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 133 branch sales offices in 37 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 and warehousing. 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.
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
The Company's operations are decentralized and are conducted primarily in branch offices. Of the 133 branch offices, 25 are operated by the Company and 108 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 the design and management of dedicated trucking operations and truck brokerage are available to the logistics management services operations. The Company currently uses a Data General model MV9600 computer and customized software which integrates shipment tracking, customer records and billing, accounts payable and general accounting. A new system currently being developed, which is year 2000 compliant, will greatly expand the Company's capabilities in the area of information systems. Scheduled to be implemented during the second half of 1998, the system will employ the latest in client/server technologies. Components of the system include a powerful Informix Dynamic Server relational database; a SUN Ultra Enterprise Server operating on SUN's Solaris UNIX Operating System with attached data storage facilities capable of providing over one terabyte of available capacity, using both magnetic and optical media; Microsoft NT Servers; and Windows 95 and Windows NT workstations. High speed document imaging, electronic document interchange, electronic mail, integrated electronic FAX, internet and networking capabilities will greatly improve the Company's efficiency in processing thousands of shipments per day as well as enhancing certain customer service offerings.
SEASONALITY
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 (the "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 regulation 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 308 individuals at March 6, 1998. 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 25 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 principal administrative office is located in leased space in Memphis, Tennessee. Each of the 108 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 and the Joplin property has been leased through June 2002.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various 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
(a) A Special Meeting of Shareholders of the Company was held on November 7, 1997.
(b) Not Applicable
(c) 1. Amendment to the Certificate of Incorporation to Increase Authorized Shares. The Company's Certificate of Incorporation was amended to increase the number of authorized shares of common stock from 10 million shares to 20 million shares and to reduce the par value from $.10 per share to $.05 per share pursuant to the following vote:
Votes in Favor Withheld/Against Abstained -------------- ---------------- --------- 3,529,417 1,066,455 2,100
(d) Not Applicable
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 6, 1998, the last sale price per share of the common stock was $18. At March 6, 1998, there were 190 holders of record, representing an estimated 1,300 individual holders of the Company's common stock.
On November 7, 1997, the Company's Board of Directors authorized a two-for-one stock split. All references in the accompanying financial statements to the number of common shares and per share amounts for periods prior to November 7, 1997 have been restated to reflect the stock split.
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 limits the payment of 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 January 3, 1998 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 1997 included 53 weeks.
(2) Effective January 3, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share". Earnings per share have been restated for the periods presented to conform to the new accounting standard. In addition, on November 7, 1997, the Company's Board of Directors authorized a two-for-one stock split, thereby increasing the number of shares issued by 5,003,000 and decreasing the par value of each share to $.05. All references to the number of common shares and per share amounts for the periods presented have been restated to reflect the stock split.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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
Fiscal Years 1997 Compared to 1996 and 1996 Compared to 1995
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 627,000, 503,000, and 414,000 in 1997, 1996 and 1995, respectively. Increases in shipments of 25% and 21% in 1997 and 1996, respectively, were the result of expanded services to both new and existing customers. The Company also increased the number of sales offices by 11 offices in 1996 and 20 offices in 1997.
Net Revenues. The Company's net revenues as a percentage of operating revenues were 12.7%, 13.2% and 14.7%, in 1997, 1996 and 1995, respectively. During 1996, the Company closed several of its unprofitable dedicated trucking operations, resulting in decreased net revenues as a percentage of operating revenues in 1996 and 1997. These decreases in net revenues as a percentage of operating revenues have been offset by proportionate changes in operating expenses as a percentage of operating revenues.
In recent years, truck related services have grown at a faster rate than rail and other modes. This increase in truck shipments has been fueled by the Company's growth of comprehensive logistics management services which have higher levels of over-the-road freight than other modes. Since operating revenue per truck shipment averages about 60% of operating revenue per rail shipment, the shipment count growth rate exceeded the operating revenue growth rate for 1997. The net revenue as a percentage of operating revenue is slightly higher for truck shipments than rail shipments, however, any resulting increases in net revenues as a percentage of operating revenues have been offset by the Company's downsizing of dedicated trucking operations in recent years.
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 - Cash flow from operations has been adequate to cover the Company's operating needs and capital requirements in recent years, resulting in decreased interest expense and increased interest income in 1997 and 1996.
Provision for Income Taxes - The Company's effective tax rates were 42% in 1997 and 1996 and 41% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company's cash flows from operations have exceeded its working capital needs. In addition, the Company has available a $25,000,000 unsecured revolving credit facility (the "Facility"). On January 3, 1998, there were no borrowings under the Facility, but letters of credit totaling $3,953,000 had been issued on the Company's behalf to secure insurance deductibles and purchases of operating services, resulting in unused borrowing capacity of $21,047,000. The interest rate for borrowings under the Facility is a variable rate based upon the 30 day LIBOR Funding Rate, as defined, plus 50 to 125 basis points. The Company pays a varying fee of .35% to 1.00% on outstanding letters of credit and a varying commitment fee of .15% to .30% on the unused portion of the Facility, as defined. At January 3, 1998, the interest rate was 6.46% and the letter of credit fee and commitment fee were .35% and .15%, respectively. The line of credit expires on July 1, 2000, but may be extended by mutual agreement of the lender and the Company, for subsequent periods of one year each.
