ITEM 1. BUSINESS
GENERAL
Mark VII, Inc. (the "Company") is a holding company, the principal assets of which are its transportation services subsidiary, Mark VII Transportation Company, Inc. ("Mark VII") and Mark VII's subsidiaries. The Company is a Delaware corporation, but was originally organized in 1976 as a Missouri corporation. The Company is a service organization that acts as a provider of transportation and logistics services. As a provider of transportation services, the Company arranges for domestic and international transportation, using a number of different transportation modes, including rail, truck, ship and air. As a logistics manager, the Company provides its customers with value-added elements of the distribution chain, such as private fleet management, warehousing and regional and local distribution.
The Company has established a network of transportation sales personnel and logistics managers at its headquarters in Memphis, Tennessee and 111 branch sales offices in 33 states. The majority of the Company's branch offices are operated by independent commission agents responsible for the client relationships, office expenses and billing. The Company supports its agency offices by providing expertise in multiple transportation modes, rate negotiation and logistics design, as well as administrative and credit services.
The Company acts as a link between shippers and carriers. Shippers use transportation services companies to complement in-house transportation departments. The Company augments in-house shipping departments by providing expertise in multiple modes of transportation, providing access to additional transportation equipment, negotiating transportation rates and increasing the productivity of in-house personnel. The Company provides shippers with an opportunity to outsource all or part of the transportation function, thereby allowing them to devote assets and personnel to their primary business. The Company's services are also used by transportation carriers to supplement their in-house sales departments and to improve equipment utilization. The Company maintains close relationships with major railroads, trucklines, shipping lines and air freight carriers.
SERVICES PROVIDED
The Company's transportation services can be broadly classified into the following categories:
Transaction-Based Services. "Transaction based services" are identified with the traditional freight brokerage business where a shipper calls a transportation services company to arrange for service on a shipment-by-shipment basis. The transportation services company then assumes responsibility for the transportation carrier's obligations to perform in accordance with the shipper's specifications. Similarly, a carrier may call the transportation services company when it has resources available to transport freight. The transportation services company arranges a match and adds a fee to the carrier's rate.
Logistics Management Services. "Logistics management services" include both process-based and information/knowledge-based services. Process-based services involve the Company taking responsibility for all transactions of a particular type for a shipper or carrier. The Company's expertise in intermodal service and trucking has led shippers and carriers to request the Company to regularly arrange shipments for a pre-arranged fee. Both shippers and carriers avail themselves of this service, often realizing financial savings due to the Company's volume and information base and its ability to arrange shipments more efficiently. The Company can help trucklines maintain competitive positions, including allowing them to supplement their sales and marketing efforts without incremental fixed costs. Process based services generally are a result of the full or partial outsourcing of internal traffic department functions. For example, the Company currently coordinates the time-sensitive raw potato delivery for a number of processing plants of a major potato chip manufacturer. Other examples of process based services currently executed by the Company are the procurement of truck and rail services for a substantial portion of a customer's shipments from a particular location, procurement of backhaul shipments for private fleets, freight consolidation and forwarding for a customer with complex logistical needs, and utilization management of an equipment owner's fleet and operation of small dedicated fleets to serve several logistics customers.
"Information/knowledge based services" involve management and consultation on any and all aspects of transportation for a shipper or carrier, including dedicated fleet, warehousing and risk management. The Company utilizes its sales network to design transportation and distribution programs for customers with complex logistical needs. For example,
ERX Logistics, L.L.C., a joint venture between the Company and a warehousing firm, provides a major household appliance manufacturer with warehousing and time-sensitive delivery of its appliances to its dealers and building contractor customers.
The Company also offers risk management and single source leasing services. The risk management group markets all lines of insurance needed for a transportation company and serves as a provider of consultation services, driver recruiting, safety program design, regulatory compliance and claims handling. These services may be used separately or combined with the overall logistics management function. Under the Company's single source leasing program, the Company will arrange the lease of a fully licensed and insured tractor, trailer and driver on behalf of the fleet operator.
TRANSPORTATION MODES
Transportation modes used by the Company have been organized into product lines. Each product line has one or more managers to provide marketing and operational support to the Company's network of sales people and logistics professionals.
Rail Services. Intermodal services involve arranging for the pick up and delivery of shipments by trucks, and the shipments' transport by railroads, in a coordinated manner. Other rail services involve rail transport by boxcar or flatcar for shippers' heavy or bulky freight. Related services may include load stabilization, load expediting and equipment selection.
