-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H3rLIjnwX5lUpEPBbpyJieXomtwfC+i063wL0ic3VlgSghexrjmuv9Bny9ex95sN MVrX87Sgu3nGse841G1CtA== 0000950149-99-000560.txt : 19990331 0000950149-99-000560.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950149-99-000560 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOTOR CARGO INDUSTRIES INC CENTRAL INDEX KEY: 0001047073 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 870406479 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23341 FILM NUMBER: 99577831 BUSINESS ADDRESS: STREET 1: 845 W CENTER ST STREET 2: 845 W CENTER ST CITY: NORTH SALT LAKE STATE: UT ZIP: 84054 BUSINESS PHONE: 8012921111 MAIL ADDRESS: STREET 1: 845 WEST CENTER ST STREET 2: 845 WEST CENTER ST CITY: NORTH SALT LAKE STATE: UT ZIP: 84054 10-K 1 FORM 10-K FOR THE YEAR ENDED 12/31/98 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from___________ to_______________ Commission File Number 000-23341 MOTOR CARGO INDUSTRIES, INC. (Exact Name of the Registrant as Specified in its Charter) Utah 87-0406479 - --------------------------------- ----------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 845 West Center Street North Salt Lake, Utah 84054 (801) 292-1111 (Address of principal executive offices and telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, no par value -------------------------- (Title of Class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 17, 1999, the aggregate market value of the Registrant's voting Common Stock held by non-affiliates of the Registrant based upon the last sale price reported for such date on the Nasdaq National Market System was approximately $13,029,286. The number of shares of the Registrant's Common Stock outstanding as of March 17, 1999 was 6,947,220. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the 1999 Annual Meeting of Shareholders of the Registrant is incorporated by reference into Part III of this Form 10-K. ================================================================================ 2 This report contains certain forward-looking statements that involve risks and uncertainties, including statements regarding the Company's plans, objectives, goals, strategies and financial performance. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Cautionary Statement for Forward-Looking Information" and elsewhere in this report. PART I ITEM 1. BUSINESS GENERAL Motor Cargo Industries, Inc. (the "Company") is a regional less-than-truckload ("LTL") carrier which provides transportation and logistics services to shippers within the Company's core service region. The Company's core service region is the western United States, including Arizona, California, Colorado, Idaho, New Mexico, Oregon, western Texas, Utah and Washington. The Company transports general commodities, including consumer goods, packaged foodstuffs, electronics, computer equipment, apparel, hardware, industrial goods and auto parts for a diversified customer base. The Company offers a broad range of services, including expedited scheduling and full temperature-controlled service. Through its wholly-owned subsidiary, MC Distribution Services, Inc. ("MCDS"), the Company also provides customized logistics, warehousing and distribution management services. The Company utilizes 23 strategically located service centers (also referred to as "terminals") to serve major markets within the Company's core service region. In addition, the Company provides service to smaller markets within its core service region pursuant to agreements with 20 independent agents, most of which act as exclusive agents for the Company. See Item 1 "Business - Operations." In 1997, the Company initiated a program to establish market and operations presence in several major business economic areas ("BEAs") outside of the Company's core service region. Unlike more traditional inter-regional expansion models, the Company intends only to solicit tonnage from these markets moving west into its core service region. The Company intends to utilize third-party truckload carriers to transport freight from these markets to its core service region. The Company anticipates that this strategy of selling into the region will improve lane, route and service center densities in its core service region without requiring the Company to incur the costs associated with building an inter-regional terminal network. The Company opened its BEA expansion facilities in Dallas and Chicago in October 1997 and April 1998, respectively. The next BEA expansion facility is scheduled to open in Cincinnati, Ohio in mid-1999. The Company intends to continue to evaluate other major distribution centers for additional BEA expansion facilities. THE LTL INDUSTRY The Company transports primarily LTL shipments. LTL shipments are defined as shipments weighing less than 10,000 pounds. Generally, LTL carriers transport freight from multiple shippers to multiple consignees on a scheduled basis. Unlike truckload carriers, LTL carriers typically do not transport full trailer loads directly from origin to destination. LTL operations require the handling of shipments in several coordinated stages. Typically, LTL carriers transport freight along scheduled routes from multiple shippers to multiple consignees utilizing a network of terminals, together with fleets of linehaul and pickup and delivery tractors and trailers. Freight is picked up from customers by local drivers and consolidated for shipment. The freight is then loaded into inter-city trailers and transported to other terminals by linehaul drivers. Large LTL carriers have traditionally employed a series of hub and spoke terminals. This method improves truck utilization but requires both multiple cargo rehandlings, which are expensive, and a fixed network of pickup, breakbulk and destination terminals, which is capital intensive and requires a large staff of freight handlers. At each breakbulk terminal, freight is unloaded and reloaded with other freight destined for locations in the same general direction of another breakbulk terminal, where the truck is sent for further unloading and loading, until the freight arrives at a destination terminal located nearest the region of the consignee. At the destination terminal, freight is then loaded 2 3 onto a local truck for final delivery. The Company emphasizes direct loading between the originating and destination service centers in order to avoid the costly and time-consuming use of breakbulk terminals. LTL companies are generally categorized as regional, inter-regional or national carriers, based upon length of haul and service territory. Carriers with average lengths of haul less than 500 miles are referred to as regional carriers and generally provide either overnight or second day service. Regional LTL carriers usually are able to load freight for direct transport to a destination terminal, thereby avoiding the costly and time-consuming use of breakbulk terminals (where freight is rehandled and reloaded for delivery to its ultimate destination). Carriers with average lengths of haul between 500 and 1,000 miles are generally referred to as inter-regional carriers. National carriers, with average lengths of haul greater than 1,000 miles, generally operate coast-to-coast relying on networks of breakbulk and satellite terminals. Due to the geographical size of the western United States and the length of haul associated with the Company's BEA expansion facilities, the Company has a longer average length of haul than most other regional carriers. For the year ended December 31, 1998, the Company had an average length of haul of approximately 700 miles. In general, the more freight volume an LTL carrier has within a given geographical area, the lower its incremental operating costs. This is particularly true with respect to its pickup and delivery operations where increased freight volumes generally result in less distance between stops and more shipments per stop ("route density"). As route density increases, an LTL carrier is able to make more deliveries on shorter routes, thereby increasing the number of shipments that can be delivered within a defined period and lowering overall labor costs for each shipment. Similarly, the more business a carrier experiences in a given traffic lane from one service center to another ("lane density") the lower its incremental costs. As lane density increases, a carrier experiences improved load factors resulting in increased revenue per mile, reduced empty miles and reduced costs associated with intermediate shipment handling and reconsolidation. A carrier's incremental costs are also improved as the amount of freight handled at a given service center location ("service center density") increases. As service center density improves, a carrier experiences higher revenues, while maintaining the same fixed cost structure, thereby improving asset utilization. OPERATIONS The Company picks up freight with pickup and delivery trucks during the day and transports the freight to Company service centers by early evening. Pick-ups and deliveries are typically made within a 70 mile radius of each service center. Upon arrival at a service center, freight is unloaded, logged onto the Company's computerized tracing system, and reloaded onto trailers destined for the Company's other service centers. Trucks depart later in the evening for their destination service centers. In order to ensure prompt service, the Company enforces established time schedules for linehaul service between service centers and utilizes an advanced computer system to track and coordinate deliveries. Through the Company's wide-area computer network, all vital information relating to shipments is available to each service center on a real-time basis. Before the cargo arrives at its destination service center, a manifest showing the contents of each trailer and the sequence in which it is loaded, along with the delivery bills, is generated by the Company's computerized tracing system and is available to the destination service center manager via the Company's computer network. Upon arrival at the destination service center, the freight is unloaded, sorted and delivered to its final destination by local delivery trucks. Instead of utilizing a "hub and spoke" system, which is typically used by large, national LTL carriers, the Company emphasizes direct loading of freight between service centers with no intermediate handling on most shipments. Hub and spoke systems generally require shipments to be loaded and unloaded several times at a number of service centers and breakbulk facilities prior to delivery. Direct loading allows shipments to be transported directly from the originating service center to the destination service center without intermediate handling. Direct loading reduces the Company's costs because it requires less loading and unloading of freight and requires fewer terminals and breakbulk facilities. The Company uses a single service center, rather than multiple satellite terminals, in each of the major cities it serves. Single service centers reduce rehandling of freight, shorten delivery times and thereby reduce the risk of freight damage or loss. 3 4 In addition to the Company's 23 service centers, the Company also utilizes 20 independent agents in smaller markets in which the Company does not operate service centers. These agents are independent businesses which operate within a specific area as the Company's pick-up and delivery agent. Shipments are coordinated through these agents in the same manner as the Company's service centers. Agents are compensated based upon a percentage of freight bill revenue and are required to maintain standards established by the Company. The Company believes that its utilization of agents in smaller markets helps the Company maintain a lower fixed cost structure and emphasize variable costs while improving the level of local market presence and allowing the Company to provide its customer base with broader geographical coverage. The table indicates the location of each of the Company's service centers and agents within its core service region:
SERVICE CENTERS AGENTS --------------- ------- Albuquerque, New Mexico Battle Mountain, Nevada Bakersfield, California Beatty, Nevada Benicia, California Bishop, California Colorado Springs, Colorado Boise, Idaho Denver, Colorado Cedar City, Utah El Paso, Texas Elko, Nevada Fresno, California Ely, Nevada Grand Junction, Colorado Eugene, Oregon Kent, Washington Flagstaff, Arizona Las Vegas, Nevada Hawthorne, Nevada Medford, Oregon Hermiston, Oregon Newark, California Kingman, Arizona North Salt Lake, Utah Las Vegas, New Mexico Oxnard, California Lovelock, Nevada Phoenix, Arizona Redding, California Pico Rivera, California Ridgecrest, California Portland, Oregon Tonopah, Nevada Reno, Nevada Wells, Nevada Rialto, California Wendover, Utah Sacramento, California Winnemucca, Nevada San Diego, California Spokane, Washington Tucson, Arizona
The Company also maintains BEA expansion facilities in Dallas and Chicago. These facilities function similarly to the Company's other service centers with respect to pick-up and shipping operations; however, the Company does not regularly transport freight from its other service centers to these facilities for delivery. The Company transports freight from the BEA expansion facilities to service centers within its core service region using primarily purchased linehaul transportation. Approximately 40% of the Company's shipments are currently delivered overnight. The Company uses two-man "sleeper" teams to transport the remaining second and third day deliveries to outlying service centers and agents. Over 80% of the Company's shipments are currently delivered within two days. When necessary, the Company contracts with third parties for transportation services ("purchased linehaul transportation") to supplement peak demand periods and address lane imbalances. The Company obtains purchased linehaul transportation from several sources, including truckload carriers and independent contractors. By utilizing purchased linehaul transportation, the Company is able to reduce "empty miles" and improve load factors. The Company selectively solicits business from customers to reduce operational inefficiencies by improving the mix of shipment and lane density, shipment size and lane flow. During the year ended December 31, 4 5 1998, the Company handled an average of approximately 3,440 shipments per day with an average weight per shipment of approximately 1,147 lbs. and average revenue per bill of approximately $125.31. The Company's revenue per hundredweight was $10.92 for the year ended December 31, 1998. The Company's rates for LTL shipments are typically based on weight and volume characteristics and the distance traveled. The Company periodically publishes base rates that are generally applicable to customer shipments. The Company typically offers special rates to customers based on tonnage levels and other factors. In certain instances, the Company competes with other carriers for business by participating in competitive bidding. Customers generally solicit bids for relatively large shipment and tonnage volumes over a one or two year period. These customers often enter into contractual relationships with a limited number of carriers based upon price and service. SPECIALIZED SERVICES The Company offers a broad range of services, including service capabilities beyond the scope of most LTL carriers. These services include Priority+Plus, an expedited time-definite service; Protective+Plus, a full temperature-controlled service for LTL shipments within the Company's core service region; and Canadian+Plus, full points coverage into all major Canadian markets through an exclusive regional marketing partnership with one of Canada's leading LTL carriers. In November 1997, the Company began providing less-than-container load service to Hawaii. The Company consolidates shipments, loads containers and tenders them to a major transoceanic carrier for transport to Hawaii. The shipments are then delivered by a local carrier in Hawaii pursuant to an agreement between the carrier and the Company. The Company intends to continue to evaluate additional niche service offerings which complement existing operating systems. In addition to the service offerings described above, the Company offers customized services tailored to the ongoing needs of a particular customer. These customized services often involve a high level of coordination between the Company and the customer and may include time definite delivery, highly specialized reporting requirements and electronic data interchange, full time on-site loading by Company employees, return goods consolidation and management, and specialized handling and equipment requirements. Through a program referred to as "Motor Cargo USA," the Company also provides customers with service to points outside its core service region. The Company enters into interline agreements with other carriers to provide delivery of freight outside of the Company's core service region. In 1995, the Company began providing customized logistics, warehousing and distribution management services through its subsidiary MCDS. MCDS currently provides "just-in-time" delivery services for a small number of specialty retailers. One customer currently accounts for more than 77% of the operating revenues of MCDS. For the year ended December 31, 1998, $3.1 million or 2.7% of the Company's revenues were generated by MCDS. CUSTOMERS AND MARKETING The Company has approximately 3,500 regular customers with an average monthly revenue billing of $1,000 or more. The Company's customers are not concentrated in any one area or industry and no one customer accounts for over 6% of total revenues. The Company has positioned itself in the high service end of the regional LTL market. The Company targets prospective customers that require high levels of customized service and are not inclined to select a carrier solely on the basis of price. The Company emphasizes its ability to provide specialized or customized services to shippers, including (i) highly flexible scheduling, (ii) consistent and expedited transit commitments, (iii) strong management information systems and electronic data interchange capabilities, (iv) commitment to customer service and responsiveness and (v) a willingness to provide transportation programs outside the scope of the traditional LTL industry. 5 6 The Company has written contracts with most of its large customers. These contracts specify rate levels and eliminate the need to negotiate rates for individual shipments. The Company's contracts typically do not provide for guaranteed volumes. Although the Company's contracts typically run for a specified term of one year, they generally may be terminated by either party upon 30 days' notice. The Company has pricing agreements with substantially all of its customers which are not covered by contracts. These pricing agreements specify rate levels but do not require minimum tonnage commitments on the part of the customer. Pricing agreements may generally be terminated by either party upon five days' notice. The Company's senior management is actively involved in the Company's sales and marketing activities. In order to attract new customers, the Company relies on its ability to provide quality service and on selective targeting of potential accounts. The Company's account executives are managed by five regional directors of sales. The account executives are responsible for developing new business and maintaining relations with existing customers. The Company also employs three corporate account managers in its corporate account office in Chicago. These corporate account managers solicit business from corporate level decision-makers who are responsible for freight shipments to locations within the Company's core service region. The Company has designed and implemented a sales force automation system which provides for improved contact and opportunity management, improved sales forecasting and simplified reporting. The Company maintains comprehensive customer base profiles of existing and prospective customers. Using this database, key strategic and account development information is updated daily by the Company's sales force using automated processes. The Company utilizes this resource to track emerging opportunities and direct highly targeted and precisely timed marketing messages to existing and prospective customers. DRIVERS, INDEPENDENT CONTRACTORS AND OTHER PERSONNEL At December 31, 1998, the Company employed 1,571 persons in the following categories:
CATEGORY NO. OF EMPLOYEES -------- ---------------- Full time drivers 487 Part time drivers and dock workers 581 Salaried and clerical 371 Warehousemen 11 Mechanics 61 Sales and sales management 60
At December 31, 1998, the Company employed 110 linehaul drivers and 522 pick-up and delivery drivers. The Company selects its drivers based upon experience and driving records. Pursuant to DOT regulations, drivers are required to pass drug tests prior to employment and periodically thereafter. The trucking industry experiences driver shortages from time to time; however, the Company has maintained an adequate and qualified driver force. The Company compensates linehaul drivers on a per mile basis. Pick-up and delivery drivers are compensated on an hourly basis. In addition to its employee drivers, the Company utilized approximately 90 linehaul drivers, as of December 31, 1998, pursuant to an agreement with FHF Transportation, Inc. ("FHF"). These drivers operate tractors owned by the Company but are not employees of the Company. The Company makes payments to FHF based upon mileage. The Company supplements its linehaul fleet with the use of approximately 75 independent contractors. Because independent contractors provide their own tractor, independent contractors provide the Company with an alternative method of obtaining the use of additional revenue equipment with reduced capital investment. This approach reduces costs and maximizes flexibility by quickly providing additional linehaul capacity during periods of peak demand. Further, because independent contractors are compensated at a contracted rate per mile, the use of independent contractors helps the Company reduce fixed overhead and improve asset utilization. Independent contractors also allow the Company to better adjust to seasonal fluctuations in shipping volumes. 6 7 Approximately 5% of the Company's employees are covered by two separate collective bargaining agreements relating to employees at the Company's North Salt Lake, Utah and Reno, Nevada service centers. Although the employees covered by these contracts are members of the International Brotherhood of Teamsters, the contracts are not tied to the Teamsters National Master Contract. The Company's agreement with North Salt Lake employees expires on November 30, 1999, and the Company's Agreement with Reno employees expires on November 30, 2000. Both agreements provide for automatic renewal from year to year after expiration, subject to the right of either party to cancel or terminate the agreement upon at least 60 days' notice prior to the date of expiration. SAFETY AND INSURANCE The Company emphasizes safety in all aspects of its operations. The Company employs a Director of Safety and Compliance who has over 25 years of safety-related experience with the Company. Each of the Company's terminals conducts its own safety program and all tractors in use are inspected daily by Company personnel. The Company has also established guidelines for hauling hazardous materials. The Company earned the highest DOT safety and fitness rating of "satisfactory" during its last audit. The Company currently maintains liability insurance for bodily injury and property damage in the amount of $30 million, with a self retention amount of $250,000 per incident, and cargo insurance in the amount of $1 million, with a self retention amount of $100,000, per load. The Company is self-insured with respect to physical damage to its properties. The Company also maintains workers' compensation insurance, with a deductible of $250,000 in Nevada, and without a deductible in Washington. The Company is responsible for workers' compensation claims in other states in which the Company operates up to an aggregate of approximately $1.9 million per year, and the Company maintains insurance for workers' compensation payments in excess of such amount. REVENUE EQUIPMENT At December 31, 1998, the Company operated a fleet of 629 tractors and trucks and 2,361 trailers. The Company uses new linehaul tractors in linehaul operations for approximately five years. After five years of use, the Company trades-in used linehaul tractors and purchases new linehaul tractors. The table below reflects, as of December 31, 1998, the average age of the type of equipment, and the number of respective units:
NUMBER AVERAGE TYPE OF EQUIPMENT (CATEGORIZED BY PRIMARY USE) OF UNITS AGE ---------------------------------------------- -------- ------- Linehaul tractors 171 2.1 Pick-up and delivery tractors 362 2.8 Pick-up and delivery trucks 96 4.8 Trailers 2,361 7.8
The Company lowers its cost structure through the use of 28 foot trailers in doubles combinations and, where permitted by state regulations, triples combinations in its linehaul operations. These 28 foot trailers allow for more direct loading and minimize handling costs and exposure. In addition, the Company improves linehaul trailer utilization and reduces potential damages and subsequent cargo claims expenses by using logistic deck trailers and pallet decks. This specialized equipment minimizes damage and maximizes trailer utilization. The Company maintains its revenue equipment through the use of its own maintenance facilities as well as outside vendors. The Company's service centers in Pico Rivera, Las Vegas, Reno, Denver, Portland and North Salt Lake have maintenance facilities. In addition to scheduled maintenance on its equipment, the Company also performs occasional equipment modifications which are designed to improve operating performance and reduce operating costs of equipment. All data regarding equipment costs, depreciation, mileage and maintenance are recorded on the Company's computer system, allowing management to access equipment records quickly and plan scheduled maintenance efficiently. 7 8 The Company purchases all of its parts through nationally-recognized vendors. To enable management to better control inventory and costs, all orders are placed through the Company's central purchasing unit at the Company's headquarters. FUEL AVAILABILITY AND COST Fuel comprises 1.5% to 3% of the Company's total operating expenses. Generally, in order to obtain lower fuel costs and greater flexibility in fueling its fleet, the Company purchases its own fuel in bulk and requires its drivers to fuel at Company terminals. The Company emphasizes fuel economy through the use of modern, fuel-efficient equipment, driver and mechanic training programs and aerodynamic improvements. Although fuel constitutes a much lower percentage of costs to the Company than it would to a full truckload carrier, increases in fuel prices or fuel taxes, shortages of fuel or rationing of petroleum products could have a material adverse effect on the operations and profitability of the Company. Generally, in times of sharp fuel price increases, the Company implements fuel surcharges. The Company presently has a sliding scale fuel surcharge which is based on a fuel price index for the west coast. The fuel surcharge currently has no effect due to low fuel prices. Because of the highly competitive nature of the market for LTL services, the Company generally must wait for larger carriers to implement fuel surcharges before the Company can effectively implement fuel surcharges. COMPETITION The transportation industry is highly competitive on the basis of both price and service. The Company competes with regional, inter-regional and national LTL carriers and, to a lesser extent, with truckload carriers, railroads and overnight delivery companies. Several large LTL carriers operate within the Company's core service region. Some of the Company's competitors are divisions or subsidiaries of larger trucking companies. Many of the Company's competitors have greater financial resources, more equipment and greater freight capacity than the Company. Certain carriers occasionally experience periods of over capacity during which these carriers reduce prices in order to increase utilization of revenue equipment. The Company believes that it is able to compete effectively in its markets by providing high quality customized service at competitive prices. REGULATION The Motor Carrier Act of 1980 significantly deregulated the trucking industry and increased competition among motor carriers. Following enactment of the Motor Carrier Act, applicants have obtained operating authority more easily, and interstate motor carriers such as the Company are able to change their rates and services with less regulatory oversight and delay. The Motor Carrier Act also removed many route and commodity restrictions on transportation of freight. Effective January 1, 1995, Section 601 of the Federal Aviation Administrative Authorization Act and the Trucking Industry Regulatory Reform Act ("TIRRA") substantially deregulated intrastate operating authority. Prior to TIRRA, the Company maintained intrastate authority in California, Nevada and Utah. Subsequent to TIRRA, the Company obtained intrastate authority in Colorado, Oregon, New Mexico, Washington and Texas. The Company was regulated by the ICC until the ICC Termination Act of 1995 abolished the ICC effective January 1, 1996. The Surface Transportation Board, an independent entity within the DOT, assumed many of the responsibilities of the ICC. The Company is also regulated by various state agencies. These regulatory authorities have broad powers, generally governing matters such as authority to engage in motor carrier operations, rates, certain mergers, consolidations and acquisitions, and periodic financial reporting. The trucking industry is subject to regulatory and legislative changes that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and the costs of providing services to, shippers. Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. Such matters as weight and dimensions of equipment are also subject to federal and state regulation. The use of triple trailers is 8 9 subject to state regulation and is prohibited by several states within the Company's core service region. The Company is subject to federal, state and local environmental laws and regulations governing the management of hazardous wastes, other discharge of pollutants into the air and surface and underground waters, and the disposal of certain substances. These regulations extend to the Company's above-ground and underground fuel storage tanks. The Company has completed modifications of underground storage tanks at several of its facilities in order to comply with new federal regulations which became effective at the end of 1998. In most cases, the Company replaced its underground storage tanks with above-ground tanks. The Company believes that all of its fuel storage tanks are in compliance with the new regulations. The Company also believes that it is in material compliance with all other applicable environmental laws and regulations and does not believe that the cost of future compliance should have a material adverse effect on the Company's operations or financial condition. ITEM 2. PROPERTIES The Company owns its executive offices, located in North Salt Lake, Utah, consisting of a two-story building of approximately 21,377 square feet. Of the 23 service centers used by the Company within its core service region as of December 31, 1998, eight were owned, 13 were leased and two had multiple facilities that were partially owned and partially leased by the Company. These facilities range in size according to the markets served. The Company has not experienced and does not anticipate difficulties in renewing existing leases on favorable terms or obtaining new facilities as and when required. The following table sets forth the location of each service center owned or leased by the Company as of December 31, 1998.
# OF OWNED OR LEASE LOCATION DOORS LEASED EXPIRATION -------- ----- -------- ---------- Pico Rivera, CA 102 Leased December 2013 Rialto, CA 78 Owned North Salt Lake, UT 77 Owned Denver, CO Building 1 43 Leased November 2000 Building 2 36 Owned Newark, CA 35 Owned Portland, OR 34 Owned Reno, NV 32 Leased December 1999 Sacramento, CA 30 Owned Kent, WA 30 Owned Benicia, CA 28 Leased August 2001 Phoenix, AZ Building 1 24 Leased February 1999 Building 2 14 Leased Month-to-month El Paso, TX 20 Owned Las Vegas, NV 20 Owned San Diego, CA 20 Leased May 2001 Fresno, CA 20 Leased October 2001 Albuquerque, NM 12 Leased October 2001 Oxnard, CA 9 Leased May 2000 Bakersfield, CA 9 Leased October 2000 Tucson, AZ 8 Leased August 2000 Medford, OR 8 Leased July 2001 Spokane, WA 8 Leased Month-to-month Colorado Springs, CO 7 Leased August 2001 Grand Junction, CO 3 Leased May 1999
The Company also maintains BEA expansion facilities in Dallas and Chicago. The Dallas facility has 23 doors and is leased by the Company pursuant to a lease which expires in May 2000. The Chicago location has 20 doors and the Company's lease expires in November 2001. 9 10 In addition to the service center facilities leased by the Company as described above, the Company also leases a sales office in Chicago pursuant to a lease which expires in November 2001. The Company's subsidiary, MCDS, leases an aggregate of 161,286 square feet of warehouse space in southern California pursuant to two leases which expire in January 2001 and February 2001. In addition, MCDS leases 60,000 square feet of warehouse space in York, Pennsylvania, pursuant to a lease that expires in June 2001, and 5,800 square feet of warehouse space in Las Vegas, Nevada pursuant to a month-to-month lease. ITEM 3. LEGAL PROCEEDINGS The Company is routinely a party to litigation incidental to its business, primarily involving claims for personal injury or property damage incurred in the transportation of freight. The Company maintains insurance to cover liabilities in excess of self-insured amounts. The Company's management is not aware of any claims or threatened claims that it believes are likely to exceed insurance limits or have a materially adverse effect upon the Company's operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS The Company did not submit any matter to a vote of security holders during the fourth quarter of 1998. ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the present executive officers and certain key employees of the Company:
NAME AGE POSITION - ---- --- -------- Harold R. Tate 72 Chairman of the Board, Director Marshall L. Tate 36 President and Chief Executive Officer, Director William J. Mahan 53 Executive Vice President and Chief Operating Officer Louis V. Holdener 60 Vice President, President of Motor Cargo Marvin L. Friedland 56 Vice President and General Counsel, Secretary, Director Lynn H. Wheeler 57 Vice President and Chief Financial Officer R. Scott Price 35 Vice President of Sales and Marketing Steven E. Wynn(1) 49 Vice President of Human Resources (Motor Cargo) Kevin L. Avery(1) 41 Vice President of Traffic (Motor Cargo) Jim D. Matt(1) 44 Vice President of Sales (Motor Cargo)
(1) Messers Wynn, Avery and Matt are officers of the Company's principal operating subsidiary, Motor Cargo, and are not officers of the Company. 10 11 Harold R. Tate has over 50 years of experience in the trucking industry and has served as Chairman of the Board of the Company and its predecessors since 1947. Mr. Tate served as Chief Executive Officer of the Company and its predecessors from 1947 to March 1997. Mr. Tate also serves as a member of the Board of Trustees of the Buffalo Bill Historical Center. Harold R. Tate is the father of Marshall L. Tate, President and Chief Executive Officer of the Company. Marshall L. Tate has over 14 years experience in the trucking industry. Mr. Tate has been employed by the Company since 1984, has served as its President and Chief Executive Officer since March 1997, and was appointed to the Board of Directors of the Company in 1996. Prior to becoming the Company's President and Chief Executive Officer, Mr. Tate served in various divisional positions as well as Vice President of Sales and Marketing and Executive Vice President of Corporate Development for Motor Cargo. In 1995, Mr. Tate directed the start-up of the Company's logistics warehousing and distribution management services subsidiary, MC Distribution Services. Marshall L. Tate is the son of Harold R. Tate, the majority shareholder and Chairman of the Board of Directors of the Company. William J. Mahan has over 30 years experience in the trucking industry. Mr. Mahan joined the Company in February 1999 as Executive Vice President and Chief Operating Officer. Prior to joining the Company, Mr. Mahan held a series of positions with Viking Freight, a subsidiary of FDX Corp., including Vice President of Operations, Senior Vice President of Operations, President of Spartan Express (a Viking Freight subsidiary) and, most recently, Executive Vice President of Viking Freight. Louis V. Holdener has over 33 years experience in the trucking industry. Mr. Holdener has been employed by the Company since 1965, has served as President of Motor Cargo, the Company's primary operating subsidiary, since 1991, and was named Vice President of the Company in 1997. Prior to 1991, Mr. Holdener served in various positions with the Company, including Vice President of Operations of Motor Cargo. Marvin L. Friedland has served as Vice President and General Counsel of the Company and its predecessors since 1982. Prior to joining the Company, Mr. Friedland was an attorney in private practice. Mr. Friedland was appointed to the Board of Directors in 1996. Mr. Friedland is a Certified Public Accountant and a member of the California Bar and the Utah Bar. Lynn H. Wheeler has been employed by the Company since 1983 and has served as Vice President of Finance of Motor Cargo since 1988. Mr. Wheeler was appointed Vice President and Chief Financial Officer of the Company in March 1997. Mr. Wheeler is a Certified Public Accountant, a Certified Internal Auditor and a member of the American Institute of Certified Public Accountants. R. Scott Price joined the Company in 1986 and has served as a Vice President of Sales and Marketing of the Company since February 1999. From October 1997 to February 1999, Mr. Price served as a Vice President of the Company responsible for overseeing MCDS. From 1995 to 1997, Mr. Price served as Vice President of Sales of Motor Cargo. From 1986 to 1995, Mr. Price held various positions with Motor Cargo, including Service Center Manager and Director of Corporate Accounts. Steven E. Wynn has been employed by Motor Cargo since 1973 and has served as Vice President of Human Resources of Motor Cargo since February 1999. From 1991 to 1999, Mr. Wynn served as Vice President of Operations of Motor Cargo. From 1973 to 1991, Mr. Wynn served in various positions, including Director of Linehaul Operations and Director of Operations for Motor Cargo. Kevin L. Avery joined the Company in 1985 and has served as Vice President of Traffic of Motor Cargo since 1992. From 1985 to 1992, Mr. Avery served in various positions, including Director of Pricing, Rate Department Manager and Director of Quality Assurance for Motor Cargo. Jim D. Matt joined the Company in October 1997 as Vice President of Sales for Motor Cargo. Prior to joining the Company, Mr. Matt was Vice President of Sales for the Midwestern and Eastern divisions of Viking 11 12 Freight Incorporated from 1996 to 1997, Vice President of Sales and Marketing for Spartan Express from 1995 to 1996 and Vice President of Sales and Marketing for Spartan Central from 1992 to 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq Stock Market (National Market) under the symbol "CRGO". At March 17, 1999, there were approximately 400 holders of the common stock, including 21 shareholders of record. Prior to the Company's initial public offering there was no established trading market for the Company's Common Stock. The Company's Common Stock began trading on the Nasdaq Stock Market on November 25, 1997. The following table sets forth the high and low sales prices for the Company's common stock as reported by the Nasdaq National Market System for the period from November 25, 1997 through December 31, 1997, and by quarter for the year ended December 31, 1998.
