300 2002-2006
1998 option activity:
Exercised................................................. (3) 15.00 15.42 (3) 2002-2006
Cancelled................................................. (2) 15.00-18.25 15.42 2002-2006
Recapitalization.......................................... (532) 6.05-18.25 15.42 (297) 2002-2006
----- ----
Old options outstanding at December 31, 1998................... -- --
===== ====
</TABLE>
The Company uses Accounting Principles Board Opinion No. 25, "Accounting
for Stock-Based Compensation," and the related interpretations to account for
the Plan. No compensation cost has been recognized under the Plan as the option
price has been greater than or equal to the market price of the common stock on
the applicable measurement date for all options issued. The Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), for disclosure
purposes in 1996. For SFAS 123 purposes, the fair value of each option grant has
been estimated as of the grant date using the Black-Scholes option pricing model
with the following weighted average assumptions: risk free interest rate of
6.18% for options with an expected life of four years and 6.39% for options with
an expected life of six years, expected option life of four or six years,
expected dividend rate of 0%, and expected volatility of 30.05%. Using these
assumptions, the fair value of stock options granted in 1996 is $2,054, which
would be amortized as compensation over the vesting period of the options. No
options were granted during 1997.
New Stock Option Plan
Subsequent to the recapitalization, MTL adopted a new employee stock option
plan pursuant to which a total of 222 shares of ML common stock will be
available for grant. Fifty percent of each new option granted on June 9, 1998
will vest in
52
<PAGE> 54
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
equal increments over four years. The remaining fifty percent of
each new option will vest in nine years, subject to acceleration if certain
per-share equity value targets are achieved or, in the event of a sale of MTL.
Vesting of the new options occurs only during an employee's term of employment.
The new options will become fully vested in the event of a termination of
employment without "cause" or for "good reason" within six months following a
sale of MTL. The exercise price for the new options is $40.00 per share and the
new options will expire ten years from the date of grant. Options granted after
June 9, 1998 shall vest as determined by a committee of MTL's Board of
Directors. The stock of the Company is no longer traded publicly. The fair value
of options granted during 1998 are based upon a model using a risk free rate of
4.64% for options with an expected life of 10 years. The fair value of stock
options granted in 1998 is $3,089.
In 1998, MTL granted 210 options in the new plan which are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE REMAINING EXERCISE PRICE
NUMBER OF EXERCISE CONTRACTUAL SHARES OF VESTED
PRICE RANGE SHARES PRICE LIFE (IN YEARS) VESTED SHARES
----------- ---------- -------- --------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$40 210 $40 10 -- --
</TABLE>
At December 31, 1998, a total of 12 authorized shares remain available
for granting.
Had compensation cost relating to the Plans been determined based upon the
fair value at the grant date for awards under the Plans consistent with the
method described in SFAS 123, the Company's net income (loss) and earnings
(loss) per share common would have been as follows for the years ended December
31:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C> <C>
Net income (loss) attributable to common stockholders:
As reported............................................... $8,837 $10,483 $(10,746)
Pro forma................................................. 8,010 10,217 (10,928)
Earnings (loss) per common share:
As reported............................................... $ 1.92 $ 2.23 $ (3.38)
Pro forma................................................. 1.74 2.17 (3.44)
</TABLE>
13--COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases revenue and other equipment under operating leases.
Future minimum lease payments under non-cancelable operating leases at December
31, 1998, are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
------------------------ ---------
<S> <C>
1999...................................................................... $6,063
2000...................................................................... 3,896
2001...................................................................... 2,399
2002...................................................................... 1,404
2003...................................................................... 1,400
</TABLE>
Rent expense under operating leases was $2,210, $2,821 and $2,798 for
the years ended December 31, 1996, 1997 and 1998, respectively.
Guarantor of Certain Lease Obligations
In 1995 and 1996, the Company entered into capital leases for tractors
and trailers with certain affiliates and owner--operators. The Company then sold
to a third party the lease receivables for which it received $979 in 1996. The
Company is contingently liable as the guarantor for the remaining balance of the
receivables sold of $1,573 at December 31, 1998. These
53
<PAGE> 55
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
leases are collateralized by the equipment related to these leases. Management
estimated the fair value of this equipment to be $1,359 at December 31, 1998,
which was based upon an average dealer-estimated repurchase price.
Also, in 1995 and 1996, the Company entered into capital leases for
tractors and trailers with other affiliates. The Company then sold to a third
party the lease receivables for which it received $202 in 1996. The Company is
contingently liable as the guarantor for the remaining balance of the
receivables sold of $2,228 at December 31, 1998. These leases are collateralized
by the equipment related to these leases. Management estimated the fair value of
this equipment to be $1,952 at December 31, 1998, which was based upon an
average dealer-estimated repurchase price.
Reserves have been recognized by the Company for its estimated exposure
under the above guarantees. There have been no material changes in the
recognized reserves, nor are material changes expected in the future. It is
possible that the estimates used in determining these reserves and the fair
value may change. However, it is the opinion of management that the ultimate
difference in the estimates will not have a material effect on the Company's
financial position or results of operations.
