-----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, KDUwh9k/t4DONWYelq7nsK7RvC1VSh/6B6vvy16syIigRhZ9EVMj0INRJr0xuD4j geUZ3bs3Z5Bf8QChcYzx9A== 0000950134-00-001761.txt : 20000310 0000950134-00-001761.hdr.sgml : 20000310 ACCESSION NUMBER: 0000950134-00-001761 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARKANSAS BEST CORP /DE/ CENTRAL INDEX KEY: 0000894405 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 710673405 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19969 FILM NUMBER: 564212 BUSINESS ADDRESS: STREET 1: 3801 OLD GREENWOOD RD CITY: FORT SMITH STATE: AR ZIP: 72903 BUSINESS PHONE: 5017856000 MAIL ADDRESS: STREET 1: P O BOX 48 CITY: FORT SMITH STATE: AR ZIP: 72902 10-K405 1 FORM 10-K405 FOR YEAR ENDED DECEMBER 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year December 31, 1999. [ ] 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 0-19969 ARKANSAS BEST CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 71-0673405 ----------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3801 Old Greenwood Road, Fort Smith, Arkansas 72903 - ------------------------------------------------ --------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 501-785-6000 Securities registered pursuant to Section 12(b) of the Act: None --------------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange Title of each class on which registered - ----------------------------------------- ----------------------- Common Stock, $.01 Par Value ......................... Nasdaq Stock Market/NMS $2.875 Series A Cumulative Convertible exchangeable Preferred Stock, $.01 Par Value ......... Nasdaq Stock Market/NMS
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 shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 18, 2000, was $196,001,193. The number of shares of Common Stock, $.01 par value, outstanding as of February 18, 2000, was 19,762,133. Documents incorporated by reference into the Form 10-K 1) The following sections of the 1999 Annual Report to Shareholders: - Market and Dividend Information - Selected Financial Data - Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk - Consolidated Financial Statements 2) Proxy Statement for the Annual Shareholder's meeting to be held April 19, 2000 INTERNET:www.arkbest.com 1 2 ARKANSAS BEST CORPORATION FORM 10-K TABLE OF CONTENTS
ITEM PAGE NUMBER NUMBER PART I Item 1. Business .................................................................................... 3 Item 2. Properties .................................................................................. 11 Item 3. Legal Proceedings ........................................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders ......................................... 12 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ....................... 13 Item 6. Selected Financial Data ..................................................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................................. 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 13 Item 8. Financial Statements and Supplementary Data ................................................. 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................................ 13 PART III Item 10. Directors and Executive Officers of the Registrant .......................................... 14 Item 11. Executive Compensation ...................................................................... 14 Item 12. Security Ownership of Certain Beneficial Owners and Management .............................. 14 Item 13. Certain Relationships and Related Transactions .............................................. 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................. 15
2 3 PART I Except for historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Arkansas Best Corporation's (the "Company") actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1, "Business." ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS CORPORATE PROFILE Arkansas Best Corporation (the "Company") is a diversified holding company engaged through its subsidiaries primarily in motor carrier transportation operations, intermodal transportation operations and truck tire retreading and new tire sales (see Note N of the Consolidated Financial Statements appearing on pages 39 through 41 of the registrant's Annual Report). Principal subsidiaries are ABF Freight System, Inc. ("ABF"); Treadco, Inc. ("Treadco"); Clipper Express Company and related companies ("Clipper"); G.I. Trucking Company ("G.I. Trucking"); and FleetNet America, LLC; and until July 15, 1997, Cardinal Freight Carriers, Inc. ("Cardinal"). HISTORICAL BACKGROUND The Company was publicly owned from 1969 until 1988, when it was acquired in a leveraged buyout by a corporation organized by Kelso & Company, L.P. ("Kelso"). In 1992, the Company completed an initial public offering of Common Stock par value $.01 (the "Common Stock"). The Company also repurchased substantially all the remaining shares of Common Stock beneficially owned by Kelso, thus ending Kelso's investment in the Company. In 1993, the Company completed a public offering of 1,495,000 shares of preferred stock ("Preferred Stock"). In August 1995, pursuant to a tender offer, a wholly owned subsidiary of the Company purchased the outstanding shares of common stock of WorldWay Corporation ("WorldWay"), at a price of $11 per share (the "Acquisition"). WorldWay was a publicly-held company engaged through its subsidiaries in motor