YEAR ENDED -------------------------------------------------------- DECEMBER 31, 1998 DECEMBER 31, 1997 QUARTER ----------------------- ----------------------- ENDED HIGH LOW HIGH LOW ----- ------- -------- -------- ----- 3/31 $13.750 $10.750 6/30 13.00 10.00 9/30 12.125 7.875 12/31(1) 9.50 6.50 $12.125 $11.50
(1) The Company's Common Stock commenced trading on November 25, 1997. The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data have been summarized from the Company's consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," under Item 7 below. 12 13 SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share amounts)
Year ended December 31, ------------------------------------------------------------------ 1994 1995 1996 1997 1998 -------- -------- -------- --------- --------- STATEMENT OF EARNINGS DATA: Operating revenues $ 82,984 $ 80,808 $ 92,310 $ 105,381 114,725 Operating expenses Salaries, wages and benefits 36,055 35,495 39,666 45,247 51,747 Operating supplies and expenses 12,145 12,669 14,947 15,706 15,974 Purchased transportation 12,238 11,532 14,164 15,389 17,974 Operating taxes and licenses 3,068 3,178 3,531 3,519 3,885 Insurance and claims 2,685 1,842 2,785 4,478 3,651 Depreciation and amortization 4,974 5,930 6,578 6,998 7,928 Communications and utilities 1,314 1,521 1,784 1,896 1,924 Building rents 1,093 1,274 1,540 1,745 2,365 -------- -------- -------- --------- --------- Total operating expenses 73,572 73,441 84,995 94,978 105,448 -------- -------- -------- --------- --------- Operating income 9,412 7,367 7,315 10,403 9,277 Other income (expense) Interest expense (1,392) (1,500) (1,430) (1,051) (154) Other, net 104 107 (32) 221 326 -------- -------- -------- --------- --------- Earnings before income taxes 8,124 5,974 5,853 9,573 9,449 Income taxes 2,943 2,094 2,118 3,805 3,660 -------- -------- -------- --------- --------- Net earnings $ 5,181 $ 3,880 $ 3,735 $ 5,768 $ 5,789 ======== ======== ======== ========= ========= Earnings per common share - basic and diluted $ .83 Weighted-average shares outstanding - diluted 6,992 Pro forma (1) Earnings before income taxes $ 8,124 $ 5,974 $ 5,853 $ 9,573 Income taxes 3,125 2,303 2,256 3,952 -------- -------- --------- --------- Net earnings $ 4,999 $ 3,671 $ 3,597 $ 5,621 ======== ======== ========= ========= Earnings per common share - basic $ 0.86 $ 0.63 $ 0.62 $ 0.95 ======== ======== ========= ========= Weighted-average shares outstanding - basic 5,820 5,820 5,820 5,939 ======== ======== ========= ========= Earnings per common share - diluted $ 0.86 $ 0.63 $ 0.62 $ 0.95 ======== ======== ========= ========= Weighted-average shares outstanding - diluted 5,820 5,820 5,820 5,939 ======== ======== ========= =========
December 31, ------------------------------------------------------ 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------ BALANCE SHEET DATA: Current assets $18,741 $20,233 $23,197 $26,965 26,775 Current liabilities 13,414 14,752 15,752 11,597 10,741 Total assets 49,391 59,507 63,834 68,069 72,660 Long-term obligations, less current maturities 14,044 17,724 16,820 6,492 5,390 Total liabilities 30,631 36,784 37,794 24,618 23,386 Stockholders' equity 18,760 22,723 26,040 43,451 49,275
(1) Effective August 28, 1997, the Company acquired the membership interests of Ute, a Utah limited liability company. A limited liability company passes through to its members essentially all taxable earnings and losses and pays no tax at the company level. Accordingly, for comparative purposes, a pro forma provision for income taxes using an effective income tax rate of 38% has been determined assuming Ute had been taxed as a C corporation for all periods presented. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this section is to discuss and analyze the Company's consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this report. This section contains certain forward-looking statements that involve risks and uncertainties, including statements regarding the Company's plans, objectives, goals, strategies and financial performance. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under "Cautionary Statement for Forward-Looking Information" below and elsewhere in this report. OVERVIEW The Company's results of operations for 1996, 1997 and 1998 reflect fluctuations within the motor carrier industry and significant changes within the Company's operations. In the second half of 1995 the Company initiated a significant expansion of its terminal network in order to increase coverage within its core service region. As part of this expansion, the Company opened new service centers in Rialto, California; Oxnard, California; Bakersfield, California; Fresno, California; and Grand Junction, Colorado. Costs associated with the Company's new service centers continued to affect earnings in 1996 as several of these service centers were in the early stages of operation. Earnings in 1996 were also adversely affected by sluggish demand for LTL carrier services throughout the year, which resulted in severe pricing pressures, and by escalating fuel prices in the latter half of 1996. In 1997 the Company began to experience favorable results associated with its terminal network expansion. Revenues produced by the Company's new service centers during the year ended December 31, 1997 were more consistent with the revenues of the Company's other service centers than in prior periods. Higher demand for carrier services also contributed to a more stable pricing environment during 1997. The Company's results of operations for the year ended December 31, 1997 were also significantly affected by an aggressive account rationalization program initiated by the Company in late 1996 to improve revenue quality. By analyzing each account based upon revenue quality characteristics such as revenue per bill and revenue per hundredweight, the Company was able to identify accounts providing inadequate profit margins. While revenue growth was negatively affected by this account rationalization, the Company's earnings for the year ended December 31, 1997 were positively affected by the elimination of certain business and tonnage which did not meet the Company's margin requirements. During 1998, the Company experienced moderate revenue growth resulting from an increased volume of freight within the Company's core service region, as well as new freight from the Company's BEA expansion facilities in Dallas and Chicago. The Company's operating income decreased in 1998, however, due to increased costs associated with efforts to optimize and reorganize linehaul operations, as well as staffing increases to provide for higher quality of service and expansion of the BEA facilities in Dallas and Chicago. As a result, the Company experienced only a slight increase in net earnings during 1998, compared to 1997. The Company's management believes that its expanded terminal network provides the Company with the necessary infrastructure for continued growth within its core service region. With an established terminal network in place to provide high quality service throughout its core service region, the Company intends to continue its focus on improving route, lane and service center densities by increasing the amount of business handled by the Company within its core service region. The Company intends to achieve this growth by increasing the amount of business generated by existing customers within its core service region and acquiring new customers outside its core service region for the purpose of soliciting new business into its core service region. The Company intends to continue its rigorous analysis of costs and profitability associated with each customer, lane and shipment. 14 15 RESULTS OF OPERATIONS The following table sets forth the percentage relationship of certain items to revenues for the periods indicated:
YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1997 1998 ------ ------ ------ Operating revenues 100.0% 100.0% 100.0% Operating expenses Salaries, wages and benefits 43.0 42.9 45.1 Operating supplies and expenses 16.2 14.9 13.9 Purchased transportation 15.3 14.6 15.7 Depreciation and amortization 7.1 6.6 6.9 Insurance and claims 3.0 4.2 3.2 Operating taxes and licenses 3.9 3.3 3.4 Communications and utilities 1.9 1.9 1.7 Building rents 1.7 1.7 2.0 ------ ------ ------ Total operating expenses 92.1 90.1 91.9 ------ ------ ------ Operating income 7.9 9.9 8.1 Other income (expense) Interest expense (1.6) (1.0) (0.1) Other, net 0.0 0.2 0.3 ------ ------ ------ Earnings before income taxes 6.3 9.1 8.3 Income taxes 2.3 3.6 3.2 ------ ------ ------ Net earnings 4.0% 5.5% 5.1% ====== ====== ======
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Operating revenues increased 8.9% in 1998 to $114.7 million from $105.4 million in 1997. The increase was attributable to new freight from the Company's BEA expansion facilities in Dallas, Texas and Chicago, Illinois, as well as increased freight volume within the Company's core service region. The number of shipments during 1998 increased by 9.5% to 893,957, compared to 816,567 for 1997. Revenue per hundred weight decreased to $10.92 in 1998 from $10.96 for 1997. The Company's warehousing and distribution management company, MCDS, contributed $3.1 million of the $114.7 million in operating revenues for the year ended December 31, 1998 compared to $3.4 million for the year ended December 31, 1997. The decrease was due primarily to the termination of a contract with one customer in the first quarter of 1998, which resulted in lower revenues for the first and second quarters of 1998. Revenues from MCDS increased during the third and fourth quarters of 1998 due to the expanding of service to an existing customer. Tonnage increased by 10.0% to 512,705 in 1998, compared to 466,131 in 1997. Average revenue per bill increased .1% to $125.31 in 1998 compared to $125.15 in 1997. Demand for freight was sluggish during 1998 limiting the growth in revenue and increasing the stress on margins. As a percentage of operating revenues, salaries, wages, and benefits increased to 45.1% for the year ended December 31, 1998 from 42.9% for 1997. Salaries and wage rates increased approximately 4% in 1998. In addition, staffing increases were made to provide for new facilities in Chicago, Illinois and Benecia, California, along with staffing increases at other service centers to maximize quality of service. The Company also incurred additional labor costs in connection with the Company's efforts to optimize and reorganize linehaul operations. Operating supplies and expenses, which include agent commissions, tires, parts, repairs and fuel and other general operating expenses, decreased in 1998 to 13.9% of operating revenue compared to 14.9% for 1997. The decrease was primarily due to lower fuel costs and decreased agent commissions. Purchased transportation increased to 15.7% of operating revenues in 1998 from 14.6% for 1997. This increase was primarily attributable to 15 16 the use of purchased transportation providing one-way hauling of freight from the Company's BEA expansion facilities in Dallas and Chicago into the Company's core service region for delivery. Insurance and claims decreased to 3.2% of revenue for 1998 compared to 4.2% for 1997. Insurance and claims expenses were higher in 1997 due to an increase in insurance reserves in 1997 for two accidents which occurred in prior years. Interest expense decreased to .1% as a percentage of operating revenues in 1998 compared to 1.0% for 1997. The decrease was attributable to lower debt levels. Approximately $7.3 million of the Company's debt was paid off in December 1997 with proceeds from the Company's initial public offering. Strong operating cash flows also contributed to lower debt levels during 1998. At December 31, 1998, total obligations were $5.5 million compared to $6.6 million at December 31, 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Operating revenues increased 14.2% in 1997 to $105.4 million from $92.3 million for 1996. The increase was attributable to the Company's efforts beginning in the third quarter of 1996 to improve significantly the yield of its revenue base, the addition of new customers and, to a lesser extent, expansions within the Company's operating region. The number of shipments during 1997 increased by 9.3% to 816,567 compared to 747,024 for 1996. Revenue per hundred weight increased to $10.96 in 1997 from $10.74 for 1996. Of the $13.1 million increase in operating revenues for the year ended December 31, 1997, $1.7 million was attributable to the Company's warehousing and distribution management company, MCDS. The increase in revenues for MCDS resulted primarily from the addition of a single large distribution management project for a large retail company. As a result of the Company's focus on revenue quality, tonnage grew by 9.4% to 466,131 in 1997, compared to 426,109 tons for 1996, while total shipments increased 9.3% to 816,567 for 1997 compared to 747,024 for 1996. Average revenue per bill increased 2.1% to $125.15 in 1997 compared to $122.54 for 1996. Lower margin yields resulting from a difficult freight market in early 1996 and sluggish demand throughout the year contributed to lower revenues in 1996. Revenues for the year ended December 31, 1997 were adversely affected by the Company's decision to discontinue service to certain customers whose business volumes did not meet minimum margin yield requirements. As a percentage of operating revenues, salaries, wages and benefits decreased to 42.9% for the year ended December 31, 1997 from 43.0% for 1996. While salary and wage rates increased approximately 4.0% in 1997, salaries and wages decreased as a percentage of revenues due to improved quality of revenue as well as improved utilization of labor. Workers compensation costs increased 1.1% in 1997 due to a workers compensation credit which eliminated workers compensation expense for the same period in 1996. Pension costs decreased 0.2% in 1997 compared to 1996 due to a better rate of return on invested pension assets. Operating supplies and expenses, which includes agent commissions, tires, parts, repairs and fuel and other general operating expenses, decreased in 1997 to 14.9% of operating revenues compared to 16.2% for 1996. This decrease was due to lower fuel prices and agent commissions, partially offset by increased general, marketing and employee related expense. Purchased transportation decreased to 14.6% of operating revenues for 1997 from 15.3% for 1996. This decrease was primarily due to improved linehaul load factors and higher revenue per operating mile. Insurance and claims increased to 4.2% of operating revenues for the year ended December 31, 1997, from 3.0% in 1996. This increase was a result of the Company and its insurance carrier increasing the insurance reserves in 1997 for two accidents which occurred in prior years. As a percentage of operating revenues, depreciation and amortization decreased to 6.6% for the year ended December 31, 1997 compared to 7.1% for 1996. This decrease was due largely to increased revenue levels and continued improvement in asset utilization. 16 17 As a percentage of operating revenues, interest expense decreased to 1.0% in 1997, compared to 1.6% for 1996. This decrease was due primarily to lower debt levels resulting from strong operating cash flows and continued improvement in cash management techniques. In addition, approximately $7.3 million of the Company's debt was paid off in December 1997 with proceeds from the Company's initial public offering. At December 31, 1997, total obligations were $6.6 million compared to $23.7 million at December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have been funds provided by operations and bank borrowings. Net cash provided by operating activities was approximately $10.2 million, $12.6 million and $12.6 million in 1996, 1997 and 1998, respectively. Net cash provided by operating activities is primarily attributable to the Company's earnings before depreciation and amortization expense. Capital expenditures totaled approximately $9.7 million, $7.9 million and $13.7 million during 1996, 1997 and 1998, respectively. The majority of the Company's capital expenditures are financed with cash provided by operating activities and long-term debt. The Company's budget for total capital expenditures is approximately $14 million for 1999. These capital expenditures will consist primarily of the acquisition of new revenue equipment and construction of terminal facilities. Net cash used in financing activities was $0.6 million, $5.4 million and $1.1 million in 1996, 1997 and 1998, respectively. At December 31, 1998, the Company had outstanding long-term obligations (including current maturities) consisting of approximately $5.5 million, most of which comprised obligations for the purchase of revenue equipment. See Note F to the Company's Consolidated Financial Statements. The Company leases a small portion of the revenue equipment used in its operations. At December 31, 1998, the Company's future minimum lease payments under operating leases relating to equipment amounted to $2.9 million. See Note D to the Company's Consolidated Financial Statements. The Company is a party to a loan agreement with Zions First National Bank ("Zions") that provides for a revolving line of credit in an amount not exceeding $5 million. The loan agreement provides for the issuance of letters of credit and may be used for this purpose, as well as to fund the working capital needs of the Company. As of December 31, 1998, there was no outstanding balance under this revolving line of credit. Zions has also provided a second revolving line of credit to the Company in an amount not to exceed $20 million. The Company intends to use amounts available under this credit facility, if necessary, primarily to purchase equipment used in operations. As of December 31, 1998, the Company had $4 million in loans outstanding under this facility. All amounts outstanding under the two loan facilities described above accrue interest at a variable rate established from time to time by Zions. The Company does have the option, however, to request that specific advances accrue interest at a fixed rate quoted by Zions subject to certain prepayment restrictions. All amounts outstanding under the two loan facilities are collateralized by the Company's inventory, chattel paper, accounts receivable and equipment now owned or hereafter acquired by the Company. INFLATION Inflation has had a minimal effect upon the Company's profitability in recent years. Most of the Company's operating expenses are inflation-sensitive, with inflation generally producing increased costs of operation. Although the Company historically has been able to pass through most increases in fuel prices and taxes to customers in the form of fuel surcharges or higher rates, the Company generally must wait for larger carriers to implement fuel surcharges before the Company can effectively implement fuel surcharges. See Item 1 "Business-Fuel Availability and Cost." The Company expects that inflation will affect its costs no more than it affects those of other regional LTL carriers. 