Truck Services. Truck services involve arranging for the pick up and delivery of shipments that will be transported over the road using trucks. In addition to locating appropriate equipment to meet shippers' needs, trucklines actively solicit shipments from the Company's sales offices. Although the Company owns or leases only a limited equipment base, it has access to an abundant supply of truckload units provided by trucklines meeting the Company's safety and service criteria.
NVOCC Brokerage. Ocean freight brokerage involves acting as agents for shippers and importers under non-vessel operating common carrier authority (NVOCC), issued by the Federal Maritime Commission, to arrange for the services of ocean carriers.
Other Services. Other services, such as air freight forwarding, local truckload and heavy equipment transport, are important to the Company's strategy because they respond to a customer's total transportation needs and provide the Company's network of sales personnel and logistics managers a complete range of services to sell.
AGENCY NETWORK AND OPERATIONS
Mark VII's operations are decentralized and are conducted primarily in branch offices. Of the 111 branch offices, 17 are operated by Mark VII and 94 are operated under agency agreements. Contracts with agents have a duration of ten years and are terminable by either party on each anniversary of the agreement by giving 30 days' notice. Although the Company's contracts with its agents are non-exclusive, the Company's agents generally do not provide services on behalf of other transportation services companies. Agency offices operate as independent businesses, responsible for all costs associated with sales, operations, billing and any related overhead for these items and are compensated by a percentage of fees associated with transportation arranged. Each of the agency branches is responsible for obtaining its own office facilities. Offices operated by employees, rather than agents, are structured as stand-alone business units. Most offices have one to four operations people, who are responsible for controlling all aspects of executing the shipment, including (i) taking the order from the customer, (ii) arranging for transportation services, (iii) monitoring progress of the shipment and reporting back to the customer and (iv) billing the customer on the Company's invoices. To foster the growth of its agency network, the Company provides new agents with advances to cover start-up and initial operating costs. These advances are typically repaid over 24 months.
Typically, a sales person identifies a potential customer and determines its transportation requirements. The sales person then prepares a rate proposal from pricing data negotiated by the Company with representatives of the carriers and the providers of other services that may be required. Before any freight is handled for a customer, credit approval must be obtained from the Company's corporate credit department. Upon customer acceptance of a rate proposal, the operations unit in the branch office assumes responsibility for executing individual shipment orders for that customer.
The Company provides administrative support, such as computer systems, sales support, credit services, collection services and accounts payable services, to its branch office operations on a centralized basis. Specialty operations such as risk management, design and management of dedicated trucking operations and truck brokerage are available to the logistics management services operations. The Company utilizes a Data General model MV9600 computer and customized software which integrates shipment tracking, customer records and billing, accounts payable and general accounting. This system can
also access the computer systems of railroads to maintain up-to-date information on all shipments. The Company also utilizes its electronic data interchange capabilities with a number of carriers and shippers so that customers may follow the movement of their shipments and receive electronic billing.
Results of operations in the transportation industry generally show a seasonal pattern, as customers reduce shipments during and after the winter holiday season. In recent years, the Company's operating income and earnings have been higher in the second and third quarters than in the first and fourth quarters.
COMPETITION
The transportation services industry is highly competitive. The Company competes against other integrated logistics companies, as well as transportation companies. The Company also competes against carriers' internal sales forces. This competition is based primarily on freight rates, quality of service, (such as damage free shipments, on-time delivery and consistent transit times), reliable pickup and delivery and scope of operations. Other logistics companies and transportation services companies and numerous carriers have substantially greater financial and other resources than the Company. The Company also competes with transportation services companies for the services of independent commission agents.
GOVERNMENT REGULATION
The Company is licensed by the United States Department of Transportation ("DOT") to engage in operations as a broker in arranging for the transportation, by motor vehicle, of general commodities between points in the United States. The DOT prescribes qualifications for acting in this capacity, including certain surety bonding requirements. The Company also acts as a common and contract motor carrier regulated by the DOT. Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. Matters such as weight and dimensions of equipment are also subject to federal regulations.
In its ocean freight forwarding business, the Company is licensed as an ocean freight forwarder and as a non-vessel operating common carrier by the Federal Maritime Commission (the "FMC"). The FMC prescribes qualifications for acting as a shipping agent, including the filing of tariffs and surety bonding requirements.