Environmental Matters
MTL and CLC's activities involve the handling, transportation, storage,
and disposal of bulk liquid chemicals, many of which are classified as hazardous
materials, hazardous substances, or hazardous wastes. The combined companies'
tank wash and terminal operations engage in the storage or discharge of
wastewater and stormwater that may contain hazardous substances, and from time
to time MTL and CLC store diesel fuel and other petroleum products at their
terminals. As such, MTL and CLC are subject to environmental, health and safety
laws and regulations by U.S. federal, state, local and Canadian government
authorities. Environmental laws and regulations, are complex, change frequently
and have tended to become more stringent over time. There can be no assurance
that violations of such laws or regulations will not be identified or occur in
the future, or that such laws and regulations will not change in a manner that
could impose material costs on MTL and CLC.
As handlers of hazardous substances, MTL and CLC are potentially subject
to strict, joint and several liability for investigating and rectifying the
consequences of spills and other environmental releases of such substances
either under CERCLA or comparable state laws. From time to time, MTL and CLC
have incurred remedial cost and regulatory penalties with respect to chemical or
wastewater spills and releases at their facilities. In addition, MTL's
relationship could, under certain circumstances, result in MTL incurring
environmental liabilities attributable to affiliates' operations, although MTL
has not incurred any such related liability in the past.
As a result of environmental studies being conducted at its facilities in
conjunction with its environmental program, MTL has identified environmental
contamination at certain of such sites which will require environmental
remediation. Additionally, MTL has been named a "potentially responsible party,"
or has otherwise been alleged to have some level of responsibility, under CERCLA
or similar state laws for cleanup of off-site locations at which MTL's waste, or
material transported by MTL, has allegedly been disposed.
While the Company believes the environmental liability is a reasonable
estimate based on known probable events at December 31, 1998, certain
preacquisition contingencies exist (including, among other, success of
remediation plans, negotiations with state and federal agencies, final
allocation of responsibility for certain sites and settlement of certain
indemnifications and escrows created in connection with the acquisition of CLC).
These preacquisition contingencies may require adjustment to the purchase price
of CLC in accordance with SFAS 38, "Accounting for Certain Preacquisition
Contingencies of Purchased Enterprises."
As of December 31, 1998, MTL's recorded environmental liabilities
include two federal superfund sites where CLC is the sole party responsible for
remediation, certain sites where MTL or CLC have been named a potentially
responsible party and other sites where the Company has identified environmental
contamination. MTL's recorded assets as of December 31, 1998 include funds
receivable from excess carriers related to the Company's Bridgeport, New Jersey
site and certain indemnifications (including escrow on seller proceeds) from the
former shareholders related to the CLC acquisition. While the Company believes
they may have valid insurance claims with respect to liabilities in addition to
Bridgeport, New Jersey, MTL has not recorded assets with respect to these other
sites. Due to the uncertainty of timing of the actual receipts and disbursements
of funds related to MTL's recorded environmental assets and liabilities, amounts
are recorded on an
54
<PAGE> 56
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
undiscounted basis. It is the opinion of management that the ultimate
disposition of these matters will not have a material effect on the Company's
financial position or results of operations. FEDERAL SUPERFUND SITES
CLC is currently the sole party responsible for remediation of the
following two federal Superfund sites:
Bridgeport, New Jersey
During 1991, CLC entered into a Consent Decree with the EPA filed in
the U.S. District Court for the District of New Jersey, U.S. v. Chemical Leaman
Tank Lines, Inc., Civil Action No. 91-2637 (JFG) (D.N.J.), MTL INC. AND
SUBSIDIARIES with respect to its site located in Bridgeport, New Jersey,
requiring CLC to remediate groundwater contamination. The Consent Decree
required CLC to undertake Remedial Design and Remedial Action ("RD/RA") related
to the groundwater operable unit of the cleanup.
In August 1994, the EPA issued a Record of Decision, ("ROD") selecting
a remedy for the wetlands operable unit at the Bridgeport site. In October
1998, the EPA issued an administrative order that requires CLC to implement the
EPA's wetlands remedy. In April 1998, the federal and state natural resource
damages trustees indicated their intention to bring claims against CLC for
natural resource damages at the Bridgeport site. The trustees have indicated
that their demand for natural resources damages is due to wetlands damage,
other conditions and oversight cost reimbursement. CLC is currently negotiating
with the state and federal trustees to enter a Consent Decree that will resolve
the natural resource damages claims. CLC has also entered an agreement in
principle to reimburse the EPA for past costs in investigating and overseeing
activities at the site. In addition, the EPA has investigated contamination in
site soils. No decision has been made as to the extent of soil remediation to
be required, if any.
CLC is in litigation with its insurers to recover its costs in connection
with the environmental cleanup at the Bridgeport site. Chemical Leaman Tank
Lines, Inc. v. Aetna Casualty & Surety Co., et al. On April 7, 1993, the U.S.