17 18 SEASONALITY The Company experiences some seasonal fluctuations in freight volume. Historically, the Company's shipments decrease during the winter months. In addition, the Company's operating expenses historically have been higher in the winter months due to decreased fuel efficiency and increased maintenance costs for revenue equipment in colder weather. The Company's operating revenue and net earnings may vary as a result of seasonal factors, and accordingly, results of operations are subject to fluctuation, and results in any period should not be considered indicative of the results to be expected for any future period. THE YEAR 2000 ISSUE The Company utilizes computer hardware and software in its operations. Certain computer applications could fail or create erroneous results due to the upcoming change in the century (the "Year 2000 Issue"). The Company has performed an analysis and has implemented procedures to address the Year 2000 Issue. The Company regularly upgrades its computer hardware and believes that it will not incur any additional expenses to modify computer hardware due to the Year 2000 Issue. In addition, the Company has received commitments from software vendors that will allow the Company to upgrade third-party software programs with minimal expense to the Company. The Company anticipates, however, that it will incur expenses of approximately $100,000 to upgrade and test certain proprietary software developed for the Company. As of December 31, 1998, approximately $60,000 of these expenses had been incurred. The Company has completed the modification of its proprietary software and will begin testing such software in early 1999. The Company is also contacting vendors and customers to determine the extent to which the Company may be vulnerable to third party year 2000 issues. Based upon current information, the Company believes that all hardware and software modifications necessary to operate and effectively manage the Company will be performed by the year 2000 and that related costs will not have a material impact on the results of operations, cash flow, or financial condition of the Company. CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION Certain information set forth in this Annual Report on Form 10-K contains "forward-looking statements" within the meaning of federal securities laws. Forward looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions by the Company and other information that is not historical information. When used in this report, the words "estimates," "expects," "anticipates," "forecasts," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. Additional forward-looking statements may be made by the Company from time to time. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. The Company's forward-looking statements are based upon the Company's current expectations and various assumptions. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs and projections will result or be achieved or accomplished. The Company's forward-looking statements apply only as of the date made. The Company undertakes no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in, contemplated by or underlying the forward-looking statements contained in this report. In addition to the other factors and matters discussed elsewhere in this report, the following factors are among the factors that could cause actual results to differ materially from the forward-looking statements. Any forward-looking statements made by or on behalf of the Company should be considered in light of these factors. 18 19 Economic Factors and Fuel Price Fluctuations The availability and price of fuel, insurance costs, interest rates, fluctuations in customers' business cycles and national and regional economic conditions are economic factors over which the Company has little or no control. Significant increases in fuel prices, interest rates or increases in insurance costs, to the extent not offset by increases in freight rates, or disruptions in fuel supply, would adversely affect the Company's results of operations. A significant downturn in customers' businesses, temporary inventory imbalances (resulting from a recession or otherwise), or decreased demand for LTL carrier services could also have a material adverse affect on the Company. Availability of Employee Drivers and Independent Contractors The Company utilizes the services of both employee drivers and independent contractors. Competition for employee drivers and independent contractors is intense in the trucking industry, and the Company occasionally experiences difficulty attracting or retaining enough qualified employee drivers and independent contractors. There can be no assurance that the Company will not be affected by a shortage of qualified employee drivers or independent contractors in the future, which could result in temporary underutilization of revenue equipment, difficulty in meeting shipper demands and increased compensation levels. Prolonged difficulty in attracting or retaining qualified employee drivers or independent contractors could have a materially adverse effect on the Company's operations. Risks Associated with Geographic Expansion As part of the Company's growth strategy, the Company has established market and operational presence in certain metropolitan areas outside its core service region. The Company is also considering other major distribution centers for additional facilities. Unlike more traditional inter-regional expansion models, the Company intends only to solicit tonnage from these markets moving west into its core service region. The Company has limited experience with this new operating concept, and no assurance can be given that such operations will be successful in the long-term. Capital Requirements The trucking industry is very capital intensive. If in the future the Company were unable to borrow sufficient funds, enter into acceptable operating lease arrangements, or raise additional equity, the resulting capital shortage would impair the Company's ability to acquire additional revenue equipment and adversely affect the Company's growth and profitability. Claims Exposure and Insurance Costs Trucking companies, including the Company, face multiple claims for personal injury and property damage relating to accidents, cargo damage and workers' compensation. To the extent that the Company experiences a material increase in the frequency or severity of accidents or workers' compensation claims, or an unfavorable development on existing claims, the Company's operating results and financial condition could be materially adversely affected. Significant increases in the Company's claims and insurance costs, to the extent not offset by rate increases, would reduce the Company's profitability. Competition The trucking industry is highly competitive and fragmented. Competition for freight transported by the Company is based primarily on service and efficiency and on freight rates. The Company competes with regional, inter-regional and national LTL carriers of varying sizes and, to a lesser extent with truckload carriers, railroads and overnight delivery companies. Some of the Company's competitors are divisions or subsidiaries of larger trucking companies. Many of the Company's competitors have greater financial resources, more equipment and greater freight capacity than the Company. 19 20 Environmental Hazards The Company's operations are subject to various environmental laws and regulations dealing with the transportation, storage, presence, use, disposal, and handling of hazardous materials and hazardous wastes, discharge of stormwater, and underground fuel storage tanks. The Company transports certain commodities that are or may be deemed hazardous substances. The Company also currently maintains above-ground and underground fuel storage tanks on several of its properties. The Company is not aware of any fuel spills or hazardous substance contamination on its properties that would have a material adverse effect on the Company and the Company believes that its operations are in material compliance with existing environmental laws and regulations. If, however, the Company should be involved in a fuel spill, or a spill or other accident involving hazardous substances, if any such substances were found on the Company's properties, or if the Company were found to be in violation of applicable laws and regulations, the Company could be responsible for clean-up costs, property damage, and fines or other penalties, any one of which could have a materially adverse effect on the Company. Other Factors In addition to the factors described above, the Company may be impacted by a number of other matters and uncertainties, including: (i) changes in demand for LTL carrier services; (ii) potential legislation and regulatory changes; (iii) the ability of the Company and those with which it conducts business to timely resolve Year 2000 issues; (iv) changes in competitive conditions in the Company's core service region; and (v) increases in the cost of compliance with regulations, including environmental regulations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not use financial instruments for trading purposes and is not a party to any derivative financial instruments or derivative commodity instruments. The Company is exposed to a variety of market risks, including the effects of changes in interest rates and fuel prices. The Company's short-term and long-term financing is generally at variable rates; however, these obligations may be repaid or converted to a fixed rate at the Company's option. For more information regarding the Company's debt obligations see Note F to the Company's consolidated financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) below. 20 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information to be included under the caption "Election of Directors" in the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A of the Exchange Act in connection with the 1999 annual meeting of shareholders of the Company (the "Proxy Statement") is incorporated herein by reference. In addition, reference is made to Item 10 in Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION The information to be included under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information to be included under the caption "Present Beneficial Ownership of Common Stock" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information to be included under the caption "Executive Compensation--Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements Report of Independent Certified Public Accountants F-1 Consolidated Balance Sheets at December 31, 1998 and 1997 F-2 Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Stockholders' F-4 Equity for the years ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-8
21 22 (a)(2) Financial Statement Schedules Schedules are omitted because they are not required or are not applicable or the required information is shown in the financial statements or notes thereto (a)(3) The following exhibits are filed herewith or incorporated by reference:
Exhibit Number Exhibit - ------ ------- 3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.1 Loan Agreement, dated November 25, 1998, between the Company, Motor Cargo and Zions First National Bank.* 10.2 $20,000,000 Promissory Note, dated November 26, 1998, to the order of Zions First National Bank.* 10.3 1997 Stock Option Plan (filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).(1) 10.4 Pension Plan of Employees of Motor Cargo and Trust Agreement (filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).(1) 10.5 Motor Cargo Profit Sharing Plan (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).(1) 10.6 Restricted Stock Agreement, dated October 2, 1997, between the Company and Louis V. Holdener (filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).(1) 10.7 Agreement to Purchase and Sell Leasehold Interest dated October 2, 1990 between Leonard L. Gumport and Motor Cargo (filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.8 Lease Agreement dated December 23, 1996 between Channing, Inc. and Motor Cargo (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.9 Lease Agreement dated as of January 1, 1989 between Andrea Tacchino Company and Motor Cargo (filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.10 First Amendment to Lease dated March 1, 1990 between Andrea Tacchino Company and Motor Cargo (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).
22 23 10.11 Lease Agreement dated October 31, 1995 between Pete Aardema and Motor Cargo (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.12 Lease Agreement dated September 29, 1995 among Colburn R. Thomason, Michael Tolladay, Kevin Tweed and Motor Cargo (filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.13 Form of Salary Continuation Agreement (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).(1) 10.14 Management Agreement between the Company and FHF Transportation, Inc. (filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (file No. 333-37211 and incorporated herein by reference). 11 Pro Forma Earnings Per Share Calculation* 21 Subsidiaries of the Company (filed as Exhibit 21 to the Company's Registration Statement on Form S-1 (file No. 333-37211 and incorporated herein by reference). 23 Consent of Grant Thornton LLP.* 27 Financial Data Schedule.*
- -------------- (1) Management contracts and compensatory plans and arrangements identified pursuant to Item 14(a)(3) of Form 10-K. * Filed with this report. (b) Reports on Form 8-K Not Applicable. 23 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MOTOR CARGO INDUSTRIES, INC. Date: March 24, 1999 By /s/ Lynn H. Wheeler ----------------------------- Lynn H. Wheeler Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 24, 1999 By /s/ Harold R. Tate ---------------------------- Harold R. Tate, Director and Chairman of the Board Date: March 24, 1999 By /s/ Marshall L. Tate ----------------------------- Marshall L. Tate, Director (Principal Executive Officer) Date: March 24, 1999 By /s/ Lynn H. Wheeler ----------------------------- Lynn H. Wheeler, Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 24, 1999 By /s/ Marvin L. Friedland ----------------------------- Marvin L. Friedland, Director Date: March 24, 1999 By /s/ Robert Anderson ----------------------------- Robert Anderson, Director Date: March 24, 1999 By /s/ James Clayburn La Force, Jr. ----------------------------- James Clayburn La Force, Jr., Director 24 25 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Motor Cargo Industries, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Motor Cargo Industries, Inc. and Subsidiaries (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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 consolidated financial position of Motor Cargo Industries, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Grant Thornton LLP Salt Lake City, Utah February 5, 1999 F-1 26 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, ASSETS
1998 1997 ----------- ----------- CURRENT ASSETS Cash and cash equivalents (Notes E and M) $ 7,514,654 $ 8,616,702 Receivables (Notes B and E) 14,182,974 13,171,720 Prepaid expenses 2,630,416 2,409,524 Supplies inventory (Note E) 459,711 503,498 Deferred income taxes (Note G) 1,365,000 1,581,000 Income taxes receivable 622,648 683,033 ----------- ----------- Total current assets 26,775,403 26,965,477 PROPERTY AND EQUIPMENT, AT COST (Notes C, E, and F) 85,954,356 75,901,875 Less accumulated depreciation and amortization 40,560,113 35,242,661 ----------- ----------- 45,394,243 40,659,214 Other assets Deferred charges 426,461 374,417 Unrecognized net pension obligation (Note H) 63,861 69,651 ----------- ----------- 490,322 444,068 ----------- ----------- $72,659,968 $68,068,759 =========== ===========
The accompanying notes are an integral part of these statements. F-2 27 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED December 31, LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997 ----------- ----------- CURRENT LIABILITIES Current maturities of long-term obligations (Note F) $ 99,990 $ 89,557 Accounts payable 4,237,515 4,123,703 Accrued liabilities (Note O) 5,021,286 4,426,519 Accrued claims (Note P) 1,382,085 2,956,911 ----------- ----------- Total current liabilities 10,740,876 11,596,690 LONG-TERM OBLIGATIONS, less current maturities (Note F) 5,389,852 6,491,882 DEFERRED INCOME TAXES (Note G) 7,255,000 6,529,000 COMMITMENTS AND CONTINGENCIES (Notes D, E, H, K, and L) -- -- STOCKHOLDERS' EQUITY (Notes F, I and N) Preferred stock, no par value; Authorized - 25,000,000 shares - none issued -- -- Common stock, no par value; Authorized - 100,000,000 shares - issued and outstanding 6,987,820 shares in 1998 and 6,990,000 shares in 1997 12,135,490 12,101,298 Retained earnings 37,138,750 31,349,889 ----------- ----------- 49,274,240 43,451,187 ----------- ----------- $72,659,968 $68,068,759 =========== ===========
The accompanying notes are an integral part of these statements. F-3 28 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31,
1998 1997 1996 ------------- ------------- ------------- Operating revenues $ 114,724,798 $ 105,381,447 $ 92,310,142 ------------- ------------- ------------- Operating expenses Salaries, wages and benefits 51,746,567 45,247,186 39,666,468 Operating supplies and expenses 15,973,557 15,706,124 14,947,069 Purchased transportation 17,975,515 15,388,965 14,164,292 Operating taxes and licenses 3,884,923 3,519,313 3,531,244 Insurance and claims 3,651,217 4,477,747 2,784,489 Depreciation and amortization 7,927,663 6,997,498 6,577,569 Communications and utilities 1,923,707 1,896,379 1,783,797 Building rents 2,365,006 1,744,877 1,540,407 ------------- ------------- ------------- Total operating expenses 105,448,155 94,978,089 84,995,335 ------------- ------------- ------------- Operating income 9,276,643 10,403,358 7,314,807 Other income (expense) Interest expense (153,673) (1,050,791) (1,429,843) Other, net 325,891 220,909 (32,073) ------------- ------------- ------------- 172,218 (829,882) (1,461,916) ------------- ------------- ------------- Earnings before income taxes 9,448,861 9,573,476 5,852,891 Income taxes (Note G) 3,660,000 3,805,000 2,118,000 ------------- ------------- ------------- NET EARNINGS $ 5,788,861 $ 5,768,476 $ 3,734,891 ============= ============= ============= Pro forma (Note A14) Earnings before income taxes $ 9,573,476 $ 5,852,891 Income taxes 3,952,000 2,256,000 ------------- ------------- NET EARNINGS $ 5,621,476 $ 3,596,891 ============= ============= Earnings per common share - basic $ 0.83 $ 0.95 $ 0.62 ============= ============= ============= Weighted-average shares outstanding - basic 6,987,820 5,938,602 5,820,000 ============= ============= ============= Earnings per common share - diluted $ 0.83 $ 0.95 $ 0.62 ============= ============= ============= Weighted-average shares outstanding - diluted 6,991,820 5,938,602 5,820,000 ============= ============= =============
The accompanying notes are an integral part of these statements. F-5 29 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Years ended December 31, 1998, 1997 and 1996
Preferred Stock Common Stock ----------------- ---------------------------- Number Number of of Retained Shares Amount Shares Amount earnings Total ------- ------ --------- ----------- -------- ----- Balance, January 1, 1996 -- $ -- 5,820,000 $ 1,000 $ $ 22,723,423 Net distributions to LLC members -- -- -- -- (417,900) (417,900) Net earnings for the year -- -- -- -- 3,734,891 3,734,891 -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1996 -- -- 5,820,000 1,000 26,039,414 26,040,414 Distributions to LLC members -- -- -- -- (458,001) (458,001) Public sale of common stock -- 1,150,000 12,100,298 12,100,298 Issuance of 20,000 shares pursuant to Restricted Stock Agreement (Note N) -- -- 20,000 -- -- -- Net earnings for the year -- -- -- -- 5,768,476 5,768,476 -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1997 -- -- 6,990,000 12,101,298 31,349,889 43,451,187 Vesting of shares pursuant to Restricted Stock Agreement (Note N) -- -- (2,180) 34,192 -- 34,192 Net earnings for the year -- -- -- -- 5,788,861 5,788,861 -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1998 -- $ -- 6,987,820 $ 12,135,490 $ 37,138,750 $ 49,274,240 == ===== ============ ============ ============ ============
The accompanying notes are an integral part of this statement. F-5 30 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