The Company's air freight forwarding business is subject to regulation, as an indirect air cargo carrier, under the Federal Aviation Act (the "Act") by the DOT. The DOT's Economic Aviation Regulations exempt domestic air freight forwarders from most, but not all, of the Act's requirements. The major provisions of the Act that remain applicable to the Company forbid solicitation of certain rebates, require the carrier to provide safe service, equipment and facilities, prohibit discrimination with respect to foreign air cargo transportation, prohibit unfair or deceptive practices and authorize the DOT to inquire into the carrier's management for certain purposes.
In certain foreign markets in which the Company operates, the air freight forwarding business is subject to rate schedules and other restrictions which in the first instance are agreed to by the International Air Transport Association and subsequently approved by the governments concerned. The Company also is subject to certain foreign regulations.
Management does not believe that current regulations of its activities imposes significant economic restraints upon its operations or upon the entry of new competitors into the industry in general or into the markets that are served by the Company in particular.
EMPLOYEES
The Company employed 310 individuals at March 7, 1997. The employees were not represented by a collective bargaining unit. Management considers relations with its employees to be good.
ITEM 2.
ITEM 2. PROPERTIES
All of the Company's operations at the 17 company branch locations are conducted in office space under leases with terms of less than four years. Although the Company owns the land and building which houses its administrative offices in Indianapolis, Indiana, the Company's other two principal administrative offices are located in leased space in Memphis, Tennessee and Kansas City, Missouri. Each of the 94 agency branches is responsible for obtaining its own office facilities.
The Company also owns, and is holding for sale or lease, office, maintenance and fuel facilities in St. Joseph, Missouri and Joplin, Missouri and a four acre tract in Los Angeles, California. The Los Angeles property has been leased through December 2000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
At year end, the Company was engaged in an arbitration proceeding filed by Roger Crouch, the Company's former Vice Chairman of the Board, as a result of the Company's termination of his employment agreement for cause in December 1995. Mr. Crouch was seeking payment of his annual salary of $225,000 per year for the remaining seven years of the employment agreement, as well as certain bonus payments. The matter was settled in January 1997. According to the terms of the settlement, Mr. Crouch was compensated for approximately 13 months at a rate less than the salary provided for in the original employment agreement. The Company and Mr. Crouch also entered into a consulting agreement on February 3, 1997 with a term of approximately six years which provides for consulting fees, at a rate less than the salary provided for in the original employment agreement.
The Company is involved in various other legal proceedings generally incidental to its business. While the result of any litigation contains an element of uncertainty, the Company presently believes that the outcome of any known pending or threatened legal proceedings or claims, or all of them combined, will not have a material adverse effect on its results of operations or consolidated financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during the three months ended December 28, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock trades on the Nasdaq Stock Market's National Market System under the symbol: MVII. The following table sets forth the high and low sale prices per share of the common stock for the periods indicated, as reported by the Nasdaq Stock Market:
On March 7, 1997, the last sale price per share of the common stock was $31 1/4. At March 7, 1997, there were 200 holders of record, representing an estimated 1,500 individual holders of the Company's common stock.
DIVIDENDS
The Company has never paid a cash dividend on its common stock. It is the intention of the Board of Directors to continue to retain earnings to finance the growth of the Company's business rather than to pay cash dividends. Future payments of cash dividends will depend upon the financial condition, results of operations and capital commitments of the Company, as well as other factors deemed relevant by the Board of Directors. The Company and its subsidiaries are currently subject to a line of credit which requires approval of the lender before paying dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for each of the years in the five-year period ended December 28, 1996 are derived from the Company's consolidated financial statements which have been audited by Arthur Andersen LLP, independent public accountants. The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto, and Report of Independent Public Accountants thereon, for the most recent three years, included elsewhere in this Annual Report.
(1) The Company's fiscal year ends on the Saturday nearest December 31. Fiscal years 1993, 1994, 1995 and 1996 included 52 weeks and fiscal year 1992 included 53 weeks.
(2) The historical operations of the Company's former truckload business have been classified as a discontinued operation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Years 1996 Compared to 1995 and 1995 Compared to 1994
The following table sets forth the percentage relationship of the Company's revenue and expense items to operating revenues for the periods indicated:
General - The transportation services operation contracts with carriers for the transportation of freight by rail, truck, ocean or air for shippers. Operating revenues include the carriers' charges for carrying shipments plus commissions and fees, as well as revenues from fixed fee arrangements on a portion of the Company's integrated logistics projects. The carriers with whom the Company contracts provide transportation equipment, the charge for which is included in transportation costs. As a result, the primary operating costs incurred by the transportation services operations and logistics projects are for purchased transportation. Net revenues include only the commissions and fees.