carrier operations. The total purchase price of WorldWay amounted to approximately $76 million. Assets acquired had an estimated fair value of approximately $313.0 million and liabilities assumed had a fair value of approximately $252.0 million. During the first half of 1999, the Company acquired 2,457,000 shares of Treadco for $23.7 million via a cash tender offer pursuant to a definitive merger agreement. As a result of the transaction, Treadco became a wholly owned subsidiary of the Company (see Note R appearing on page 45 of the registrant's Annual Report). (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The response to this portion of Item 1 is included in "Note N - Operating Segment Data" appearing on pages 39 through 41 of the registrant's Annual Report to Shareholders for the year ended December 31, 1999, and is incorporated herein by reference under Item 14. 3 4 ITEM 1. BUSINESS - continued (c) NARRATIVE DESCRIPTION OF BUSINESS GENERAL During the periods being reported on, the Company operated in five defined reportable operating segments: 1) ABF; 2) G.I. Trucking; 3) Cardinal, which was sold in July 1997; 4) Clipper; and 5) Treadco. Note N to the Consolidated Financial Statements contains additional information regarding the Company's operating segments and appears on pages 39 through 41 of the registrant's Annual Report to Shareholders for the year ended December 31, 1999, and is incorporated herein by reference under Item 14. DISCONTINUED OPERATIONS As of June 30, 1997, and prior periods since 1995, the Company was engaged in providing logistics services, including warehousing and distribution, through two wholly owned subsidiaries, The Complete Logistics Company ("CLC") and Integrated Distribution, Inc. ("IDI"). CLC was sold on August 8, 1997. In September, 1997, the Company completed a formal plan to exit the logistics segment by disposing of IDI. The Company closed the sale of IDI on October 31, 1997. At December 31, 1998, the Company was engaged in international ocean freight services through its subsidiary, CaroTrans International, Inc. ("Clipper International"), a non-vessel operating common carrier (N.V.O.C.C.). On February 28, 1999, the Company completed a formal plan to exit its international ocean freight N.V.O.C.C. services by disposing of the business and assets of Clipper International. On April 17, 1999, the Company closed the sale of the business and certain assets of Clipper International, including the trade name "CaroTrans International, Inc." Remaining assets are being liquidated by the Company. EMPLOYEES At December 31, 1999, the Company and its subsidiaries had a total of 15,269 employees of which approximately 62% are members of a labor union. MOTOR CARRIER OPERATIONS LESS-THAN-TRUCKLOAD MOTOR CARRIER OPERATIONS GENERAL The Company's less-than-truckload ("LTL") motor carrier operations are conducted through ABF, ABF Freight System (B.C.), Ltd. ("ABF-BC"), ABF Freight System Canada, Ltd. ("ABF-Canada"), ABF Cartage, Inc. ("Cartage"), and Land-Marine Cargo, Inc. ("Land-Marine") (collectively "ABF") and G.I. Trucking Company ("G.I. Trucking"). LTL carriers offer services to shippers transporting a wide variety of large and small shipments to geographically dispersed destinations. LTL carriers pick up small shipments throughout the vicinity of a local terminal and consolidate them at the terminal. Shipments are consolidated by destination for transportation by intercity units to their destination cities or to distribution centers. Shipments from various locations can be reconsolidated for transportation to distant destinations, other distribution centers or local terminals. Once delivered to a local terminal, a shipment is delivered to the customer by local trucks operating from the terminal. In some cases, when a sufficient number of different shipments at one origin terminal are going to a common destination, they can be combined to make a full trailerload. A trailer is then dispatched to that destination without the freight having to be rehandled. 4 5 ITEM 1. BUSINESS - continued COMPETITION, PRICING AND INDUSTRY FACTORS The trucking industry is highly competitive. The Company's LTL motor carrier subsidiaries actively compete for freight business with other national, regional and local motor carriers and, to a lesser extent, with private carriage, freight forwarders, railroads and airlines. Competition is based primarily on personal relationships, price and service. In general, most of the principal motor carriers use similar tariffs to rate interstate shipments. Competition for freight revenue, however, has resulted in discounting which effectively reduces prices paid by shippers. In an effort to maintain and improve its market share, the Company's LTL motor carrier subsidiaries offer and negotiate various discounts. The trucking industry, including the Company's LTL motor carrier subsidiaries, is directly affected by the state of the overall economy. The trucking industry faces rising costs including government regulations on safety, maintenance and fuel economy. In addition, seasonal fluctuations also affect tonnage to be transported. Freight shipments, operating costs and earnings also are affected adversely by inclement weather conditions. INSURANCE AND SAFETY Generally, claims exposure in the motor carrier industry consists of cargo loss and damage, auto liability, property damage and bodily injury and workers' compensation. The Company's motor carrier subsidiaries are effectively