District Court for the District of New Jersey entered a judgment requiring the
insurers to reimburse CLC 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,
CLC and its primary insurer settled all of CLC'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. In September 1997, the District Court issued an order
allocating liability among applicable policies. An appeal from the allocation is
currently pending before the Third Circuit. Since some of CLC's insurance
carriers are insolvent, allocation of the costs among the insurers will affect
the amount of recovery CLC can expect to receive. CLC anticipates that it will
recover the majority of the costs associated with remediation of the Bridgeport
site, including attorneys fees and expenses, from its insurance carriers.
West Caln Township, Pennsylvania
The EPA has alleged that CLC disposed of Hazardous Materials at the William
Dick Lagoons Superfund Site in West Caln, Pennsylvania. On October 10, 1995,
CLC entered a Consent Decree with the EPA which required CLC to (1) pay the EPA
for installation of an alternate water line to provide water to area residents;
(2) perform an interim groundwater remedy at the site; and (3) conduct soil
remediation. CLC has paid all costs associated with installation of the
waterline. CLC has performed a hydrogeologic study, and has commenced
activities for construction of a groundwater treatment plant to pump and treat
groundwater. The EPA anticipates that CLC will operate the plant for about five
years, at which time the EPA will evaluate groundwater conditions and determine
whether a final groundwater remedy is necessary. Field sampling for soil
remediation recently commenced. The Consent Decree does not cover the final
groundwater remedy or other site remedies or claims, if any, for natural
resource damage.
POTENTIALLY RESPONSIBLE PARTY AND OTHER SITES
CLC has been named as a PRP under CERCLA and similar state laws at
approximately 40 former waste treatment and/or disposal sites including the
Helen Kramer Site in New Jersey where CLC recently settled its liability. In
general, CLC is among several PRPs named at these sites. CLC is also incurring
expenses resulting from the investigation and/or remediation of certain current
and former CLC properties, including its facility in Tonawanda, New York and
its former facility in Putnam County, West Virginia. As a result of its due
diligence for the acquisition of CLC, MTL identified other owned or formerly
owned properties that may require investigation and/or remediation. CLC's
involvement at some of the above referenced sites could amount to material
liabilities, and there can be no assurance that costs associated with these
sites, individually or in the aggregate, will not be material. MTL has
established reserves to cover amounts associated with the Helen Kramer
Landfill, its facility at Tonawanda, New York and its former facility in Putnam
County, West Virginia.
55
<PAGE> 57
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
14--OTHER TRANSACTIONS WITH RELATED PARTIES:
On December 15, 1998, the Company sold its corporate headquarters and the
adjoining trailer manufacturing facility to a former shareholder for
approximately $.75 million. The Company purchased tank trailers for $5,138,
$6,587 and $7,497 in 1996, 1997 and 1998, respectively, from a tank trailer
manufacturing company owned by the former shareholder and has commitments to
purchase additional tank trailers costing approximately $58 as of December 31,
1998. Also, the related company provided repair, maintenance, design,
engineering, transloading, intermodal and other services to the Company totaling
$572, $347 and $367 during the years ended December 31, 1996, 1997 and 1998,
respectively. See also Note 3 for accounts and notes receivable from former
shareholders.
MTL and Apollo Management have entered into a management agreement
whereby MTL retained Apollo Management to provide financial and strategic advice
to MTL. Pursuant to the terms of the management agreement, Apollo Management has
agreed to provide financial and strategic services to MTL as reasonably
requested by MTL's Board of Directors. As consideration for services to be
rendered under the management agreement, Apollo Management received an initial
fee of $2.0 million on June 9, 1998 and thereafter will receive an annual fee of
$500 until termination of the management agreement. The
56
<PAGE> 58
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
management agreement may be terminated upon 30 days written notice by Apollo
Management or MTL to the other party thereto. Under this agreement MTL
recognized $294 in selling and administrative expense in 1998.
15--GEOGRAPHIC SEGMENTS:
The Company's operations are located primarily in the United States,
Canada and Mexico. Inter-area sales are not significant to the total revenue of
any geographic area. Information about the Company's operations in different
geographic areas for the years ended December 31, 1996, 1997 and 1998, is as
follows:
<TABLE>
<CAPTION>
1996
----
U.S. INTERNATIONAL ELIMINATIONS CONSOLIDATED
-------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues................................ $212,508 $23,889 $ (797) $ 235,600
Operating income.................................. 17,426 794 -- 18,220
Identifiable assets............................... 159,976 19,690 (6,062) 173,604
Depreciation and amortization..................... 12,530 1,362 -- 13,892
Capital expenditures.............................. 20,244 333 -- 20,577
1997
----
U.S. INTERNATIONAL ELIMINATIONS CONSOLIDATED
-------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues................................ $252,943 $34,174 $ (1,070) $286,047
Net operating income.............................. 19,977 1,116 -- 21,093
Identifiable assets............................... 178,347 27,398 (11,709) 194,036
Depreciation and amortization..................... 14,708 2,627 -- 17,335
Capital expenditures.............................. 23,043 12,078 -- 35,121
1998
----
U.S. INTERNATIONAL ELIMINATIONS CONSOLIDATED
-------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues................................ $373,562 $25,221 $ (1,045) $397,738
Net operating income.............................. 6,171 2,395 -- 8,566
Identifiable assets............................... 569,482 28,182 (14,418) 583,246
Depreciation and amortization..................... 27,478 3,565 -- 31,043
Capital expenditures.............................. 21,630 8,134 -- 29,764
</TABLE>
16--SUBSEQUENT EVENTS:
On February 3, 1999, the Company entered into a settlement agreement
with former shareholders of CLC regarding the remaining consideration owed in
the CLC acquisition. The agreement calls for a payment of $3 million of
restricted cash to the former shareholders as a settlement of final payment of
amounts owed under the merger agreement and a cancellation of the 50 preferred
shares issued in connection with the acquisition. This agreement resulted in
the recording of additional goodwill of approximately $3 million.