Selling, general and administrative expenses primarily consist of the percentage of net revenue paid to agencies and independent sales contractors as consideration for providing sales and marketing, arranging for movement of shipments, entering billing and accounts payable information on shipments and maintaining customer relations, as well as other company operating expenses. Certain costs incurred by the Company's dedicated trucking fleets are also reported in salaries and related costs and selling, general and administrative expenses.
Revenues - The Company's total number of shipments were 503,000, 414,000, and 368,000 in 1996, 1995 and 1994, respectively. Increases in shipments of 21% and 13% in 1996 and 1995, respectively, were the result of expanded services to both new and existing customers. The Company also increased the number of sales offices by four offices in 1995 and 11 offices in 1996.
Revenues from the Company's temperature-controlled freight operations have remained comparable in 1996 following the decline from 1994 to 1995 resulting from management's decision during the fourth quarter of 1994 to limit this service to a core group of customers. Revenues from these operations were $15,047,000 in 1996, $14,996,000 in 1995 and $23,324,000 in 1994. The net revenues from these operations were $2,768,000 in 1996, $2,864,000 in 1995 and $6,242,000 in 1994.
Net Revenues. The Company's net revenues as a percentage of operating revenues were 13.2%, 14.7% and 13.7%, in 1996, 1995 and 1994, respectively. Net revenues as a percentage of operating revenues increased in 1995 due to the growth of the Company's dedicated trucking fleets. During 1996, the Company closed many of its unprofitable dedicated trucking operations, resulting in decreased net revenues as a percentage of operating revenues in 1996. These fluctuations in net revenues as a percentage of operating revenues during 1996 and 1995 have been offset by proportionate changes in operating expenses as a percentage of operating revenues.
In recent years, variances in the growth rate of the Company's transportation modes has not significantly impacted the growth of net revenues, but it has resulted in fluctuations in the growth of operating revenues and purchased transportation costs. Brokered truck shipments, because of their shorter length of haul, generate lower operating revenues and purchased transportation costs per shipment than intermodal, but each produce similar net revenues per shipment. During 1995, incremental growth of the Company's truck brokerage business and shifts in transportation mode from intermodal to truck carriers due to excess truck capacity resulted in an increase in operating revenues of only 7%. Net revenue growth, however, was comparable to the increase in volume due to similar net revenues on a per shipment basis. In 1996, brokered truck shipments and intermodal shipments each grew incrementally, resulting in net revenue growth which was more comparable to the growth of operating revenues and purchased transportation costs.
Operating Expenses - As discussed above in net revenues, the closing of certain dedicated trucking fleets has resulted in fluctuations in operating expenses as a percentage of operating revenues. In general, the Company's dedicated trucking fleets have relatively higher fixed costs compared to operating revenues than the Company's transportation services and logistics management operations.
Interest and Other Expense, Net - Interest and other expenses declined 46% in 1996 and 20% in 1995 due to decreased borrowings under the line of credit as cash flow from operations have been adequate in 1996 and 1995 to cover most of the Company's operating needs and capital requirements.
Provision for Income Taxes - The Company's effective tax rates were 42%, 41%, and 41.5% in 1996, 1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital needs have been met through cash flow from operations and a line of credit from a lending institution. Mark VII maintains a $20 million line of credit which bears interest at 1/2% over the bank's prime rate. The original term of the line of credit expires in July 1997, but may be extended, by mutual agreement of the lender and the Company, for subsequent periods of one year each, thereafter. The Company pays a fee of 1.5% on outstanding letters of credit and a commitment fee of .38% on the average daily unused portion of the line. The line is secured by accounts receivable and other assets of Mark VII and is guaranteed by the Company. At December 28, 1996, $32,000 was outstanding on the line of credit and letters of credit totaling $7,769,000 had been issued on Mark VII's behalf to secure insurance deductibles and purchases of operating services, resulting in a remaining balance available to borrow of $12,199,000.
Among other restrictions, the terms of the line of credit require that the Company earn $2,000,000 in consolidated income from continuing operations annually and maintain consolidated tangible net worth of $21,000,000 in 1996 and $23,000,000 thereafter and obtain approval of the lender before paying dividends. The line of credit agreement allows for adjustments to the net worth requirements under certain circumstances, one of which is the repurchase of the Company's stock. After adjustment for stock repurchases, the consolidated tangible net worth required to be maintained for 1996 is $16,000,000.