self-insured for the first $100,000 of each cargo loss, $300,000 of each workers' compensation loss and $200,000 of each general and auto liability loss, plus an aggregate of $750,000 of auto liability losses between $200,000 and $500,000. The Company maintains insurance adequate to cover losses in excess of such amounts. The Company has been able to obtain adequate coverage and is not aware of problems in the foreseeable future which would significantly impair its ability to obtain adequate coverage at comparable rates for its motor carrier operations. ABF FREIGHT SYSTEM, INC. Headquartered in Fort Smith, Arkansas, ABF is the largest subsidiary of the Company. ABF currently accounts for approximately 74% of the Company's consolidated revenues. ABF is the fourth largest national LTL motor carrier in the United States, based on revenues for 1999 as reported to the U.S. Department of Transportation ("D.O.T."). ABF provides direct service to over 98.6% of the cities in the United States having a population of 25,000 or more. ABF provides interstate and intrastate direct service to more than 40,000 points through 311 terminals in all 50 states, Canada and Puerto Rico. Through an alliance and relationships with trucking companies in Mexico, ABF provides motor carrier services to customers in that country as well. ABF was incorporated in Delaware in 1982 and is the successor to Arkansas Motor Freight, a business originally organized in 1935. ABF offers long-haul, interstate, regional and intrastate transportation of general commodities through LTL, assured services and expedited shipments. General commodities include all freight except hazardous waste, dangerous explosives, commodities of exceptionally high value, commodities in bulk and those requiring special equipment. ABF's general commodities shipments differ from shipments of bulk raw materials which are commonly transported by railroad, pipeline and water carrier. General commodities transported by ABF include, among other things, food, textiles, apparel, furniture, appliances, chemicals, non-bulk petroleum products, rubber, plastics, metal and metal products, wood, glass, automotive parts, machinery and miscellaneous manufactured products. During the year ended December 31, 1999, no single customer accounted for more than 3% of ABF's revenues, and the ten largest customers accounted for less than 9% of ABF's revenues. 5 6 ITEM 1. BUSINESS - continued EMPLOYEES At December 31, 1999, ABF employed 12,190 persons. Employee compensation and related costs are the largest components of ABF's operating expenses. In 1999, such costs amounted to 64.1% of ABF's revenues. Approximately 79% of ABF's employees are covered under a collective bargaining agreement with the International Brotherhood of Teamsters ("IBT"). The IBT voted in favor of a new labor contract on April 9, 1998. The contract was effective April 1, 1998, and is for a five-year term. The contract provides for an average annual wage and benefit increase during its term of approximately 2.3%, including a lump-sum payment of $750 for the first contract year for all active employees who are IBT members. During 1997 employee wages and benefits increased an average of 3.9%. Under the terms of the National Agreement, ABF is required to contribute to various multiemployer pension plans maintained for the benefit of its employees who are members of the IBT. Amendments to the Employee Retirement Income Security Act of 1974 ("ERISA") pursuant to the Multiemployer Pension Plan Amendments Act of 1980 (the "MPPA Act") substantially expanded the potential liabilities of employers who participate in such plans. Under ERISA, as amended by the MPPA Act, an employer who contributes to a multiemployer pension plan and the members of such employer's controlled group are jointly and severally liable for their proportionate share of the plan's unfunded liabilities in the event the employer ceases to have an obligation to contribute to the plan or substantially reduces its contributions to the plan (i.e., in the event of plan termination or withdrawal by the Company from the multiemployer plans). Although the Company has no current information regarding its potential liability under ERISA in the event it wholly or partially ceases to have an obligation to contribute or substantially reduces its contributions to the multiemployer plans to which it currently contributes, management believes that such liability would be material. The Company has no intention of ceasing to contribute or of substantially reducing its contributions to such multiemployer plans. Four of the five largest LTL carriers are unionized and generally pay comparable amounts for wages and benefits. Non-union companies typically pay employees less than union companies. Due to its national reputation and its high pay scale, ABF has not historically experienced any significant difficulty in attracting or retaining qualified drivers. G.I. TRUCKING COMPANY Headquartered in La Mirada, California, G.I. Trucking is one of the five largest Western states-based non-union regional LTL motor carrier. G.I. Trucking offers one to three-day regional service through a network of 33 terminals and 37 agent partners in 15 Western and Southwestern states including Hawaii and Alaska. G.I. Trucking accounted for approximately 8% of the Company's consolidated revenues in 1999. During the year ended December 31, 1999, G.I. Trucking's largest customer and its suppliers accounted for more than 23% of G.I. Trucking's revenues. G.I. Trucking provides transcontinental service through a partnership with three other regional carriers through three major hub terminals located in the Midwest and the East Coast. Customer service is enhanced through EDI communications between the partners. G.I. Trucking's linehaul structure utilizes company solo drivers, company sleeper teams, contract carriers and one-way carriers, providing flexibility in maintaining customer service and lane balance. G.I. Trucking's family of electronic services include EDI information, customer FAX capabilities, tracing, rating and reporting interface. 