Among the covenants contained in the Facility are maintenance of certain financial ratios, including debt to net worth, cash plus accounts receivable to current liabilities plus debt and debt to earnings before income taxes, depreciation and amortization (all as defined). Other covenants include the level of capital and lease expenditures, acquisitions and mergers, dividends and redemptions of stock.
At January 3, 1998, the Company had a ratio of current assets to current liabilities of approximately 1.24 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
In response to expanding capabilities in the area of information systems and issues related to the year 2000, the Company is designing a new financial and administrative system scheduled for implementation during the second half of 1998. The total cost of this system is not expected to exceed $1,500,000, the majority of which was expended in 1997. Additionally, the Company is performing an in-depth review of the year 2000 compliance aspects of all peripheral systems not included in the above system. Management is uncertain at this time what additional costs, if any, may be incurred in connection with these peripheral systems. Management is confident that all issues relating to the Company's internal information systems arising from the year 2000 will be addressed during the course of these two projects. The Company is also in the process of seeking information concerning year 2000 compliance from vendors, customers and other third parties upon whom the Company relies.
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 the 1998 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of January 3, 1998 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 the 1998 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of January 3, 1998.
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 the 1998 Annual Meeting of Shareholders and Proxy Statement which will be filed within 120 days of January 3, 1998.
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
- ------------ * Management contracts or compensatory plans
(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, 1998
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 (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").
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 $1,054,000, $1,130,000 and $1,154,000 in 1997, 1996 and 1995, 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 $2,851,000 and $6,515,000 are included in accrued transportation charges at January 3, 1998 and December 28, 1996, 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. Fiscal years 1995 and 1996 included 52 weeks and fiscal year 1997 included 53 weeks.
EARNINGS PER SHARE
Effective January 3, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share". Earnings per share have been restated for the periods presented to conform to the new accounting standard. In addition, on November 7, 1997, the Company's Board of Directors authorized a two-for-one stock split, thereby increasing the number of shares issued by 5,003,000 and decreasing the par value of each share to $ .05. All references to the number of common shares and per share amounts for the periods presented have been restated to reflect the stock split.
A reconciliation between basic earnings per share and diluted earnings per share follows:
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 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
The Company has a $25 million unsecured revolving credit facility (the "Facility"). The Facility bears a variable interest rate based upon the 30 day LIBOR Funding Rate, as defined, plus 50 to 125 basis points. The Company pays a varying fee of .35% to 1.00% on outstanding letters of credit and a varying commitment fee of .15% to .30% on the unused portion of the Facility, as defined. At January 3, 1998, the interest rate was 6.46% and the letter of credit fee and commitment fee were .35% and .15%, respectively. The line of credit expires on July 1, 2000, but may be extended by mutual agreement of the lender and the Company, for subsequent periods of one year each.
The following is a summary of data on the credit facility:
Among the covenants contained in the Facility are maintenance of certain financial ratios, including debt to net worth, cash plus accounts receivable to current liabilities plus debt and debt to earnings before income taxes, depreciation and amortization (all as defined). Other covenants include the level of capital and lease expenditures, acquisitions and mergers, dividends and redemptions of stock.
(3) 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 follows:
Deferred tax assets (liabilities) are comprised of the following:
(4) LONG-TERM DEBT AND OPERATING LEASES
Long-term debt 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 $1,403,000, $903,000, $825,000, $268,000 and $114,000 in 1998, 1999, 2000, 2001 and 2002, respectively. The accompanying financial statements include rent expense of $5,025,000, $5,737,000 and $6,220,000 in 1997, 1996 and 1995, respectively.
(5) CONTINGENCIES AND COMMITMENTS
The Company is involved in various 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 January 3, 1998, 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 January 3, 1998, 2,122,748 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 January 3, 1998, December 28, 1996 and December 30, 1995 and changes during the years ended on those dates is presented below:
The following table summarizes information about stock options outstanding at January 3, 1998:
In 1990, the Company granted stock appreciation rights for 52,000 shares of the Company's common stock at a base price of $2.13 per share to key employees of the Company. On October 1, 1997, the Company issued stock appreciation rights for an additional 6,000 shares at a base price of $14.50. Stock appreciation rights for 34,000 shares were outstanding at January 3, 1998. 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, 1997, 1996 and 1995 were $15.25, $8.63 and $8.63 per share, respectively. Compensation of $128,000, $203,000 and $47,000 was expensed under this plan in 1997, 1996 and 1995, respectively. The 1997 compensation has been accrued based on the closing market price of $16.75 per share on January 3, 1998.
QUARTERLY FINANCIAL DATA (Unaudited):
The results of operations for each of the four quarters of 1997 and 1996 are summarized below. Effective January 3, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share". Earnings per share have been restated for 1996 to conform to the new accounting standard. 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 January 3, 1998, and December 28, 1996, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended January 3, 1998. 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 consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mark VII, Inc. and Subsidiaries as of January 3, 1998, and December 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic consolidated 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 consolidated 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 consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Memphis, Tennessee, February 11, 1998
SCHEDULE II
MARK VII, INC. AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
EXHIBIT INDEX