At December 28, 1996, the Company had a ratio of current assets to current liabilities of approximately 1.32 to 1. Management believes that the Company will have sufficient cash flow from operations and borrowing capacity to cover its operating needs and capital requirements for the foreseeable future.
OTHER INFORMATION
Except for the historical information contained herein, this document contains forward-looking statements based on management's current expectations of the Company's near term results, based on current information available pertaining to the Company. Actual future results and trends may differ materially depending on a variety of factors, including competition in the marketplace, changes in the carrier base, changes in capacity and changes in government regulations.
Results of operations in the transportation industry generally show a seasonal pattern, as customers reduce shipments during and after the winter holiday season. In recent years, the Company's operating income and earnings have been higher in the second and third quarters than in the first and fourth quarters.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required under this item and set forth elsewhere in this Form 10-K as indicated in the following index are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The sections entitled "Election of Directors" and "Executive Officers and Key Employees" of the Company's Notice of 1997 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of December 28, 1996 are incorporated herein by reference.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required hereunder is incorporated by reference from the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Company's Notice of 1997 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of December 28, 1996.
ITEM 11, 12, AND 13. EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under these items is incorporated by reference from the Company's Notice of 1997 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of December 28, 1996.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
All financial statements of the Registrant as set forth under Item 8 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
The report of the Registrant's independent public accountants with respect to the above-listed financial statements and financial statement schedule appears on page 26 of this Annual Report on Form 10-K.
All other financial schedules not listed above have been omitted since the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
(3) Exhibits
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MARK VII, INC.
By: /s/ R.C. Matney -------------------------------- R. C. Matney Chairman of the Board, President and Chief Executive Officer
Date: March 26, 1997
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.
MARK VII, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts)
The accompanying notes are an integral part of these balance sheets.
MARK VII, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these statements.
MARK VII, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (In thousands)
The accompanying notes are an integral part of these statements.
MARK VII, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
The accompanying notes are an integral part of these statements.
MARK VII, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Mark VII, Inc., a Delaware corporation, and its wholly owned subsidiaries, collectively referred to herein as the "Company." The Company is a sales, marketing and service organization that acts as a provider of transportation services and a transportation logistics manager. The Company has a network of transportation sales personnel that provides services throughout the United States, as well as Mexico and Canada. The principal operations of the Company are conducted by its transportation services subsidiary, Mark VII Transportation Company, Inc. ("Mark VII"). As a result of the sale of substantially all of the assets of the Company's truckload subsidiaries completed on October 3, 1994 (the "Asset Sale"), the operations of MNX Carriers, Inc. ("Carriers") and its subsidiaries (Missouri-Nebraska Express, Inc. ("Mo-Neb"), MNX Trucking, Inc. and MNX Transport, Inc.) are reported as a discontinued operation in these consolidated financial statements.
REVENUE
Revenues earned as a third party agent include the carriers' charges for carrying the shipment plus commissions and fees, as well as revenues from fixed fee arrangements on a portion of the Company's integrated logistics projects. Revenues and related expenses are recognized on completion of the Company's service obligation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of property and equipment are provided using the straight-line method based on the estimated useful lives of the respective assets as follows:
Transportation equipment 3 to 7 years Computer equipment, furniture and other 3 to 10 years
The accompanying financial statements include depreciation expense of $1,130,000, $1,154,000 and $1,268,000 in 1996, 1995 and 1994, respectively.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, deposits in banks, certificates of deposit and short-term marketable securities with maturities of 90 days or less when purchased, as cash and cash equivalents.
The Company utilizes a cash management system under which cash overdrafts exist in the book balances of its primary disbursing accounts. These overdrafts represent the uncleared checks in the disbursing accounts. The cash amounts presented in the consolidated financial statements represent balances on deposit at other locations, prior to their transfer to the primary disbursing accounts. Uncleared checks of $6,515,000 and $7,059,000 are included in accrued transportation charges at December 28, 1996 and December 30, 1995, respectively.
INTANGIBLE ASSETS
Goodwill and other intangible assets are being amortized on the straight-line basis over 10 to 20 years. Goodwill and other intangible assets consisted of the following:
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest December 31. Operations in 1994, 1995 and 1996 included 52 weeks.