17--GUARANTOR SUBSIDIARIES:
The 10% Series B Senior Subordinated Notes issued in June 1998 and due
2006 are unconditionally guaranteed on a senior unsecured basis pursuant to
guarantees by all the Company's direct and indirect domestic subsidiaries (the
Guarantors). In 1996, the Company acquired Levy Transport, Ltd., a Canadian
Corporation, which is a non-guarantor subsidiary.
The Company conducts all of its business through and derives virtually
all its income from its subsidiaries. Therefore, the Company's ability to make
required principal and interest payments with respect to the Company's
indebtedness (including the notes) and other obligations depends on the earnings
of subsidiaries and its ability to receive funds from its subsidiaries through
dividends or other payments.
The following condensed consolidating financial information presents:
1. Condensed consolidating balance sheets at December 31, 1998, 1997 and
condensed consolidating statements of operations and of cash flows
for the three years ended December 31, 1998.
57
<PAGE> 59
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
2. The parent company and combined guarantor subsidiaries.
3. Elimination entries necessary to consolidate the parent company and
all its subsidiaries.
58
<PAGE> 60
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ -------------- ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ......................... $ -- $ (721) $ 806 $ -- $ 85
Restricted cash ................................... -- 10,867 -- 10,867
Accounts receivable, net .......................... -- 85,867 3,031 -- 88,898
Current maturities & other
receivables ...................................... -- 178 1,082 -- 1,260
Notes receivable .................................. -- 784 -- -- 784
Inventories ....................................... -- 1,740 261 -- 2,001
Prepaid expenses .................................. -- 7,283 468 -- 7,751
Prepaid tires ..................................... -- 7,240 124 -- 7,364
Income tax recoverable ............................ -- 4,952 (12) -- 4,940
Deferred income taxes ............................. -- 11,559 -- -- 11,559
Other ............................................. -- 3,764 29 -- 3,793
--------- --------- --------- --------- ---------
Total current assets ........................... -- 133,513 5,789 -- 139,302
Property and equipment, net .............................. -- 211,905 21,317 -- 233,222
Other receivables, less current
maturities ............................................ -- 885 -- -- 885
Goodwill, net ............................................ -- 136,276 1,076 -- 137,352
Insurance proceeds and other environmental
receivables ........................................... -- 45,916 -- -- 45,916
Deferred income taxes .................................... -- 7,869 -- -- 7,869
Investment in subsidiaries ............................... 301,391 -- -- (301,391) --
Other assets ............................................. 100,000 18,700 -- (100,000) 18,700
--------- --------- --------- --------- ---------
$ 401,391 $ 555,064 $ 28,182 $(401,391) $ 583,246
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of
indebtedness ..................................... $ 3,153 $ 208 $ 100 $ -- $ 3,461
Accounts payable .................................. -- 6,272 1,371 -- 7,643
Affiliates and independent
owner-operators payable .......................... -- 8,266 73 -- 8,339
Accrued expenses .................................. -- 64,622 2,847 -- 67,469
Income taxes payable .............................. -- 1,331 215 -- 1,546
--------- --------- --------- --------- ---------
Total current liabilities ...................... 3,153 80,699 4,606 -- 88,458
Long-term debt, less current
maturities ............................................ 429,354 100,000 8,516 (100,000) 437,870
Accrued loss and damage claims ........................... -- 3,290 -- -- 3,290
Environmental liabilities ................................ -- 69,956 -- -- 69,956
Other long term liabilities .............................. -- 9,321 642 -- 9,963
Deferred income tax ...................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Total liabilities .............................. 432,507 263,266 13,764 (100,000) 609,537
Mandatorily redeemable common stock ...................... 1,210 -- -- -- 1,210
Mandatorily redeemable preferred stock ................... 15,994 -- -- -- 15,994
Minority interest in subsidiaries ........................ -- 4,825 -- -- 4,825
Shareholders' equity:
Common stock and
additional paid-in-capital ....................... 104,827 241,381 15,082 (256,463) 104,827
Retained earnings ................................. 38,495 45,592 69 (45,661) 38,495
Stock recapitalization ............................ (189,589) -- (54) 54 (189,589)
Cumulative translation adjustment ................. (655) -- (679) 679 (655)
Note receivable ................................... (1,398) -- -- -- (1,398)
--------- --------- --------- --------- ---------
Total shareholders' equity (deficit)............ (48,320) 286,973 14,418 (301,391) (48,320)
--------- --------- --------- --------- ---------
$ 401,391 $ 555,064 $ 28,182 $(401,391) $ 583,246
========= ========= ========= ========= =========
</TABLE>
59
<PAGE> 61