1998 1997 1996 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net earnings $ 5,788,861 $ 5,768,476 $ 3,734,891 ------------ ------------ ------------ Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 7,927,663 6,997,498 6,577,569 Provision for losses on receivables 217,500 220,000 286,000 Loss (gain) on disposition of property and equipment (103,110) (156,914) 72,458 Amortization of unrecognized pension obligation (benefit) 5,790 5,790 5,790 Charge associated with stock issuance to an officer 60,625 -- -- Deferred income taxes 942,000 800,971 891,000 Changes in assets and liabilities Receivables (1,228,754) (2,633,264) (1,448,305) Prepaid expenses (220,892) (323,335) (37,444) Supplies inventory 43,787 (164,668) 28,682 Income taxes receivable 60,385 (516,050) (100,525) Other assets (52,044) (6,862) (107,172) Accounts payable 113,812 1,142,106 252,404 Accrued liabilities and claims (1,006,492) 1,457,923 36,446 ------------ ------------ ------------ Total adjustments 6,760,270 6,823,195 6,456,903 ------------ ------------ ------------ Net cash provided by operating activities 12,549,131 12,591,671 10,191,794 ------------ ------------ ------------ Cash flows from investing activities Purchase of property and equipment (13,720,140) (7,935,965) (9,712,567) Proceeds from disposition of property and equipment 1,160,558 630,080 1,800,989 ------------ ------------ ------------ Net cash used in investing activities (12,559,582) (7,305,885) (7,911,578) ------------ ------------ ------------
(Continued) F-6 31 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended December 31,
1998 1997 1996 ------------ ------------ ------------ Cash flows from financing activities Distributions to LLC members -- (458,001) (524,000) Contributions from LLC members -- -- 106,100 Proceeds from public sale of common stock -- 12,100,298 -- Proceeds from issuance of long-term obligations -- 48,385,000 55,564,002 Principal payments on long-term obligations (1,091,597) (65,468,268) (55,756,549) ------------ ------------ ------------ Net cash used in financing activities (1,091,597) (5,440,971) (610,447) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (1,102,048) (155,185) 1,669,769 Cash and cash equivalents at beginning of year 8,616,702 8,771,887 7,102,118 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 7,514,654 $ 8,616,702 $ 8,771,887 ============ ============ ============ Supplemental cash flow information Cash paid during the year for Interest $ 154,751 $ 1,102,819 $ 1,459,189 Income taxes 2,537,933 2,811,000 2,077,215
Noncash investing and financing activities During 1998, in connection with the shares issued per the restricted stock agreement, 2,180 shares valued at $26,433 were withheld by the Company as tax withholdings. The accompanying notes are an integral part of these statements. F-7 32 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. 1. Financial statement presentation The accounting and reporting policies of Motor Cargo Industries, Inc. and Subsidiaries (the Company) conform with generally accepted accounting principles and with general practices in the motor carrier industry. In preparing the Company's financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Significant estimates include accrued claims and allowance for doubtful accounts. 2. Principles of consolidation The consolidated financial statements include the accounts of Motor Cargo Industries, Inc. (MCI) and its wholly-owned subsidiaries, Ute Trucking and Leasing, LLC (Ute) and Motor Cargo and its wholly-owned subsidiaries, MC Leasing, Inc., MC Distribution Services, Inc., and ICC, Inc. All significant intercompany accounts and transactions have been eliminated. 3. Business activity Motor Cargo is a regulated motor carrier which hauls commercial commodities both intrastate and interstate. 4. Cash equivalents The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. 5. Supplies inventory Supplies inventory consists primarily of fuel and equipment parts and is stated at the lower of cost (first-in, first-out method) or market. F-8 33 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 6. Depreciation and amortization Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives of the assets. Accelerated methods of depreciation of property and equipment are used for income tax purposes. Leasehold improvements are amortized over the lesser of the useful life of the asset or term of the lease. Maintenance, repairs, and renewals which neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in earnings. 7. Income taxes The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statement and tax bases of assets and liabilities as measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities. 8. Insurance coverage and accrued claims The Company is self-insured for health costs, cargo damage claims, and automobile and general liability claims up to $70,000, $100,000, and $250,000 respectively, per single occurrence. The Company also maintains workers' compensation insurance, with a deductible of $250,000 in Nevada, and without a deductible in Washington. The Company is responsible for workers' compensation claims in other states in which the Company operates up to an aggregate of approximately $1.9 million per year. Liabilities in excess of these amounts are assumed by insurance companies up to applicable policy limits. The Company estimates and accrues a liability for its share of final settlements using all available information including the services of a third-party insurance risk claims administrator to assist in establishing reserve levels for each occurrence based on the facts and circumstances of the incident coupled with the Company's past history of such claims. The Company accrues for workers' compensation and automobile liabilities when reported, usually the same day as the occurrence. Additionally, the Company accrues an estimated liability for incurred but not reported claims. Expense depends upon actual loss experience and changes in estimates of settlement amounts for open claims which have not been fully resolved. The Company provides for adverse loss developments in the period when new information becomes available. F-9 34 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 9. Revenue recognition Freight charges are generally recognized as revenue in the period relative to the transit time for that period and operating expense when incurred. 10. Prepaid tires The Company capitalizes tires purchased with new equipment and depreciates them over the estimated useful life of the equipment (5 - 10 years). Replacement tires are expensed upon placement into service. 11. Pro forma earnings per share Pro forma basic earnings per common share are based upon the weighted-average number of common shares outstanding during each period presented. Pro forma diluted earnings per common share are based on shares outstanding (computed as under basic EPS) and dilutive potential common shares. Potential common shares include the options to acquire 291,500 and 249,500 shares of common stock for 1998 and 1997, respectively. 12. Fair value of financial instruments The fair value of the Company's cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate carrying value due to the short-term maturity of the instruments. The fair value of long-term obligations approximate carrying value based on their effective interest rates compared to current market prices. 13. Certain reclassifications Certain nonmaterial reclassifications have been made to the 1997 and 1996 financial statements to conform to the 1998 presentation. F-10 35 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 14. Pro forma financial information (unaudited) Effective August 28, 1997, MCI acquired the membership interests of Ute (Note N). A limited liability company passes through to its members essentially all taxable earnings and losses and pays no tax at the company level. Accordingly, for comparative purposes, a pro forma provision for income taxes using an effective income tax rate of 38 percent has been determined assuming Ute had been taxed as a C Corporation for 1997 and 1996. NOTE B - RECEIVABLES Receivables consist of the following:
December 31, --------------------------------- 1998 1997 ------------ ------------ Trade receivables $ 14,570,942 $ 13,540,800 Other receivables 253,296 203,721 ------------ ------------ 14,824,238 13,744,521 Less allowance for doubtful accounts (641,264) (572,801) ------------ ------------ $ 14,182,974 $ 13,171,720 ============ ============
The history of the allowance for doubtful accounts is as follows:
1998 1997 1996 --------- --------- --------- Balance, beginning of year $ 572,801 $ 505,794 $ 855,000 Provisions for losses 217,500 220,000 286,000 Write-offs, net (149,037) (152,993) (635,206) --------- --------- --------- Balance, end of year $ 641,264 $ 572,801 $ 505,794 ========= ========= =========
F-11 36 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE C - PROPERTY AND EQUIPMENT Cost of property and equipment and estimated useful lives are as follows:
December 31, -------------------------------------------- 1998 1997 Years ----------- ----------- ------- Land $ 5,155,289 $ 4,984,268 -- Buildings 9,751,496 9,838,846 20-45 Revenue equipment 53,379,665 49,286,334 5-10 Service cars and equipment 620,279 562,108 3-10 Shop and garage equipment 153,350 140,355 3-10 Office furniture and fixtures 2,301,104 2,125,858 3-10 Other property and equipment 8,151,580 6,414,403 3-10 Leasehold improvements 2,375,771 2,149,953 4-5 Construction in progress 4,065,822 399,750 -- ----------- ----------- $85,954,356 $75,901,875 =========== ===========
NOTE D - LEASES The Company leases buildings and revenue equipment under operating lease agreements. The following is a schedule of future minimum lease payments under operating leases:
Total Buildings Equipment leases ----------- ---------- ------------ Year ending December 31, 1999 $ 2,317,241 $ 617,300 $ 2,934,541 2000 1,958,917 617,300 2,576,217 2001 1,366,767 570,190 1,936,957 2002 861,685 430,755 1,292,440 2003 885,685 430,755 1,316,440 Thereafter 5,520,000 288,614 5,808,614 ----------- ---------- ----------- Total minimum lease payments $12,910,295 $2,954,914 $15,865,209 =========== ========== ===========
The leases generally provide that property taxes, insurance, and maintenance expenses are obligations of the Company. It is expected that in the normal course of business, operating leases that expire will be renewed or replaced by leases on other properties. The total rent expense for the years ended December 31, 1998, 1997, and 1996, was approximately $2,220,000, $1,714,000 and $1,541,000, respectively. F-12 37 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE E - REVOLVING BANK LOAN The Company has a revolving bank loan. Under the loan agreement, borrowings are limited to the lesser of 70 percent of allowable trade receivables, or $5,000,000. Any outstanding amounts accrue interest at .25 percentage points below the lending institution's prime rate, and is payable monthly. No principal payments are required until maturity (April 2000) as long as the loan does not exceed the required limits. The agreement is collateralized by cash and cash equivalents, receivables, supplies inventory, and all documents, instruments, and chattel paper now owned or hereafter acquired by the Company. At December 31, 1998 and 1997, there were no draws against the loan. The Company also has a line of credit with a limit of $20,000,000 as of December 31, 1998. This line is collateralized by revenue equipment. As of December 31, 1998, there was $4,000,000 drawn against the line (Note F). NOTE F - LONG-TERM OBLIGATIONS Long-term obligations consist of the following:
December 31, ---------------------------- 1998 1997 ---------- ---------- Prime less .25% (7.5% at December 31, 1998) note payable on a line of credit (up to $20,000,000) to a bank, due in 2000, interest payments due monthly and unpaid balance of principal due in 2000, collateralized by revenue equipment (Note E) $4,000,000 $5,000,000 8.75-8.85% notes payable to a corporation, due in 2003, payable in monthly installments of $18,964, including interest, balloon payment of $955,868 due at maturity, collateralized by real property 1,489,842 1,581,439 ---------- ---------- 5,489,842 6,581,439 Less current maturities 99,990 89,557 ---------- ---------- $5,389,852 $6,491,882 ========== ==========
F-13 38 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE F - LONG-TERM OBLIGATIONS - CONTINUED Maturities of long-term obligations are as follows:
Year ending December 31, ------------------------ 1999 $ 99,990 2000 4,109,131 2001 119,152 2002 130,089 2003 1,031,480 Thereafter -- ---------- $5,489,842 ==========
The line of credit agreements contain various restrictive covenants including provisions relating to the maintenance of net worth, earnings to debt ratio, and liability insurance coverage. As of December 31, 1998, the Company was in compliance with all covenants under the line of credit agreements. NOTE G - INCOME TAXES Income tax expense consists of the following:
December 31, ----------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Current Federal $2,280,862 $2,507,112 $1,009,000 State 437,138 496,917 218,000 ---------- ---------- ---------- 2,718,000 3,004,029 1,227,000 ---------- ---------- ---------- Deferred Federal 781,860 664,806 743,985 State 160,140 136,165 147,015 ---------- ---------- ---------- 942,000 800,971 891,000 ---------- ---------- ---------- $3,660,000 $3,805,000 $2,118,000 ========== ========== ==========
F-14 39 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE G - INCOME TAXES - CONTINUED The income tax provision reconciled to the tax computed at the federal statutory rate of 34 percent is as follows:
December 31, -------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Federal income taxes at statutory rate $ 3,212,000 $ 3,255,000 $ 1,990,000 State income taxes, net of federal tax 392,000 402,000 248,800 benefit One time charge attributed to Ute (1) -- 238,000 -- Income taxes attributed to Ute -- (147,000) (138,000) All other 56,000 57,000 17,200 ----------- ----------- ----------- $ 3,660,000 $ 3,805,000 $ 2,118,000 =========== =========== ===========
Deferred tax assets and liabilities consist of the following:
December 31, ------------------------------- 1998 1997 ----------- ----------- Current deferred tax assets (liabilities) Allowance for doubtful accounts $ 245,000 $ 219,000 Vacation accrual 508,000 407,000 Reserve for claims 477,000 955,000 Deferred revenue 135,000 -- ----------- ----------- Net current deferred tax assets $ 1,365,000 $ 1,581,000 =========== =========== Long-term deferred tax assets (liabilities) Unfunded pension (120,000) (197,000) Accrued compensation 88,000 68,000 Equipment temporary differences (7,223,000) (6,400,000) ----------- ----------- Net deferred tax liability $(7,255,000) $(6,529,000) =========== ===========
F-15 40 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE G - INCOME TAXES - CONTINUED (1) Effective August 28, 1997, Ute was acquired by MCI and became a taxable entity (Note N). Previously, its earnings and losses were included in the personal tax returns of the members, and Ute did not record an income tax provision. Effective with the change in ownership, in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," income taxes will be provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of property and equipment for financial and income tax reporting. The deferred tax liability represents the future tax return consequences of these differences, which will be taxable when the liabilities are settled. Accordingly, a deferred tax liability at the date of the change of approximately $238,000 was recorded through a one time non-cash charge to the deferred tax provision. NOTE H - PENSION AND PROFIT-SHARING PLANS 1. Pension plan The Company participates in a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and hours of service in the current year. A participant is fully vested after five years. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected benefits to be earned in the future. Information pertaining to the activity in the plan is as follows:
Pension Benefits --------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Change in benefit obligation Benefit obligation at beginning of year $ 4,413,501 $ 4,111,673 $ 3,606,505 Service cost 268,884 248,967 238,559 Interest cost 346,433 318,316 288,520 Actuarial loss 586,993 -- 96,781 Benefit paid (166,188) (265,455) (118,692) ----------- ----------- ----------- Benefit obligation at end of year $ 5,449,623 $ 4,413,501 $ 4,111,673 =========== =========== ===========
F-16 41 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE H - PENSION AND PROFIT-SHARING PLANS - CONTINUED
Pension Benefits --------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Change in plan assets Fair value of plan assets at beginning of year $ 4,929,225 $ 4,125,240 $ 3,423,488 Actual return on plan assets 440,189 769,440 497,698 Employer contribution 125,000 300,000 322,746 Benefits paid (166,188) (265,455) (118,692) ----------- ----------- ----------- Fair value of plan assets at end of year $ 5,328,226 $ 4,929,225 $ 4,125,240 =========== =========== =========== Funded status $ (121,397) $ 77,685 $ 13,567 Unrecognized net actuarial loss (206,611) (365,767) (379,979) Unrecognized net transition amount 63,861 69,651 75,441 ----------- ----------- ----------- Accrued pension cost $ (264,147) $ (209,431) $ (290,971) =========== =========== ===========
The components of net periodic pension cost are as follows: Service cost $ 268,884 $ 248,967 $ 238,559 Interest cost 346,433 318,316 288,520 Actual return on plan assets (440,189) (769,440) (497,698) Amortization of prior service cost 4,588 420,617 199,300 --------- --------- --------- Net periodic pension cost $ 179,716 $ 218,460 $ 228,681 ========= ========= ========= Weighted-average assumptions as of December 31, Discount rate 6.50% 8.00% 8.00% Expected return on plan assets 6.50 8.00 8.00 Rate of compensation increase -- -- --
F-17 42 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE H - PENSION AND PROFIT-SHARING PLANS - CONTINUED 2. 401(k) profit-sharing plan The Company has a qualified 401(k) profit-sharing plan (the Plan) in which substantially all of its employees participate. All employees who have completed one year of service with the Company are eligible to participate in the Plan. Under the Plan, employees are allowed to make contributions of between 1 percent and 15 percent of their annual compensation. The Company matches certain percentages of employee contributions up to 6 percent, depending on the Company's operating ratio. All amounts contributed by a participant are fully vested at all times. A participant becomes vested over time and is fully vested in any Company matching contributions after 7 years of service. Expenses for Company contributions approximated $475,000, $525,000 and $310,000, for the years ended December 31, 1998, 1997 and 1996, respectively. NOTE I - STOCK OPTIONS In October 1997, the Company's Board of Directors and stockholders adopted the Motor Cargo Industries, Inc. 1997 Stock Option Plan (the Option Plan). The Company reserved 500,000 shares of common stock under the Option Plan. Accordingly, the Board of Directors has approved the granting of options under the Option Plan as follows: Directors, officers and key employees have been granted options to acquire 291,500 shares of common stock. The options were granted at $12.00 - $12.50 per share, which was the market price of the Company's shares on the date granted. The options vest periodically through January of 2002. The options expire upon the earlier of an expiration date fixed by the committee responsible for the administering of the Plan or 10 years from the date of the grant. Fair market value of options granted The Company has adopted only the disclosure provisions of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Therefore, the Company accounts for stock based compensation under Accounting Principles Board Opinion No. 25, under which no significant compensation cost has been recognized. Had the compensation cost for the stock based compensation been determined based upon the fair value of the options at the grant date consistent with the methodology prescribed by FAS 123, the Company's net earnings and earnings per share would have been reduced to the following pro forma amounts: F-18 43 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE I - STOCK OPTIONS - CONTINUED Fair market value of options granted - continued