EARNINGS PER SHARE
Earnings per share are computed by dividing income by the average common shares outstanding plus the dilutive effect of common stock equivalents outstanding, using the treasury stock method based on the average market price of the Company's common stock. Fully diluted earnings per share are not materially different from primary earnings per share.
NEW ACCOUNTING PRONOUNCEMENT
A new accounting pronouncement, Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of" was issued in March, 1995 and became effective for fiscal years beginning after December 15, 1995. The adoption of this accounting standard did not have a material effect on the Company's results of operations or consolidated financial position.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1995 financial statements to conform to the 1996 presentation.
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.
(2) CREDIT FACILITY
Mark VII has a $20 million line of credit agreement. This line bears interest at 1/2% over the bank's prime rate. The original term of the line of credit expires in July 1997, but may be extended, by mutual agreement of the lender and the Company, for subsequent periods of one year each, thereafter. The Company pays a fee of 1.5% on outstanding letters of credit and a commitment fee of .38% on the average daily unused portion of the line. The line is secured by accounts receivable and other assets of Mark VII and is guaranteed by the Company. The available line of credit at December 28, 1996 was $12,199,000. Letters of credit totaling $7,769,000 have been issued on the Company's behalf to secure insurance deductibles and purchases of operating services.
The following is a summary of data on the line of credit:
Among other restrictions, the terms of the line of credit require that the Company earn $2,000,000 in consolidated income from continuing operations annually and maintain consolidated tangible net worth of $21,000,000 in 1996 and $23,000,000 thereafter and obtain approval of the lender before paying dividends. The agreement allows for adjustments to these amounts under certain circumstances, one of which is the repurchase of the Company's stock. After adjustment for stock repurchases, the consolidated tangible net worth required to be maintained for 1996 is $16,000,000.
(3) INCOME TAXES
The Company files a consolidated income tax return with its subsidiaries and, as agreed, the consolidated income tax provision is allocated among the members of the consolidated group based on their respective contributions to consolidated income before income taxes.
Components of the provision for income taxes consisted of the following:
A reconciliation between the provision for income taxes and the expected taxes using the federal statutory income tax rate of 34% follows:
Deferred tax assets (liabilities) are comprised of the following:
(4) LONG-TERM OBLIGATIONS AND OPERATING LEASES
Long-term obligations included the following:
Property and equipment included the following amounts related to capital lease obligations:
Scheduled annual payments on the Company's long-term obligations and commitments for operating leases are as follows:
Excluded from the operating lease commitments are scheduled rentals on tractors, trailers and containers with lease terms of one to five years which have annual cancellation provisions. If these leases are not canceled, the additional future lease
payments would be approximately $1,973,000, $1,249,000, $1,102,000, $1,033,000, $460,000 and $71,000 in 1997, 1998, 1999, 2000, 2001 and thereafter, respectively. The accompanying financial statements include rent expense of $5,737,000, $6,220,000 and $4,795,000 in 1996, 1995 and 1994, respectively.
(5) CONTINGENCIES AND COMMITMENTS
Mark VII is a member of a limited liability company formed with a warehousing and distribution company to provide contract management services for a number of regional distribution centers for one of Mark VII's largest customers. ERX Logistics, L.L.C. ("ERX"), employs management, administrative personnel, drivers and warehousemen to operate the warehouses, tractors and trailers owned by the customer. Mark VII has guaranteed $1 million of a $5 million line of credit to provide working capital for ERX. This line of credit is secured by accounts receivable of ERX.
At year end, the Company was engaged in an arbitration proceeding filed by Roger Crouch, the Company's former Vice Chairman of the Board, as a result of the Company's termination of his employment agreement for cause in December 1995. Mr. Crouch was seeking payment of his annual salary of $225,000 per year for the remaining seven years of the employment agreement, as well as certain bonus payments. The matter was settled in January 1997. According to the terms of the settlement, Mr. Crouch was compensated for approximately 13 months at a rate less than the salary provided for in the original employment agreement. The Company and Mr. Crouch also entered into a consulting agreement on February 3, 1997 with a term of approximately six years which provides for consulting fees, at a rate less than the salary provided for in the original employment agreement.
The Company is involved in various other legal proceedings generally incidental to its business. While the result of any litigation contains an element of uncertainty, the Company presently believes that the outcome of any known pending or threatened legal proceedings or claims, or all of them combined, will not have a material adverse effect on its results of operations or consolidated financial position.