6 7 ITEM 1. BUSINESS - continued CARDINAL The Company's truckload motor carrier operations were conducted primarily through Cardinal. On July 15, 1997, the Company closed the sale of Cardinal. INTERMODAL OPERATIONS GENERAL The Company's intermodal transportation operations are conducted through Clipper, headquartered in Lemont, Illinois. Clipper operates through two business units: Clipper LTL and Clipper Freight Management ("CFM"), and offers domestic intermodal freight services, utilizing a variety of transportation modes including rail, over-the-road and air. COMPETITION, PRICING AND INDUSTRY FACTORS Clipper operates in highly competitive environments. Competition is based on the most consistent transit times, freight rates, damage-free shipments and on-time delivery of freight. Clipper competes with other intermodal transportation operations, freight forwarders, railroads and airlines, as well as with other national and regional LTL and truckload motor carrier operations. Intermodal transportation operations are akin to motor carrier operations in terms of market conditions, with revenues being weaker in the first quarter and stronger in the months of September and October. Freight shipments, operating costs and earnings are also affected by inclement weather. The reliability of rail services, a critical component of Clipper's ability to provide service to its customers, was a significant problem during 1998, causing Clipper to experience lost revenue and higher operating costs. In the fourth quarter of 1998, Clipper experienced some improvements in the on-time service level of its rail suppliers. In 1999, rail service continued to improve; however, in certain lanes, rail service remained inconsistent. Clipper is aggressively trying to regain this lost business but is faced with competition from truckload carriers and other rail service providers. During the fourth quarter of 1999, Clipper experienced some success in regaining intermodal customers lost. CLIPPER Clipper's revenues accounted for approximately 7% of consolidated revenues for 1999. During the year ended December 31, 1999, no single customer accounted for more than 7% of Clipper's revenues. CLIPPER LTL Clipper LTL operates primarily through Clipper Exxpress Company ("Clipper Exxpress"). Management believes Clipper Exxpress is one of the ten largest intermodal consolidators and forwarders of LTL shipments in the United States. Clipper LTL accounts for 36% of Clipper's 1999 revenues. Clipper LTL's collection and distribution network consists of 32 service centers geographically dispersed throughout the United States. Clipper LTL's selection of markets depends on size (lane density), availability of quality rail service and truck line-haul service, length of haul and competitor profile. Traffic moving between its ten most significant market pairs generates approximately 33% of Clipper's LTL revenue. A majority of Clipper's LTL revenue is derived from long-haul, metro area-to-metro area transportation. Although pickup and delivery and terminal handling is performed by agents, Clipper LTL has an operations and customer service staff located at or near many of its principal agents' terminals to monitor service levels and provide an interface between customers and agents. 7 8 ITEM 1. BUSINESS - continued CFM CFM provides services through Agricultural Express of America, Inc. (d/b/a/ Clipper Controlled Logistics), Agile Freight System, Inc. (d/b/a Clipper Highway Services), and partially through Clipper Exxpress Company, accounting for approximately 64% of Clipper's revenues during 1999. CFM provides an extensive list of transportation services such as intermodal and truck brokerage, warehousing, consolidation, transloading, repacking, and other ancillary services. As an intermodal marketing operation, CFM arranges for loads to be picked up by a drayage company, tenders them to a railroad, and then arranges for a drayage company to deliver the shipment on the other end of the move. CFM's role in this process is to select the most cost-effective means to provide quality service, and to expedite movement of the loads at various interface points to ensure seamless door-to-door transportation. Clipper Controlled Logistics provides high quality, temperature-controlled intermodal transportation service to fruit and produce brokers, growers, shippers and receivers and supermarket chains, primarily from the West to the Midwest, Canada, and the eastern United States. At December 31, 1999, Clipper Controlled Logistics owns or leases 694 temperature-controlled trailers that it deploys in the seasonal fruit and vegetable markets. These markets are carefully selected in order to take advantage of various seasonally high rates, which peak at different times of the year. By focusing on the spot market for produce transport, Clipper Controlled Logistics is able to generate, on average, a