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ -------------- ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ......................... $ -- $ 703 $ 674 $ -- $ 1,377
Restricted cash ................................... -- -- -- -- --
Accounts receivable, net .......................... -- 35,857 5,051 (2,736) 38,172
Current maturities & other
receivables ...................................... -- 396 767 -- 1,163
Notes receivable .................................. 547 -- 547
Inventories ....................................... -- 622 336 -- 958
Prepaid expenses .................................. -- 1,893 929 -- 2,822
Prepaid tires ..................................... -- 4,324 -- -- 4,324
Income tax recoverable ............................ -- -- -- -- --
Deferred income taxes ............................. -- 2,686 -- -- 2,686
Other ............................................. -- 127 -- -- 127
--------- --------- --------- --------- ---------
Total current assets ........................... -- 47,155 7,757 (2,736) 52,176
Property and equipment, net .............................. -- 118,444 18,066 -- 136,510
Other receivables, less current
maturities ............................................ -- 1,987 -- -- 1,987
Goodwill, net ............................................ -- 750 1,253 -- 2,003
Investment in subsidiaries ............................... 79,532 -- -- (79,532) --
Other assets ............................................. -- 1,301 322 (263) 1,360
--------- --------- --------- --------- ---------
$ 79,532 $ 169,637 $ 27,398 $ (82,531) $ 194,036
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of
indebtedness ..................................... $ -- $ 1,849 $ 458 $ -- $ 2,307
Accounts payable .................................. -- 3,125 1,264 4,389
Affiliates and independent
owner-operators payable .......................... -- 6,365 67 -- 6,432
Accrued expenses .................................. 14,413 4,018 (2,713) 15,718
Income taxes payable .............................. -- 727 71 -- 798
--------- --------- --------- --------- ---------
Total current liabilities ...................... -- 26,479 5,878 (2,713) 29,644
Long-term debt, less current
maturities ............................................ -- 42,143 10,934 (286) 52,791
Accrued loss and damage claims ........................... -- 5,065 -- -- 5,065
Environmental liabilities
Other long term liabilities
Deferred income tax ...................................... -- 25,340 1,664 -- 27,004
--------- --------- --------- --------- ---------
Total liabilities .............................. -- 99,027 18,476 (2,999) 114,504
Mandatorily redeemable common stock ...................... -- -- -- -- --
Mandatorily redeemable preferred stock ................... -- -- -- -- --
Minority interest in subsidiaries ........................ -- -- -- -- --
Shareholders' equity:
Common stock and
additional paid-in capital ....................... 30,504 21,794 8,694 (30,488) 30,504
Retained earnings ................................. 49,241 48,816 425 (49,241) 49,241
Stock recapitalization ............................ -- -- -- -- --
Cumulative translation
adjustments ...................................... (213) -- (197) 197 (213)
Note receivable ................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Total shareholders' equity ..................... 79,532 70,610 8,922 (79,532) 79,532
--------- --------- --------- --------- ---------
$ 79,532 $ 169,637 $ 27,398 $ (82,531) $ 194,036
========= ========= ========= ========= =========
</TABLE>
60
<PAGE> 62
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Transportation .................................... $ -- $ 331,377 $ 23,991 $ (346) $ 355,022
Other ............................................. -- 42,185 1,230 (699) 42,716
--------- --------- --------- --------- ---------
Total revenues ................................. -- 373,562 25,221 (1,045) 397,738
Operating expenses
Purchased transportation .......................... -- 223,858 2,820 (1,045) 225,633
Option expense .................................... -- 14,678 -- -- 14,678
Depreciation and amortization ..................... -- 27,478 3,565 -- 31,043
Other operating expenses .......................... -- 101,377 16,441 -- 117,818
--------- --------- --------- --------- ---------
Operating income or (loss) ..................... -- 6,171 2,395 -- 8,566
Interest expense, net .................................... (14,290) (4,774) (727) -- (19,791)
Other income ............................................. -- 164 -- -- 164
Equity in earnings of subsidiaries ....................... (1,145) -- -- 1,145 --
--------- --------- --------- --------- ---------
Income (loss) before taxes ........................ (15,435) 1,561 1,668 1,145 (11,061)
Income taxes ............................................. 5,344 (641) (656) 4,047
Minority interest ........................................ -- (74) -- -- (74)
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary
item .............................................. (10,091) 846 1,012 1,145 (7,088)
Extraordinary item ....................................... -- (3,008) (69) -- (3,077)
--------- --------- --------- --------- ---------
Net income (loss) ........................................ $ (10,091) $ (2,162) $ 943 $ 1,145 $ (10,165)