1998 1997 ---------- --------- Pro forma net earnings As reported $ 5,826,486 $ 5,621,476 Pro forma 5,337,141 5,580,655 Net earnings per common share - basic Net earnings $ 0.83 $ 0.95 Pro forma 0.76 0.94 Net earnings per common share - assuming dilution Net earnings $ 0.83 $ 0.95 Pro forma 0.76 0.94
The fair value of these options was estimated at the date of grant using the Black-Scholes American option-pricing model with the following weighted-average assumptions for 1998 and 1997: expected volatility of 67 and 36 percent; risk-free interest rate of 5.65 and 6.66 percent; and expected life of 7.5 and 7.5 years. The weighted-average fair value of options granted was $8.90 and $6.44 in 1998 and 1997, respectively. Option pricing models require the input of highly sensitive assumptions, including the expected stock price volatility. Also, the Company's stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable. F-19 44 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE I - STOCK OPTIONS - CONTINUED Fair market value of options granted- continued Information with respect to the Company's stock options at December 31, 1998:
Weighted-average Stock options Exercise price Exercise price ------------- -------------- -------------- Outstanding at January 1, 1997 -- $ -- $ -- Granted 249,500 12.00 12.00 Exercised -- -- -- Canceled/expired -- -- -- -------- -------- Outstanding at December 31, 1997 249,500 12.00 12.00 Granted 42,000 12.50 12.50 Exercised -- -- -- Canceled/expired -- -- -- -------- -------- Outstanding at December 31, 1998 291,500 $12.00 to 12.50 $12.07 ======== =============== ====== Exercisable at December 31, 1998 62,375 $12.00 $12.00 ======== =============== ======
Additional information about stock options outstanding and exercisable at December 31, 1998: Options outstanding
Weighted-average Number Weighted-average remaining contractual Exercise price outstanding exercise price life (years) -------------- ----------- ---------------- --------------------- $12.00 249,500 $12.00 8.9 12.50 42,000 12.50 9.1 -------- 291,500 =======
Options exercisable
Number Weighted-average Exercise price exercisable exercise price -------------- ----------- ---------------- $12.00 63,375 $12.00 ------ 63,375 ======
F-20 45 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE J - RELATED PARTY TRANSACTIONS Related parties include the Company's officers, directors, stockholders and other entities under their common control. During the years ended December 31, 1997 and 1996 the Company made payments for consulting services of $160,000 and $480,000, respectively, to an entity in which the Company's Chairman is a 50 percent owner. The agreement terminated April 1997 and was not renewed. Guaranteed payments to members of Ute were $140,000 and $140,000 for the years ended December 31, 1997 and 1996. NOTE K - DEFERRED COMPENSATION The Company has salary continuation agreements with certain key management employees. Under the agreements, the Company is obligated to provide for each such employee or his beneficiaries, during a period of not more than ten years after the employee's death, disability, or retirement, annual benefits ranging from $17,000 to $23,000. The Company has purchased universal life insurance policies on the lives of these participants. These insurance policies, which remain the sole property of the Company, are payable to the Company upon the death of the participant or maturity of the insurance policy. The Company separately contracts with the participants to pay stated benefits substantially equivalent to those received or available under the insurance policies upon retirement, death, or permanent disability. The expense incurred for the years ended December 31, 1998, 1997 and 1996, was approximately $54,000, $36,000 and $62,660, respectively. NOTE L - COMMITMENTS AND CONTINGENCIES 1. Letters of credit At December 31, 1998, the Company had outstanding letters of credit totaling $1,530,000 ($2,010,000 at December 31, 1997). There were no draws against these letters of credit during any of the periods presented. F-21 46 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE L - COMMITMENTS AND CONTINGENCIES - CONTINUED 2. Litigation The Company is involved in litigation arising in the normal course of business. It is not possible to state the ultimate liability, if any, in these matters. In the opinion of management, such litigation will have no material effect on the financial position and results of operations of the Company, in excess of amounts accrued. 3. Purchase commitments At December 31, 1998, the Company has commitments to purchase property and equipment in the amount of approximately $3,266,000. NOTE M - CONCENTRATION OF CREDIT RISK The Company maintains cash and cash equivalents at several financial institutions. At December 31, 1998, uninsured amounts held in these financial institutions totaled approximately $8,187,000, (approximately $10,427,000 as of December 31, 1997). NOTE N - CAPITAL TRANSACTIONS Effective August 28, 1997, the membership interests of Ute were acquired in exchange for 700,000 shares of common stock of the Company. Because of the common ownership of the two entities, this transaction was accounted for in a manner similar to a pooling of interests. Ute is included in the consolidated financial statements for all periods presented as a wholly-owned subsidiary of MCI. All revenue generated in Ute is from the renting and contracting, under an independent operating agreement, of revenue equipment to Motor Cargo. Therefore, Ute's related operations are eliminated in the consolidated financial statements. F-22 47 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE N - CAPITAL TRANSACTIONS - CONTINUED In October 1997, the Company's Board of Directors awarded an officer of the Company 20,000 shares of the Company's common stock. The award was made pursuant to a Restricted Stock Agreement which states that 20,000 shares of the Company's common stock will be issued in the officer's name. The Company will hold the certificates for the shares, which will be released in four installments, each consisting of 25 percent of the shares issued based on the officer's continued employment. In the event the officer voluntarily ceases his employment with the Company or the Company terminates his employment for cause, the shares not previously released will be forfeited. Termination of employment by the Company without cause, or termination due to disability or death will result in the prompt release of some or all shares not previously released, depending upon the date of the relevant event. During 1998, 5,000 shares vested resulting in compensation expense in the amount of $60,625. Of the 5,000 shares vested, 2,180 shares were simultaneously redeemed by the Company. The remaining 2,820 shares were released to the officer. NOTE O - ACCRUED LIABILITIES Accrued liabilities consist of the following:
1998 1997 ---------- ---------- Salaries, wages, and payroll taxes $2,573,792 $2,430,614 Accrued employee benefits 855,889 769,063 Vacation accrual 1,333,469 1,064,935 All other 258,136 161,907 ---------- ---------- $5,021,286 $4,426,519 ========== ==========
NOTE P - ACCRUED CLAIMS The history of accrued claims is as follows:
1998 1997 1996 ----------- ----------- ----------- Balance at beginning of year $ 2,956,911 $ 2,028,631 $ 1,675,118 Provision 4,703,340 4,148,866 2,385,923 Claims (6,278,166) (3,220,586) (2,032,410) ----------- ----------- ----------- Balance at end of year $ 1,382,085 $ 2,956,911 $ 2,028,631 =========== =========== ===========
F-23 48 INDEX TO EXHIBITS
Exhibits - -------- 3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.1 Loan Agreement, dated November 25, 1998, between the Company, Motor Cargo and Zions First National Bank.* 10.2 $20,000,000 Promissory Note, dated November 26, 1998, to the order of Zions First National Bank.* 10.3 1997 Stock Option Plan (filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).(1) 10.4 Pension Plan of Employees of Motor Cargo and Trust Agreement (filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).(1) 10.5 Motor Cargo Profit Sharing Plan (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Filed No. 333-37211) and incorporated herein by reference).(1) 10.6 Restricted Stock Agreement, dated October 2, 1997, between the Company and Louis V. Holdener (filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).(1) 10.7 Agreement to Purchase and Sell Leasehold Interest dated October 2, 1990 between Leonard L. Gumport and Motor Cargo (filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.8 Lease Agreement dated December 23, 1996 between Channing, Inc. and Motor Cargo (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.9 Lease Agreement dated as of January 1, 1989 between Andrea Tacchino Company and Motor Cargo (filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.10 First Amendment to Lease dated March 1, 1990 between Andrea Tacchino Company and Motor Cargo (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.11 Lease Agreement dated October 31, 1995 between Pete Aardema and Motor Cargo (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference). 10.12 Lease Agreement dated September 29, 1995 among Colburn R. Thomason, Michael Tolladay, Kevin Tweed and Motor Cargo (filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).
49 10.13 Form of Salary Continuation Agreement (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-37211) and incorporated herein by reference).(1) 10.14 Management Agreement between the Company and FHF Transportation, Inc. (filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (file No. 333-37211 and incorporated herein by reference). 11 Pro Forma Earnings Per Share Calculation* 21 Subsidiaries of the Company (filed as Exhibit 21 to the Company's Registration Statement on Form S-1 (file No. 333-37211 and incorporated herein by reference). 23 Consent of Grant Thornton LLP.* 27 Financial Data Schedule.*
- ---------- (1) Management contracts and compensatory plans and arrangements identified pursuant to Item 14(a)(3) of Form 10-K. * Filed with this report. EX-10.1 2 LOAN AGREEMENT 1 EXHIBIT 10.1 LOAN AGREEMENT BORROWER: MOTOR CARGO INDUSTRIES, INC.; ET.AL. LENDER: ZIONS FIRST NATIONAL BANK 845 WEST CENTER STREET HEAD OFFICE/COMMERCIAL BANKING NORTH SALT LAKE CITY, UT 84054 #1 SOUTH MAIN STREET P.O. BOX 25822 SALT LAKE CITY, UT 84125 - ------------------------------------------------------------------------------------------------------
THIS LOAN AGREEMENT BETWEEN MOTOR CARGO INDUSTRIES, INC. AND MOTOR CARGO (REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AND COLLECTIVELY AS "BORROWER") AND ZIONS FIRST NATIONAL BANK (REFERRED TO IN THIS AGREEMENT AS "LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (a) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWERS REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (b) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (c) ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agreement shall be effective as of NOVEMBER 25, 1998, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money OF the United States of America. AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. ACCOUNT. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated upon an Account. ADVANCE. The word "Advance" means a disbursement of Loan funds under this Agreement. BORROWER. The word "Borrower" means individually and collectively MOTOR CARGO INDUSTRIES, INC. and MOTOR CARGO and all other persons and entities signing Borrowers' Note. BORROWING BASE. The words "Borrowing Base" mean as determined by Lender from time to time, the lesser of (a) $5,000,000.00; or (b) 50.000% or 70.000% of the aggregate amount of Eligible Accounts. Borrower shall determine the advance rate of 50.000% or 70.000%. In determining the amount of the Borrowing Base, all Eligible Accounts of all Borrowers shall be included. 2 BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open for business in the State of Utah. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. COLLATERAL. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factors lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." DEBT. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which the Account Debtor is not a resident of the United States, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender. (e) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (f) Accounts which are subject to dispute, counterclaim, or setoff. (g) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (h) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. 2 3 (i) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (j) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (k) Accounts which have not been paid in full within 60 DAYS FROM DUE DATE OR 90 DAYS from the invoice date. The entire balance of any Account of any single Account debtor will be ineligible whenever the portion of the Account which has not been paid within 60 DAYS FROM DUE DATE OR 90 DAYS from the invoice date is in excess of 20.000% of the total amount outstanding on the Account. (1) That portion of the Accounts of any single Account Debtor which exceeds 10.000% of all of Borrower's Accounts. (m) Accounts with respect to which the Account Debtor is not a resident of the following Canadian Provinces: British Columbia, Alberta, Saskatchewan, Manitoba and Ontario, except to the extent such Accounts are supported by instance, bonds or other assurances satisfactory to Lender. Accounts which Lender in its sole discretion reasonably deems ineligible. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." EXPIRATION DATE. The words "Expiration Date" mean the date of termination of Lenders commitment to lend under this Agreement. GRANTOR. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. INDEBTEDNESS. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such lndebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. LENDER. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors and assigns. 3 4 LETTER OF CREDIT. The words "Letter of Credit" mean a letter of credit issued by Lender on behalf of Borrower as described below in the section titled "Letter of Credit Facility." LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. LIQUID ASSETS. The words "Liquid Assets" mean Borrowers cash on hand plus Borrowees readily marketable securities. LOAN. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means and includes without limitation Borrowers promissory note or notes, if any, evidencing Borrowers Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any offer security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. 4 5 SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. WORKING CAPITAL. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrowees current liabilities. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (e) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable. (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested orally by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of 5 6 an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. LOAN ACCOUNT. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts and general intangibles. Lenders Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lenders Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will fib such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lenders security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lenders representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. 6 7 COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender a schedule of Accounts and Eligible Accounts, in form and substance satisfactory to the Lender. Thereafter Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and such other matters and information relating to Borrowers Accounts as Lender may request. Supplemental schedules shall be delivered according to the following schedule: EVERY 30 DAYS. REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (c) Lender, its assigns, or agents shall have the right at any time and at Borrowers expense to inspect, examine, and audit Borrowers records and to confirm with Account Debtors the accuracy of such Accounts. NOTIFICATION BASIS. In the event of default Borrower agrees and understands that this Loan shall be on a notification basis pursuant to which Lender shall directly collect and receive all proceeds and payments from the Accounts in which Lender has a security interest. In order to facilitate the foregoing, Borrower agrees to deliver to Lender, upon demand, any and all of Borrower's records, ledger sheets, payment cards, and other documentation, in the form requested by Lender, with regard to the Accounts. Borrower further agrees that Lender shall have the right to notify each Account Debtor, pay such proceeds and payments directly to Lender and to do any and all other things as Lender may deem to be necessary and appropriate, within its sole discretion, to carry out the terms and intent of this Agreement. Lender shall have the further right, where appropriate and within Lenders sole discretion, to file suit, either in its own name or in the name of Borrower, to collect any and all such Accounts. Borrower further agrees that Lender may take such other actions, either in Borrowers name or Lender's name, as Lender may deem appropriate within its sole judgment, with regard to collection and payment of the Accounts, without affecting the liability of Borrower under this Agreement or on the Indebtedness. REMITTANCE ACCOUNT. Borrower agrees that Lender may at any time require Borrower to institute procedures whereby the payments and other proceeds of the Accounts shall be paid by the Account Debtors under a remittance account or lock box arrangement with Lender, or Lenders agent, or with one or more financial institutions designated by Lender. Borrower further agrees that, if no Event of Default exists under this Agreement, any and all of such funds received under such a remittance account or lock box arrangement shall, at Lenders sole election and discretion, either be (a) paid or turned over to Borrower; (b) deposited into one or more accounts for the benefit of Borrower (which deposit accounts shall be subject to a security assignment in favor of Lender); (c) deposited into one or more accounts for the joint benefit of Borrower and Lender (which deposit accounts shall likewise be subject to a security assignment in favor of Lender); (d) paid or turned over to Lender to be applied to the Indebtedness in such order and priority as Lender may determine within its sole discretion; or (e) any combination of the foregoing as Lender shall determine from time to time. Borrower further agrees that, should one or more Events of Default exist, any and all funds received under such a remittance account or lock box arrangement shall be paid or turned over to Lender to be applied to the Indebtedness, again in such order and priority as Lender may determine within its sole discretion. ADDITIONAL CREDIT FACILITIES. In addition to the Line of Credit facility, the following credit accommodations are either in place or will be made available to Borrower: 7 8 LETTER OF CREDIT FACILITY. Subject to the terms of this Agreement, Lender will issue standby letters of credit letters of credit (each a "Letter of Credit") on behalf of Borrower. At no time, however, shall the total