(6) STOCK COMPENSATION PLANS
At December 28, 1996, the Company has three stock-based compensation plans: The 1995 Omnibus Stock Incentive Plan (the "1995 Plan"), the 1992 Non-qualified Stock Option Plan (the "1992 Plan") and the Amended and Restated 1986 Incentive Stock Option Plan (the "1986 Plan"). No awards may be granted under the 1992 and 1986 Plans. The Company applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined consistent with Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (dollars in thousands, except per share amounts):
The effects of applying SFAS No. 123 in this pro forma disclosure may not be indicative of future amounts because SFAS No. 123 does not apply to awards prior to January 1, 1995, and additional awards in future years are anticipated.
Under the provisions of the Company's 1995 Plan, options may be granted to employees of the Company and to directors who are not employees of the Company to purchase shares of common stock at a price not less than 100% of its fair market value at the date of grant. At December 28, 1996, 1,117,763 shares of common stock were reserved for issuance under all of the Company's stock option plans. Options granted have a maximum life of 10 years. Vesting requirements are determined at the discretion of the Compensation/Stock Option Committee of the Board of Directors. Presently, option vesting periods range from immediate vesting to vesting over 8 years.
Beginning with the grants issued on or after January 1, 1995, the fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
A summary of the status of stock options granted under the Company's stock option plans as of December 28, 1996, December 30, 1995 and December 31, 1994 and changes during the years ended on those dates is presented below:
The following table summarizes information about stock options outstanding at December 28, 1996:
In 1990, the Company granted stock appreciation rights for 52,000 shares of the Company's common stock at a base price of $4.25 per share to key employees of the Company. Stock appreciation rights for 14,000 shares were outstanding at December 28, 1996. The rights provide for cash payments to holders of the rights for increases in the market price of the Company's common stock as of April 1 of each year until and including April 1, 2000. The base price is adjusted each April 1 if the market closing price on that date is greater than the previous base price. The adjusted base prices as of April 1, 1996, 1995 and 1994 were $17.25, $17.25 and $14.75 per share, respectively. Compensation of $203,000, $47,000 and $85,000 was expensed under this plan in 1996, 1995 and 1994, respectively. The 1996 compensation has been accrued based on the closing market price of $28.25 per share on December 28, 1996.
(7) DISCONTINUED OPERATIONS
The loss on discontinued operations recorded in 1994 as a result of the sale of substantially all of the assets of the Company's truckload operations to Swift Transportation Co., Inc. ("Swift") in October 1994 consisted of the following (in millions):
The costs associated with the sale consisted primarily of financial consulting, legal, accounting and administrative costs. H.B. Oppenheimer & Company Incorporated ("HBOC"), an investment banking firm controlled by one of the Company's former outside directors, H.B. Oppenheimer, received $282,000 and $712,000 in 1995 and 1994, respectively, for financial consulting services provided to the Company in connection with the sale and the related refinancing of the Company's lines of credit and equipment leases.
The remaining net assets of discontinued operations include management's best estimates of the remaining liabilities of the discontinued operations and the net realizable value of property held for sale. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that the Company's estimates of these amounts could change in the near term.
(8) RELATED PARTY TRANSACTIONS
Mark VII and Carriers routinely engaged in intercompany transactions as Carriers hauled freight for Mark VII's customers and as Mark VII brokered shipments for Carriers' customers. Transportation costs on Mark VII's shipments hauled by Carriers was $5,179,000 in 1994. The Company's net revenue on Carriers' shipments brokered to Mark VII was $248,000 in 1994. Due to the treatment of Carriers as a discontinued operation, these revenues and costs have not been eliminated in the accompanying financial statements.
QUARTERLY FINANCIAL DATA (Unaudited):
The results of operations for each of the four quarters of 1996 and 1995 are summarized below. The amounts below are unaudited, but, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such periods have been made (in thousands, except per share data).
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Mark VII, Inc.:
We have audited the accompanying consolidated balance sheets of MARK VII, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 28, 1996, and December 30, 1995, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended December 28, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mark VII, Inc. and Subsidiaries as of December 28, 1996, and December 30, 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Memphis, Tennessee, February 11, 1997
SCHEDULE II
MARK VII, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
EXHIBIT INDEX
Exhibit Number Description ------- ----------- 11 Statement re: Computation of Earnings per Share
21 Subsidiaries of Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule (SEC Use Only)