========= ========= ========= ========= =========
</TABLE>
61
<PAGE> 63
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Transportation .................................... $ -- $ 233,620 $ 33,380 $ (631) $ 266,369
Other ............................................. -- 19,322 794 (438) 19,678
--------- --------- --------- --------- ---------
Total revenues ................................. -- 252,942 34,174 (1,069) 286,047
Operating expenses
Purchased transportation .......................... -- 167,462 11,724 (1,069) 178,117
Depreciation and amortization ..................... -- 14,708 2,627 -- 17,335
Other operating expenses .......................... -- 50,794 18,708 -- 69,502
--------- --------- --------- --------- ---------
Operating income or (loss) ..................... -- 19,978 1,115 -- 21,093
Interest expense, net .................................... -- (2,553) (622) -- (3,175)
Other expense ............................................ -- (39) -- -- (39)
Equity in earnings of subsidiaries ....................... 10,483 -- -- (10,483) --
--------- --------- --------- --------- ---------
Income before taxes ............................... 10,483 17,386 493 (10,483) 17,879
Income taxes ............................................. -- (7,160) (236) -- (7,396)
--------- --------- --------- --------- ---------
Net income ............................................... $ 10,483 $ 10,226 $ 257 $ (10,483) $ 10,483
========= ========= ========= ========= =========
</TABLE>
62
<PAGE> 64
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Transportation .................................... $ -- $ 194,297 $ 23,889 $ (374) $ 217,812
Other ............................................. -- 18,211 -- (424) 17,787
--------- --------- --------- --------- ---------
Total revenues ................................. 212,508 23,889 (798) 235,599
Operating expenses
Purchased transportation .......................... -- 139,229 7,464 (798) 145,895
Depreciation and amortization ..................... -- 12,530 1,362 -- 13,892
Other operating expenses .......................... -- 43,323 14,269 -- 57,592
--------- --------- --------- --------- ---------
Operating income or (loss) ..................... -- 17,426 794 -- 18,220
Interest expense, net .................................... -- (3,017) (477) -- (3,494)
Other income ............................................. -- 215 -- -- 215
Equity in earnings of subsidiaries ....................... 8,837 -- -- (8,837) --
--------- --------- --------- --------- ---------
Income before taxes ............................... 8,837 14,624 317 (8,837) 14,941
Income taxes ............................................. -- (5,954) (150) -- (6,104)
--------- --------- --------- --------- ---------
Net income ............................................... $ 8,837 $ 8,670 $ 167 $ (8,837) $ 8,837
========= ========= ========= ========= =========
</TABLE>
63
<PAGE> 65
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used for) operating activities:
Net income (loss) ................................. $ (10,091) $ (2,162) $ 943 $ 1,145 $ (10,165)
Adjustments for non cash
charges .......................................... 10,091 16,208 3,647 -- 29,946
Changes in assets and liabilities ................. -- (1,992) 210 (1,145) (2,927)
--------- --------- --------- --------- ---------
Net cash provided by (used
for) operating activities ................... -- 12,054 4,800 -- 16,854
Investing activities:
Acquisition of subsidiary ......................... (264,016) -- -- -- (264,016)
Capital expenditures .............................. -- (21,631) (8,134) -- (29,765)
Proceeds from asset dispositions .................. -- 4,026 480 -- 4,506
Other ............................................. -- (258) -- -- (258)
--------- --------- --------- --------- ---------
Net cash used for investing
activities .................................. (264,016) (17,863) (7,654) -- (289,533)
Financing activities:
Proceeds from issuance of long
term debt and capital leases ..................... 433,000 9,807 -- 442,807
Payment of obligations ............................ (45,279) (11,898) -- (57,177)
Recapitalization expenditures ..................... (188,324) (55) -- (188,379)
Issuance of common stock--net ..................... 74,323 -- -- -- 74,323
Other ............................................. -- (161) -- -- (161)
Net change in intercompany
balances ....................................... (54,983) 49,825 5,158 -- --
--------- --------- --------- --------- ---------
Net cash provided by
financing activities ........................... 264,016 4,385 3,012 -- 271,413
--------- --------- --------- --------- ---------
Net increase in cash .............................. -- (1,424) 158 -- (1,266)
Effect of exchange rate changes on
cash ............................................. -- -- (26) -- (26)
Cash, beginning of period ......................... -- 703 674 -- 1,377
--------- --------- --------- --------- ---------
Cash, end of period ............................... $ -- $ (721) $ 806 $ -- $ 85
========= ========= ========= ========= =========
</TABLE>
64
<PAGE> 66
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used for) Operating activities:
Net income (loss) ................................. $ 10,483 $ 10,225 $ 258 $ (10,483) $ 10,483
Adjustments for non cash
charges .......................................... (10,483) 17,912 2,725 10,483 20,637
Changes in assets and liabilities ................. -- (2,940) 2,288 3,364 2,712
--------- --------- --------- --------- ---------
Net cash provided by (used
for) operating activities ................... -- 25,197 5,271 3,364 33,832
--------- --------- --------- --------- ---------
Investing activities:
Capital expenditures .............................. -- (23,043) (12,078) -- (35,121)
Proceeds from asset dispositions .................. -- 800 1,341 -- 2,141
Payments received on other
receivables ...................................... -- 1,197 -- -- 1,197
Other ............................................. -- 142 (49) -- 93
--------- --------- --------- --------- ---------
Net cash used for investing
activities .................................. -- (20,904) (10,786) -- (31,690)
--------- --------- --------- --------- ---------
Financing activities:
Proceeds from issuance of long
term debt and capital leases ..................... -- -- 4,345 -- 4,345
Payment of obligations ............................ -- (3,948) (2,421) 201 (6,168)
Issuance of common stock--net ..................... 320 -- 3,545 (3,545) 320
Net change in intercompany
balances ......................................... (320) 320 -- -- --
--------- --------- --------- --------- ---------
Net cash provided by
financing activities ........................ -- (3,628) 5,469 (3,344) (1,503)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash ................... -- 665 (46) 20 639
Effect of exchange rate changes on
cash ............................................. -- -- 63 (20) 43
Cash, beginning of period ......................... -- 38 657 -- 695
--------- --------- --------- --------- ---------
Cash, end of period ............................... $ -- $ 703 $ 674 $ -- $ 1,377
========= ========= ========= ========= =========
</TABLE>
65
<PAGE> 67
MTL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN 000'S) EXCEPT PER SHARE DATA
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used for)
Operating activities:
Net income ........................................ $ 8,837 $ 8,670 $ 167 $ (8,837) $ 8,837
Adjustments for non cash
charges .......................................... (8,837) 14,227 2,869 8,837 17,096
Changes in assets and
liabilities ...................................... -- (1,519) (2,476) 366 (3,629)
--------- --------- --------- --------- ---------
Net cash provided by
(used for) operating
activities .................................. -- 21,378 560 366 22,304
--------- --------- --------- --------- ---------
Investing activities:
Capital expenditures .............................. -- (20,244) (333) -- (20,577)
Proceeds from asset
dispositions ..................................... -- 2,053 180 -- 2,233
Acquisition of subsidiary ......................... -- (4,725) -- -- (4,725)
Payments received on other
receivables ...................................... -- 1,026 -- -- 1,026
Other ............................................. -- 263 -- -- 263
--------- --------- --------- --------- ---------
Net cash used for
investing activities ........................ -- (21,627) (153) -- (21,780)
--------- --------- --------- --------- ---------
Financing activities:
Proceeds from sale of lease
receivables ...................................... -- 1,181 -- -- 1,181
Proceeds from issuance of long
term debt and capital leases ..................... -- 31,000 4,410 (366) 35,044
Payment of obligations ............................ -- (32,264) (4,144) -- (36,408)
Issuance of common stock--
net .............................................. 48 -- -- -- 48
Net change in intercompany
balances ......................................... (48) 48 -- -- --
--------- --------- --------- --------- ---------
Net cash provided by
financing activities ........................ -- (35) 266 (366) (135)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash .......................... -- (284) 673 -- 389
Effect of exchange rate changes on
cash .................................................. -- -- (16) -- (16)
Cash, beginning of period ................................ -- 322 -- -- 322
--------- --------- --------- --------- ---------
Cash, end of period ...................................... $ -- $ 38 $ 657 $ -- $ 695
========= ========= ========= ========= =========
</TABLE>
66
<PAGE> 68
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C><C>
2.1 -- Agreement and Plan of Merger, dated as of February 10, 1998, by and
among MTL and Sombrero Acquisition Corp.*
2.2 -- Agreement and Plan of Merger, dated as of June 9, 1998, by and
among Palestra Acquisition Corp., CLC and the shareholders of CLC.*
2.3 -- Amendment No. 1 to the Agreement and Plan of Merger, dated as of
July 27, 1998, by and among Palestra Acquisition Corp., CLC and the
shareholders of CLC.*
2.4 -- Amendment No. 2 to the Agreement and Plan of Merger, dated as of
August 25, 1998, by and among Palestra Acquisition Corp., CLC and the
shareholders of CLC.*
3.1 -- Articles of Incorporation of MTL.*
</TABLE>
67
<PAGE> 69
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C><C>
3.2 -- Bylaws of MTL.*