higher revenue per load compared to standard temperature-controlled carriers that pursue more stable year-round temperature-controlled freight. Clipper Controlled Logistics' services also include transportation of non-produce loads requiring protective services and leasing trailers during non-peak produce seasons. Clipper Highway Services is a non-asset intensive, premium service, long-haul truckload carrier that primarily utilizes two-person driver teams provided by contractors and provides truck brokering. Clipper Highway Services provides expedited truckload service in tightly focused long-haul lanes that originate or terminate near a Clipper LTL market. Clipper Highway Services moves full truckloads of consolidated LTL shipments for Clipper LTL, as well as for other shippers. TREADCO GENERAL The Company's tire operations are conducted by Treadco, the nation's largest independent tire retreader for the trucking industry and the largest independent commercial truck tire dealer. Treadco has 59 locations in the U.S. located primarily in the south, southwest, lower midwest and west. Treadco's revenues currently account for approximately 11% of the Company's consolidated revenues. COMPETITION, PRICING AND INDUSTRY FACTORS The trucking industry faces rising costs including government regulations on safety, maintenance and fuel economy. As a result, trucking companies continually seek ways to obtain more mileage from new tires and less expensive ways to replace old tires. Retreading tires is significantly less expensive than buying new tires. The retread tire market is highly competitive. No single dealer dominates the retread market. While Treadco is the nation's largest independent retreader for the trucking industry, Goodyear is the largest single provider of retread services, which it offers through its dealers who also sell new Goodyear tires. Historically, Treadco was a Bandag Incorporated ("Bandag") franchisee and competed primarily against smaller independent dealers in a highly fragmented market. Following the termination of the Bandag franchise agreements in 1996, Treadco has seen increased competition as Bandag has granted additional franchises in some locations currently being served by Treadco. During the fourth quarter of 1997, Bandag acquired five multi-location 8 9 ITEM 1. BUSINESS - continued Bandag franchises, through a subsidiary, Tire Distribution Systems, Inc. ("TDS"). The combination of the five franchises made TDS the second largest truck tire retreader and the second largest commercial truck tire dealer. New tire manufacturers are also entering the retreading market. This competition has led to increased pricing pressures in the marketplace. Treadco's ability to offer excellent and reliable 24-hour service through its extensive coverage network of 57 service facilities to its niche market customers, competitive pricing, central administration and its inventory and other information technology systems appeal to fleet customers and enable Treadco to compete effectively. The new truck tire business is also highly competitive and includes various manufacturers, dealers and retailers. In addition, the new tire market is being impacted by lower cost imports. As a result, new tire prices remain highly competitive. Treadco effectively competes in the new tire market by offering excellent service and competitive pricing. Generally, demand for new truck tires is closely related to the strength of regional and, ultimately national economies. In addition to sales of new tires and retread tires, Treadco also provides tire-related services, ranging from full scale tire management programs, which customers have outsourced to Treadco, to wheel and alignment services provided at specially equipped Treadco service centers to emergency roadside tire-related services. The service portion of Treadco's business provided 11.6% of Treadco's 1999 revenue. Treadco experiences reduced demand for retreads and new truck tires in the winter months due to more difficult driving and tire maintenance conditions resulting from the inclement weather. Treadco's operations are somewhat seasonal, with the third quarter of the calendar year generally having the highest sales. INSURANCE AND SAFETY Generally, claims exposure for Treadco consists of general and auto liability, property damage and bodily injury and workers' compensation. Treadco is effectively self-insured for the first $300,000 of each workers' compensation loss and $200,000 of each general and auto liability loss. Treadco maintains insurance adequate to cover losses in excess of such amounts. Treadco has been able to obtain adequate coverage and is not aware of problems in the foreseeable future which would significantly impair its ability to obtain adequate coverage at comparable rates for its tire operations. BUSINESS OPERATIONS Treadco uses the precure process to retread tires at all of its locations. The precure process uses a specific tread design measured from strips of tread rubber, cut and applied to the casing. A flexible rubber envelope then seals each tire which is placed in a bonding chamber. Air pressure in the chamber creates uniform force, applying pressure on all points of the tire. The tread is bonded to the casing by using a combination of heat and air pressure to cure the encased tire in the bonding chamber. The principal raw material in manufacturing retreaded truck tires is synthetic rubber, which is comprised of styrene and butadiene, both petroleum derivatives. Thus, the