face amount of all Letters of Credit outstanding, less any partial draws paid under the Letters of Credit exceed the sum of $5,000,000.00. (a) Upon Lenders request, Borrower promptly shall pay to Lender issuance fees and such other fees, commissions, costs, and any out-of-pocket expenses charged or incurred by Lender with respect to any Letter of Credit. (b) The commitment by Lender to issue Letters of Credit shall, unless earlier terminated in accordance with the terms of this Agreement, automatically terminate on the Expiration Date and no Letter of Credit shall expire on a date which is after the Expiration Date. (c) Each Letter of Credit shall be in form and substance satisfactory to Lender and in favor of beneficiaries satisfactory to Lender, provided that Lender may refuse to issue a Letter of Credit due to the nature of the transaction or its terms or in connection with any transaction where Lender, due to the beneficiary or the nationality or residence of the beneficiary, would be prohibited by any applicable law, regulation, or order from issuing such Letter of Credit. Under no circumstances, however, will a Letter of Credit exceed THREE HUNDRED SIXTY FIVE (365) DAYS from the issue date. (d) Prior to the issuance of each Letter of Credit, and in all events prior to any daily cutoff time Lender may have established for purposes thereof, Borrower shall deliver to Lender a duly executed form of Lenders standard form of application for issuance of letter of credit with proper insertions. LENDER'S RIGHTS UPON DEFAULT. Upon the occurrence of any Event of Default, Lender may, at its sole and absolute discretion and in addition to any other remedies available to it under this Agreement or otherwise, require Borrower to pay immediately to Lender, for application against drawings under any outstanding Letters of Credit, the outstanding principal amount of any such Letters of Credit which have not expired. Any portion of the amount so paid to Lender which is not applied to satisfy draws under any such Letters of Credit or any other obligations of Borrower to the Lender shall be repaid to Borrower without interest. LENDER'S COSTS AND EXPENSES. Borrower shall, upon Lenders request, promptly pay to and reimburse Lender for all costs incurred and payments made by Lender by reason of any future assessment, reserve, deposit, or similar requirement or any surcharge, tax, or fee imposed upon Lender or as a result of Lenders compliance with any directive or requirement of any regulatory authority pertaining or relating to any Letter of Credit. MULTIPLE BORROWERS. This Agreement has been executed by multiple obligors who are referred to herein individually, collectively and interchangeably as "Borrower." Unless specifically stated to the contrary, the word "Borrower" as used in this Agreement, including without limitation all representations, warranties and covenants, shall include all Borrowers. Borrower understands and agrees that, with or without notice to Borrower, Lender may with respect to any other Borrower (a) make one or more additional secured or unsecured loans or otherwise extend additional credit; (b) alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms any indebtedness, including increases and decreases of the rate of interest on the indebtedness; (c) exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any security with or without the substitution of new collateral; (d) release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (e) determine how, when and what application of payments and credits shall be made on any indebtedness; (f) apply such security and direct the order or manner of sale thereof, including without 8 9 limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (g) sell, transfer, assign, or grant participations in all or any part of the indebtedness; (h) exercise or refrain from exercising any rights against Borrower or others, or otherwise act or refrain from acting; (i) settle or compromise any indebtedness; and (j) subordinate the payment of all or any part of any indebtedness of Borrower to Lender to the payment of any liabilities which may be due Lender or others. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the state of Borrower's incorporation and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to all of Borrowers properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, 9 10 release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters, (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrowers due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and ALL claims, LOSSES, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the properties. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. To the best of our knowledge each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, 10 11 (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 845 WEST CENTER STREET, NORTH SALT LAKE CITY, UT 84054. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no event later than one hundred five (105) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than fifty (50) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios: 11 12 NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 1.50 TO 1.00. The financial covenants and ratios set forth in this paragraph shall be determined and calculated for all Borrowers on a consolidated basis and reference in this paragraph to "Borrower" shall mean all "Borrowers." Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be canceled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessment, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. 12 13 OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans, INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, still notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender QUARTERLY WITHIN 45 DAYS OF QUARTER END and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (b) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lenders obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation 13 14 of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: INDEBTEDNESS AND LIENS. (a) Except for debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Lender hereby acknowledges and agrees that, notwithstanding any other provisions of this agreement, Borrower may purchase any personal property with financing from sources other than Lender and that all such personal property will be subject to a first priority purchase money security interest Lender hereby consents to any indebtedness or liens created pursuant to such purchases. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, transfer, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends which cause an event of default on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower. LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, or advance money or assets, except in the normal course of business, (b) incur any obligation as surety or guarantor for any company not owned by Motor Cargo Industries without written consent of Lender. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with lender; or (e) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. ACCOUNTS RECEIVABLE AGING. BORROWER SHALL FURNISH TO LENDER A MONTHLY ACCOUNTS RECEIVABLE AGING REPORT WITHIN 30 DAYS OF THE END OF EACH MONTH IN A FORM ACCEPTABLE TO LENDER. ACCOUNTS PAYABLE AGING. BORROWER SHALL FURNISH TO LENDER A QUARTERLY ACCOUNTS PAYABLE AGING REPORT WITHIN FORTY-FIVE (45) DAYS OF THE END OF EACH QUARTER IN A FORM ACCEPTABLE TO LENDER WHEN BORROWER REQUESTS IN WRITING 70% ADVANCE ON ACCOUNTS 14 15 RECEIVABLE. CUSTOMER LIST. BORROWER SHALL FURNISH TO LENDER ON A SEMI-ANNUAL BASIS A LIST OF BORROWER'S ACCOUNTS RECEIVABLE CUSTOMERS AND THEIR ADDRESSES IN A FORM ACCEPTABLE TO LENDER WITHIN 30 DAYS OF THE END OF EACH HALF-YEAR PERIOD WHEN BORROWER REQUESTS IN WRITING 70% ADVANCE ON ACCOUNTS RECEIVABLE. BORROWING BASE CERTIFICATE. BORROWER SHALL FURNISH TO LENDER A MONTHLY BORROWING BASE CERTIFICATE CERTIFIED BY AN AUTHORIZED OFFICER/EMPLOYEE OF BORROWER, WITHIN 30 DAYS OF THE END OF EACH MONTH IN A FORM ACCEPTABLE TO LENDER UNLESS LENDER SPECIFICALLY REQUESTS OTHERWISE IN WRITING TO BORROWER. THIS SHALL TAKE EFFECT WHEN BORROWER REQUESTS IN WRITING 70% ADVANCE ON ACCOUNTS RECEIVABLE. WAIVER OF CLAIMS. Borrower (i) represents Borrower has no defenses to or setoffs against any indebtedness or other obligations owing to Lender or its affiliates (the "Obligations"), nor claims against Lender or its affiliates for any matter whatsoever, related or unrelated to the Obligations, and (ii) releases Lender and its affiliates from all claims, causes of action, and costs, in law or equity, existing as of the date of this Agreement, which Borrower has or may have by reason of any matter of any conceivable kind or character whatsoever, related or unrelated to the Obligations, including the subject matter of this Agreement. This provision shall not apply to claims for performance of express contractual obligations owing to Borrower by Lender or its affiliates. EARNINGS. BORROWER SHALL MAINTAIN A RATIO OF CONSOLIDATED COMPANY FIXED DEBT COVERAGE EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION TO CURRENT MATURITY OF LONG TERM DEBT PLUS INTEREST OF NOT LESS THAN 2.0 TO 1.0. THIS CALCULATION SHALL BE MADE QUARTERLY BASED UPON THE CURRENT QUARTER AND THE IMMEDIATELY PRECEDING THREE QUARTERS. ACQUISITIONS. ACQUISITIONS CANNOT CAUSE THE CONSOLIDATED FIXED DEBT COVERAGE INCLUDING THE ACQUIRED ENTITY FOR THE PRIOR FOUR QUARTERS TO BE LESS THAN 2.0 TO 1.0. ADDITIONAL FINANCIAL STATEMENTS. MOTOR CARGO INDUSTRIES WILL PROVIDE LENDER COPIES OF ITS 10K AND IOQ ANNUAL FINANCIAL STATEMENTS WITHIN THE LEGAL ALLOTTED TIME. LETTERS OF CREDIT. THE AMOUNT AVAILABLE UNDER THE REVOLVING LINE OF CREDIT SHALL BE AUTOMATICALLY REDUCED BY THE AMOUNT OF ANY LETTERS OF CREDIT ISSUED BY LENDER FOR OR ON ACCOUNT OF BORROWER. ANY DRAWS PAID BY LENDER IN ACCORDANCE WITH ANY SUCH LETTERS OF CREDIT SHALL BE REPAID BY BORROWER TO LENDER BY ADVANCES UNDER THE LINE OF CREDIT. YEAR 2000 COMPLIANCE COVENANT. An exhibit, titled "YEAR 2000 COMPLIANCE COVENANT," is attached to this Agreement and by this reference is made a part of this Agreement just as if all the provisions, terms and conditions of the Exhibit had been fully set forth in this Agreement. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which 15 16 the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on the Loans. OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantors estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. EVENTS AFFECTING CO-BORROWERS. Any of the preceding events occurs with respect to any co-borrower of any of the Indebtedness or any co-borrower dies or becomes incompetent, or revokes or disputes the validity of, or 16 17 liability under, any of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the co-borrower's estate to assume unconditionally the obligations on the Indebtedness in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender, in good faith, deems itself insecure. RIGHT TO CURE. If any default is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen(15)days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Utah. lf there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of SALT LAKE County, the State of Utah. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of Utah. ARBITRATION DISCLOSURES: 1. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT 17 18 2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT, INCLUDING THEIR RIGHT TO A JURY TRIAL. 3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT. 4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK MODIFICATION OF ARBITRATORS' RULINGS IS VERY LIMITED. 5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS AFFILIATED WITH THE BANKING INDUSTRY. 6. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE AMERICAN ARBITRATION ASSOCIATION. (a) Any claim or controversy ("Dispute") between or among the parties and their assigns, including but not limited to Disputes arising out of or relating to this agreement, this arbitration provision ("arbitration clause"), or any related agreements or instruments relating hereto or delivered in connection herewith ("Related Documents"), and including but not limited to a Dispute based on or arising from an alleged tort, shall at the request of any party be resolved by binding arbitration in accordance with the applicable arbitration rules of the American Arbitration Association (the "Administrator"). The provisions of this arbitration clause shall survive any termination, amendment, or expiration of this agreement or Related Documents. The provisions of this arbitration clause shall supersede any prior arbitration agreement between or among the parties. If any provision of this arbitration clause should be determined to be unenforceable, all other provisions of this arbitration clause shall remain in full force and effect. (b) The arbitration proceedings shall be conducted in Salt Lake City, Utah, at a place to be determined by the Administrator. The Administrator and the arbitrator(s) shall have the authority to the extent practicable to take any action to require the arbitration proceeding to be completed and the arbitrator(s)' award issued within one hundred fifty (150) days of the filing of the Dispute with the Administrator. The arbitrator(s) shall have the authority to impose sanctions on any party that fails to comply with time periods imposed by the Administrator or the arbitrator(s), including the sanction of summarily dismissing any Dispute or defense with prejudice. The arbitrator(s) shall have the authority to resolve any Dispute regarding the terms of this agreement, this arbitration clause or Related Documents, including any claim or controversy regarding the arbitrability of any Dispute. All limitations periods applicable to any Dispute or defense, whether by statute or agreement, shall apply to any arbitration proceeding hereunder and the arbitrator(s) shall have the authority to decide whether any Dispute or defense is barred by a limitations period and, if so, to summarily enter an award dismissing any Dispute or defense on that basis. The doctrines of compulsory counterclaim, res judicata, and collateral estoppel shall apply to any arbitration proceeding hereunder so that a party must state as a counterclaim in the arbitration proceeding any claim or controversy which arises out of the transaction or occurrence that is the subject matter of the Dispute. The arbitrator(s) may in the arbitrator(s)' discretion and at the request of any party: (1) consolidate in a single arbitration proceeding any other claim or controversy involving another party that is substantially related to the Dispute where that other party is bound by an arbitration clause with the Lender, such as borrowers, guarantors, sureties, and owners of collateral; (2) consolidate in a single arbitration proceeding any other claim or controversy that is substantially similar to the Dispute; and (3) administer multiple arbitration claims or controversies as class actions in accordance with the provisions of Rule 23 of the Federal Rules of Civil Procedure. 18 19 (c) The arbitrator(s) shall be selected in accordance with the rules of the Administrator from panels maintained by the Administrator. A single arbitrator shall have expertise in the subject matter of the Dispute. Where three arbitrators conduct an arbitration proceeding, the Dispute shall be decided by a majority vote of the three arbitrators, at least one of whom must have expertise in the subject matter of the Dispute and at least one of whom must be a practicing attorney. The arbitrator(s) shall award to the prevailing party recovery of all costs and fees (including attorneys' fees and costs, arbitration administration fees and costs, and arbitrator(s)' fees). The arbitrator(s), either during the pendency of the arbitration proceeding or as part of the arbitration award, also may grant provisional or ancillary remedies, including but not limited to an award of injunctive relief, foreclosure, sequestration, attachment, replevin, garnishment, or the appointment of a receiver. (d) Judgment upon an arbitration award may be entered in any court having jurisdiction, subject to the following limitation: the arbitration award is binding upon the parties only if the amount does not exceed Four Million Dollars ($4,000,000.00); if the award exceeds that limit, either party may demand the right to a court trial. Such a demand must be filed with the Administrator within thirty (30) days following the date of the arbitration award; if such a demand is not made within that time period, the amount of the arbitration award shall be binding. The computation of the total amount of an arbitration award shall include amounts awarded for attorneys' fees and costs, arbitration administration fees and costs and arbitrator(s)' fees. (e) No provision of this arbitration clause, nor the exercise of any rights hereunder, shall limit the right of any party to: (1) judicially or non-judicially foreclose against any real or personal property collateral or other security; (2) exercise self-help remedies, including but not limited to repossession and setoff rights; or (3) obtain from a court having jurisdiction thereover any provisional or ancillary remedies, including but not limited to injunctive relief, foreclosure, sequestration, attachment, replevin, garnishment, or the appointment of a receiver. Such rights can be exercised at any time, before or during initiation of an arbitration proceeding, except to the extent such action is contrary to the arbitration award. The exercise of such rights shall not constitute a waiver of the right to submit any Dispute to arbitration, and any claim or controversy related to the exercise of such rights shall be a Dispute to be resolved under the provisions of this arbitration clause. Any party may initiate arbitration with the Administrator; however, if any party initiates litigation and another party disputes any allegation in that litigation, the disputing party-upon the request of the initiating party--must file a demand for arbitration with the Administrator and pay the Administrator's filing fee. The parties may serve by mail a notice of an initial motion for an order of arbitration. (f) Notwithstanding the applicability of any other law to this agreement, the arbitration clause, or Related Documents between or among the parties, the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., shall apply to the construction and interpretation of this arbitration clause. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the persons signing below is responsible for all obligations in this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower 19 20 hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation reasonable attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's reasonable attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including reasonable attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile (unless otherwise required by law), and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current addressees). SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lenders behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a 20 21 waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lenders right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lenders rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. FINAL AGREEMENT. Borrower understands that this Agreement and the related loan documents are the final expression of the agreement between Lender and Borrower and may not be contradicted by evidence of any alleged oral agreement. EACH BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND EACH BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF NOVEMBER 25,1998. BORROWER: MOTOR CARGO INDUSTRIES, INC. BY: /S/ --------------------------------------- LYNN H. WHEELER, VICE PRESIDENT/CFO MOTOR CARGO, CO-BORROWER BY: /S/ --------------------------------------- LYNN H. WHEELER, VICE PRESIDENT/CFO LENDER: ZIONS FIRST NATIONAL BANK BY: /S/ RICHARD P. JACKSON, V.P. --------------------------------------- AUTHORIZED OFFICER 21 EX-10.2 3 PROMISSORY NOTE 1 EXHIBIT 10.2 PROMISSORY NOTE SALT LAKE CITY, UTAH $20,000,000.00 NOVEMBER 26,1998 For value received, MOTOR CARGO INDUSTRIES, INC. AND MOTOR CARGO (referred to as "Borrower") jointly and severally, promises to pay to the order of ZIONS FIRST NATIONAL BANK, a national banking association (hereinafter referred to as "Zions" or "Lender") at its office in Salt Lake City, Utah, the sum of Twenty Million and 00/1 00 Dollars ($20,000,000.00)or such other principal balance as may be outstanding hereunder in lawful money of the United States with interest thereon at an interest rate hereinafter described. Payments. Commencing December l5,1998, and continuing on the same day of each month thereafter, accrued interest shall be due and payable. In any event, the unpaid balance of principal and any accrued but unpaid interest shall be due and payable no later than April 15, 2000. When the interest rate hereon is adjusted, the monthly payment shall be adjusted by Zions to provide for an amortization schedule which will pay this Promissory Note in full by April 15, 2000. Interest Rate. Prime Rate means an index which is determined daily by the published commercial loan variable rate index held by any two of the following banks: Chase Manhattan Bank, Wells Fargo Bank N.A., and Bank of America N.T. & S.A. In the event no two of the above banks have the same published rate, the bank having the median rate will establish the Prime Rate. If, for any reason beyond the control of Zions, any of the aforementioned banks becomes unacceptable as a reference for the purpose of determining the Prime Rate used herein, Zions may, five days after posting notice, substitute another comparable bank for the one determined unacceptable. As used in this paragraph, "comparable bank" shall mean one of the ten largest commercial banks headquartered in the United States of America. This definition of Prime Rate is to be strictly interpreted and is not intended to serve any purpose other than providing an index to determine the variable interest rate used herein. It is not the lowest rate at which Zions may make loans to any of its customers, either now or in the future. Unless Borrower elects a fixed rate of interest, as provided below, this Promissory Note will bear interest at a variable rate equal to the Prime Rate less 0.25% per annum. The variable interest rate will change immediately and automatically with each change in the Prime Rate. At such times and in such amounts as Borrower may elect, all or a portion of the outstanding balance may be converted to a fixed rate of interest equal to the thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) day London Interbank Offered Rate (LIBOR) for a period corresponding to the LIBOR term chosen plus 2.35%per annum. Borrower may not choose a period which extends past the maturity date of this Promissory Note. Upon expiration of the applicable fixed rate period, Borrower may elect to have such portion of the Promissory Note accrue interest at an elected LIBOR Rate or the variable rate. If no election is made, such portion of the Promissory Note will bear interest at the variable rate equal to the Prime Rate less 0.25% per annum. Borrower shall not prepay any amounts which accrue interest at a fixed rate, nor may a fixed rate be converted to a variable rate until the expiration of the fixed rate option. ln the event that a LIBOR Rate is not available on such dates, the interest rate shall be the applicable variable rate. Zions will maintain records, which may be computerized, which will specify the interest rates payable hereon. Borrower will promptly notify Zions of any possible error contained in any records which are provided to Borrower. Prepayment. The Borrower shall pay to the Bank a fee with respect to the prepayment of any or all of the remaining principal balance of the term loan in an amount equal to the prepaid principal amount times the difference between: a) the "Current LIBOR" and; b) the Original LIBOR: times the number of years and fractional years remaining until the earlier of maturity or the next repricing, except that: (1) No prepayment fee shall be required if the "Current LIBOR" is greater than the "Original LIBOR"; and, (11) up to five percent (5%), non-cumulative, of the original Principal Indebtedness may be prepaid in any year without payment of any prepayment fee. 2 LIBOR is defined as the dollar London Interbank Offered Rate as quoted by the British Bankers Association on the Telerate System, or the offered side as quoted by Lasser, Marshall, Inc., or another New York based broker. "Current LIBOR" is defined to be the LIBOR in effect on the date of the prepayment for a term equal to the time to the earlier of maturity or the next repricing date. "Original LIBOR" is defined to be the LIBOR in effect on the more recent of the date the loan was made or most recent repricing for a term equal to the time to the earlier of maturity or the next repricing date. As used herein, Lender's thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) day LIBOR Rate shall mean the rates per annum quoted by Lender as Lender's thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) day LIBOR Rate based upon quotes for the London Interbank Offered Rate from the British Bankers Association Interest Settlement Rates, Lasser Marshall Inc., or other comparable services. This definition of Lender's thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) day LIBOR Rate is to be strictly interpreted and is not intended to serve any purpose other than providing an index to determine the interest rate used herein. Lender's thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) LIBOR Rate may not necessarily be the same as the quoted offer side in the eurodollar time deposit market by any particular institution or service applicable to any interest period. Not withstanding any other provision in this Promissory Note, if the adoption of any applicable law, rule, or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any request or directive (whether or not having the force of law) of any such authority, central bank, or comparable agency shall make it unlawful or impossible for Lender to maintain or fund advances based on Lender's thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) day LIBOR Rate, then upon notice to Borrower by Lender, interest accruing on the outstanding principal balance under this Promissory Note, together with interest already accrued thereon, shall, at the election of Lender, be immediately converted to the applicable variable rate. Notwithstanding anything to the contrary herein, if Lender determines (which determination shall be conclusive) that quotations of interest rates referred to in the definition of Lendees thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) day LIBOR Rate are not being provided in the relevant amounts or for the relevant maturities for purposes of Lendees determining Lendees thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) day, or if Lender determines (which determination shall be conclusive) that Lender's thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) day LIBOR Rate does not accurately cover the cost to Lender of making or maintaining advances based on Lender's thirty (30), sixty (60), ninety (90), one hundred eighty (180) or three hundred sixty five (365) day LIBOR Rate, then Lender shall give notice thereof to Borrower, whereupon, until Lender notifies Borrower that the circumstances giving rise to such suspension no longer exist, the interest rate hereunder shall be converted to the applicable variable rate. Any advance under this Promissory Note which accrues interest at the variable rate may be prepaid in whole or in part without penalty provided that any partial prepayment will not defer any monthly installments. Interest on this Promissory Note is computed on a 365/365 simple interest basis; that is, interest is computed by applying the ratio of the annual interest rate over a year of 365 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at lenders address located at #1 South Main, Salt Lake City, Utah 84111, or at such other place as Lender maintains Banking Centers. 2 3 Application of Payments. Any and all payments by Borrower under this Promissory Note shall be applied as follows: first, to the repayment of any Lender Expenditures advanced by Lender hereunder or pursuant to the loan documents relating to the Promissory Note; second, to the payment of any late charges; third, to the payment of accrued interest on the principal indebtedness; and fourth, to the payment of the principal indebtedness hereunder. Lender's Expenditures. Borrower agrees to pay on demand any expenditures made by Lender in accordance with the loan documents relating to this Promissory Note, including, but not limited to, the payment of taxes, insurance premiums, costs of maintenance and preservation of the collateral, common expense and other assessments relating to the collateral, and attorney fees and costs incurred in connection with any matter pertaining hereto or to the security pledged to secure the principal indebtedness under this Promissory Note or any portion thereof (collectively the "Lender Expenditures"). At the election of Lender, all Lender Expenditures may be added to the unpaid balance of this Promissory Note and become a part of and on a parity with the indebtedness secured by the collateral and shall accrue interest at such rate as may be computed from time to time in the manner prescribed in this Promissory Note. Zions shall maintain appropriate records of advances, repayments and the interest rates applicable to the advances. Such records may consist of computer records and shall be deemed correct. Default. Borrower will be in default if any of the following happens: (a) Borrower fails to make payment when due; (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Promissory Note or any agreement related to this Promissory Note, or in any other agreement or loan Borrower has with Lender; (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement in favor of any other creditor or person that may materially affect any of Borrower's property of Borrowees ability to repay this Promissory Note or perform Borrower's obligations under this Promissory Note or any document or agreement related to this Promissory Note and the transaction evidenced thereby; (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished; (e) Borrower dissolves (regardless of whether election to continue is made), any member withdraws from Borrower, any member dies, or any of the members or Borrower becomes insolvent, a receiver is appointed for any part of Borrowees property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws; (f) Any creditor tries to take any of Borrowers property on or in which Lender has a lien or security interest (this includes a garnishment of any of Borrower's accounts with Lender); (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note; (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired; (1) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. Lender's Rights. Upon default, Lender may declare the entire unpaid principal balance on this Promissory Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at it option, may also, if permitted under applicable law, increase the variable interest rate on this Promissory Note 3.000 percentage points. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Promissory Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's reasonable attorney's 3 4 fees and Lender's legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. Right of Setoff. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all I RA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender ,to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. If any payment of this Promissory Note becomes due and payable on a Saturday, Sunday or legal holiday for commercial banks under applicable banking laws, the maturity thereof shall be extended to the next succeeding business day and interest thereon shall be payable at the then applicable rate during such extension. Borrower and all endorsers, sureties, and guarantors hereof hereby jointly and severally waive presentment for payment, demand, protest, notice of protest and of non-payment and of dishonor, and consent to extensions of time, renewal, waivers, or modifications without notice and further consent to the release of any collateral or any part thereof, with or without substitution. This Note has been delivered to Lender and accepted by Lender in the State of Utah. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction and venue of the courts of SALT LAKE County, the State of Utah. This Promissory Note shall be governed by and construed in accordance with the laws of the State of Utah except as modified by the arbitration provisions. Arbitration Disclosures: 1. Arbitration is usually final and binding on the parties and subject to only very limited review by a court. 2. The parties are waiving their right to litigate in court, including their right to a jury trial. 3. Pre-arbitration discovery is generally more limited and different from court proceedings. 4. Arbitrators' awards are not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by arbitrators is strictly limited. 5. A panel of arbitrators might include an arbitrator who is or was affiliated with the banking industry. 6. If you have questions about arbitration, consult your attorney or the American Arbitration Association. Arbitration Provisions: (a) Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Promissory Note or any agreements or instruments relating hereto or delivered in connection herewith, and including but not limited to a claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration proceedings shall be conducted in Salt Lake City, Utah. The arbitrator(s) shall have the qualifications set forth in subparagraph (c) hereto. All statutes of limitations which would otherwise be applicable in a judicial action brought by a party shall apply to any arbitration or reference proceeding hereunder. (b) In any judicial action or proceeding arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith, including but not limited to a claim based on or arising from an alleged tort, if the controversy or claim is not submitted to arbitration as provided and limited in subparagraph (a) hereto, all decisions of fact and law shall be determined by a reference in accordance with Rule 53 of the Federal Rules of Civil Procedure or Rule 53 of the Utah Rules of Civil 4 5 Procedures or other comparable, applicable reference procedure. The parties shall designate to the court the referee(s) selected under the auspices of the American Arbitration Association in the same manner as arbitrators are selected in Association-sponsored arbitration proceedings. The referee(s) shall have the qualifications set forth in subparagraph (c) hereto. (c) The arbitrator(s) or referee(s) shall be selected in accordance with the rules of the American Arbitration Association from panels maintained by the Association. A single arbitrator or referee shall be knowledgeable in the subject matter of the dispute. Where three arbitrators or referees conduct an arbitration or reference proceeding, the claim shall be decided by a majority vote of the three arbitrators or referees, at least one of whom must be knowledgeable in the subject matter of the dispute and at least one of whom must be a practicing attorney. The arbitrator(s) or referee(s) shall award recovery of all costs and fees (including reasonable attorneys' fees, administrative fees, arbitrators' fees, and court costs). The arbitrator(s) or referee(s) also may grant provisional or ancillary remedies such as, for example, injunctive relief, attachment, or the appointment of a receiver, either during the pendency of the arbitration or reference proceeding or as part of the arbitration or reference award. (d) Judgment upon an arbitration or reference award may be entered in any court having jurisdiction, subject to the following limitation: the arbitration or reference award is binding upon the parties only if the amount does not exceed Four Million Dollars ($4,000,000); if the award exceeds that limit, either party may commence legal action for a court trial de novo. Such legal action must be filed within thirty (30) days following the date of the arbitration or reference award; if such legal action is not filed within that time period, the amount of the arbitration or reference award shall be binding. The computation of the total amount of an arbitration or reference award shall include amounts awarded for arbitration fees, attorneys' fees, interest, and all other related costs. (e) At Zions option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of a power of sale under the deed of trust or by judicial foreclosure. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (f) Notwithstanding the applicability of other law to any other provision of this Promissory Note, the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., shall apply to the construction and interpretation of this arbitration section. This Promissory Note evidences a revolving line of credit under which Borrower may repeatedly borrower and repay provided an event of default has not occurred. This Promissory Note is secured by a Commercial Pledge Agreement of even date. MOTOR CARGO INDUSTRIES, INC. By: /s/ --------------------------------------- Lynn H. Wheeler, Vice President/CFO MOTOR CARGO, CO-BORROWER By: /s/ --------------------------------------- Lynn H. Wheeler, Vice President/CFO 5 EX-11 4 PRO FORMA CALCULATION OF EARNINGS PER SHARE 1 Exhibit 11 MOTOR CARGO INDUSTRIES, INC. AND SUBSIDIARIES PRO FORMA EARNINGS PER SHARE CALCULATION
Year Ended December 31, ------------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Pro forma earnings available to common shareholders $5,788,861 $5,621,476 $3,596,891 ========== ========== ========== Basis EPS --------- Shares Common shares outstanding entire period 6,987,820 5,820,000 5,820,000 Weighted-average common shares issued during period -- 118,602 -- ---------- ---------- ---------- Weighted-average common shares outstanding during period - basic 6,987,820 5,938,602 5,820,000 ========== ========== ========== Pro forma earnings per common share - basic $ 0.83 $ 0.95 $ 0.62 ========== ========== ========== Diluted EPS ----------- Shares Weighted-average common shares outstanding during period - basic 6,987,820 5,938,602 5,820,000 Diluted effect of stock options 4,000 -- -- ---------- ---------- ---------- Weighted-average common shares outstanding during period - diluted 6,991,820 5,938,602 5,820,000 ========== ========== ========== Pro forma earnings per common share - diluted $ 0.83 $ 0.95 $ 0.62 ========== ========== ==========
EX-23 5 CONSENT OF GRANT THORNTON LLP 1 EXHIBIT 23 CONSENT We have issued our report dated February 5, 1999 accompanying the consolidated financial statements of Motor Cargo Industries, Inc. and Subsidiaries appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. We consent to the incorporation by reference in Registration Statement No. 333-62577 on Form S-8 of the aforementioned report. /s/ GRANT THORNTON LLP Salt Lake City, Utah March 23, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS FOR MOTOR CARGO INDUSTRIES, INC. FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 DEC-31-1998 7,515 0 14,824 641 460 26,775 85,954 40,560 72,660 10,741 0 0 0 12,135 37,139 72,660 114,725 114,725 0 105,448 0 0 154 9,449 3,660 5,789 0 0 0 5,789 .83 .83
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