4.1 -- Credit Agreement, dated as of June 9, 1998 and amended and restated
as of August 28, 1998, between MTL, Levy Transport, Ltd., the lenders
party thereto and Credit Suisse First Boston Corporation, as
administrative agent.*
4.2 -- Indenture, dated as of June 9, 1998, by and among MTL, the
Guarantors and United States Trust Company of New York, as trustee
(including form of 10% Senior Subordinated Notes due 2006 and form of
Floating Interest Rate Subordinated Term Securities due 2006).*
4.3 -- First Supplemental Indenture, dated as of August 28, 1998, by and
among MTL, CLC and its subsidiaries as Guarantors, to the indenture
dated as of June 9, 1998.*
4.4 -- Articles of Amendment for 13.75% Senior Exchangeable Preferred
Stock.*
4.5 -- Articles of Amendment for 8% Redeemable Preferred Stock.*
4.6 -- Exchange Indenture re: 13.75% Senior Exchangeable Preferred Stock.*
4.7 -- Indenture, dated as of June 16, 1997 between CLC and First Union
bank, as Trustee.*
4.8 -- First Supplemental Indenture, dated as of August 12, 1998, between
CLC and First Union National bank to the indenture dated as of June
16, 1997.*
4.9 -- Form of 10% Senior Subordinated Notes due 2006 (filed as part of
Exhibit 4.2).*
4.10 -- Form of Floating Interest Rate Subordinated Term Securities due
2006 (filed as part of Exhibit 4.2).*
4.11 -- Registration Rights Agreement, dated as of June 9, 1998, by and
among MTL, the Guarantors and BT Alex. Brown Incorporated, Credit
Suisse First Boston Corporation and Salomon Brothers Inc.*
10.1 -- MTL 1998 Employee Stock option Plan.*
10.2 -- Employment Agreement, dated as if February 10, 1998, by and between
Charles J. O'Brien and Montgomery Tank Lines, Inc.*
10.3 -- Supplemental Letter dated as of February 10, 1998 to Employment
Agreement between Charles J. O'Brien and Montgomery Tank Lines, Inc.*
10.4 -- Employment Agreement, dated as of February 10, 1998, by and between
Richard J. Brandewie and Montgomery Tank Lines, Inc.*
10.5 -- Employment Agreement, dated as of February 10, 1998, by and between
Marvin Sexton and Montgomery Tank Lines, Inc.*
</TABLE>
68
<PAGE> 70
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C><C>
10.6 -- Consulting Agreement between Montgomery Tank Lines and Elton E.
Babbit, dated February 10, 1998.*
10.7 -- Shareholders' Agreement by and between Elton E. Babbit, Charles J.
O'Brien, Jr., Richard J. Brandewie, Marvin E. Sexton and Apollo, dated
as of February 10, 1998.*
10.8 -- Non-Competition Agreement with Elton E. Babbit, dated as of
February 10, 1998.*
10.9 -- Non-Competition Agreement with Gordon Babbit, dated as of February
10, 1998.*
10.10 -- Management Agreement between Apollo and MTL, dated as of February
10, 1998.*
10.11 -- Marvin Sexton Limited Recourse Secured Promissory Note, dated as if
June 9, 1998.*
21.1 LIST OF THE SUBSIDIARIES OF MTL AS OF DECEMBER 31, 1998*
27 Financial Data Schedule (for SEC use only)
</TABLE>
- ------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on November 3,
1998 Registration No. 333-66711.
(d) Reports on Form 8-K
None.
69
<PAGE> 71
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.
/s/ Charles J. O'Brien, Jr.
----------------------------------------
Charles J. O'Brien, Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: March 30, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Charles J. O'Brien Chairman of the Board, President March 30, 1999
- ------------------------------------- and Chief Executive Officer
Charles J. O'Brien (Principal Executive Officer)
/s/ Richard J. Brandewie Senior Vice President, Treasurer March 30,. 1999
- ------------------------------------- and Chief Financial Officer
Richard J. Brandewie (Principal Financial and
Accounting Officer)
/s/ Marvin E. Sexton
- ------------------------------------- Director March 30, 1999
Marvin E. Sexton
/s/ Joshua J. Harris
- ------------------------------------- Director March 30, 1999
Joshua J. Harris
- ------------------------------------- Director
Michael D. Weiner
- ------------------------------------- Director
Robert A. Katz
- ------------------------------------- Director
Marc J. Rowan
/s/ John H. Kissick
- ------------------------------------- Director March 30, 1999
John H. Kissick
- ------------------------------------- Director
Philip J. Ringo
</TABLE>
70
<PAGE> 72
SUPPLEMENT INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT
No annual report to security holders covering the Registrant's last
fiscal year or proxy statement, form of proxy or other proxy soliciting
material has been sent to security holders during the 1998 fiscal year.
71
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 85
<SECURITIES> 0
<RECEIVABLES> 92,833
<ALLOWANCES> 3,935
<INVENTORY> 2,001
<CURRENT-ASSETS> 139,302
<PP&E> 327,496
<DEPRECIATION> 94,274
<TOTAL-ASSETS> 583,246
<CURRENT-LIABILITIES> 88,458
<BONDS> 0
15,994
0
<COMMON> 20
<OTHER-SE> (48,340)
<TOTAL-LIABILITY-AND-EQUITY> 583,246
<SALES> 397,738
<TOTAL-REVENUES> 397,738
<CGS> 0
<TOTAL-COSTS> 389,172
<OTHER-EXPENSES> 164
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,791
<INCOME-PRETAX> (11,061)
<INCOME-TAX> (4,047)
<INCOME-CONTINUING> (7,088)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,077)
<CHANGES> 0
<NET-INCOME> (10,165)
<EPS-PRIMARY> ($3.38)
<EPS-DILUTED> ($3.38)
</TABLE>