commodity price of oil directly affects the price of the Company's principal raw materials. However, because retreading uses roughly one-third of the amount of oil that the manufacture of new tires requires, retreads maintain a competitive price advantage in comparison to new tires, particularly when oil prices increase. In October 1995, Treadco reached an agreement with Oliver Rubber Company ("Oliver") to be a supplier of equipment and related materials for Treadco's truck tire precure retreading business. Under the Oliver license agreements, Treadco purchases from Oliver precured tread rubber and bonding cushion gum and PNEUFLEX tread rubber (collectively "Rubber Products"). Treadco's obligation to purchase Rubber Products from Oliver is subject to (i) Oliver's continuing to produce Rubber Products of no less quality and durability than it presently produces, and (ii) Oliver's overall pricing program for Treadco. 9 10 ITEM 1. BUSINESS - continued Treadco's sales and marketing strategy is based on its service strengths, network of production and sales facilities and strong regional reputation. None of Treadco's customers for retreads and new tires, including ABF or other affiliates, represent more than 2% of Treadco's revenues for 1999. ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS The Company is subject to federal, state and local environmental laws and regulations relating to, among other things, contingency planning for spills of petroleum products, and its disposal of waste oil. In addition, the Company is subject to significant regulations dealing with underground fuel storage tanks. The Company's subsidiaries store some fuel for their tractors and trucks in approximately 78 underground tanks located in 27 states. Maintenance of such tanks is regulated at the federal and, in some cases, state levels. The Company believes that it is in substantial compliance with all such regulations. The Company is not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on the Company. Environmental regulations were adopted by the United States Environmental Protection Agency ("EPA") that required the Company to upgrade its underground tank systems by December 1998. The Company successfully completed the upgrades prior to December 31, 1998. The Company has received notices from the EPA and others that it has been identified as a potentially responsible party ("PRP") under the Comprehensive Environmental Response Compensation and Liability Act or other federal or state environmental statutes at several hazardous waste sites. After investigating the Company's or its subsidiaries' involvement in waste disposal or waste generation at such sites, the Company has either agreed to de minimis settlements (aggregating approximately $300,000 over the last ten years), or believes its obligations with respect to such sites would involve immaterial monetary liability, although there can be no assurances in this regard. Treadco is affected by a number of governmental regulations relating to the development, production and sale of retreaded and new tires, the raw materials used to manufacture such products (including petroleum, styrene and butadiene), and to environmental and safety matters. In addition, the retreading process creates rubber particulate, or "dust," which requires gathering and disposal, and Treadco disposes of used and nonretreadable tire casings, both of which require compliance with environmental and disposal laws. In some situations, Treadco could be liable for disposal problems, even if the situation resulted from previous conduct of Treadco that was lawful at the time or from improper conduct of, or conditions caused by, persons engaged by Treadco to dispose of particulate and discarded casings. Such cleanup costs or costs associated with compliance with environmental laws applicable to the tire retreading process could be substantial and have a material adverse effect on Treadco's financial condition. Treadco believes that it is in substantial compliance with all laws applicable to such operations, however, and is not aware of any situation or condition that could reasonably be expected to have a material adverse effect on Treadco's operations or financial condition. As of December 31, 1999, the Company has accrued approximately $2.7 million to provide for environmental-related liabilities. The Company's environmental accrual is based on management's best estimate of the actual liability. The Company's estimate is founded on management's experience in dealing with similar environmental matters and on actual testing performed at some sites. Management believes that the accrual is adequate to cover environmental liabilities based on the present environmental regulations. Accruals for environmental liabilities are included in the balance sheet as accrued expenses. 10 11 ITEM 2. PROPERTIES The Company owns its executive office building in Fort Smith, Arkansas which contains approximately 196,000 square feet. ABF ABF currently operates out of 311 terminal facilities of which it owns 81, leases 49 from an affiliate and leases the remainder from non-affiliates. ABF's principal terminal facilities are as follows:
No. of Doors Square Footage (1) ------------ ------------------ Owned: Dayton, Ohio 330 252,940 Ellenwood, Georgia 228 153,209 South Chicago, Illinois 276 149,610 Carlisle, Pennsylvania (East) 101 72,497 Dallas, Texas 108 87,534 Leased from affiliate, Transport Realty: North Little Rock, Arkansas 195 138,830 Albuquerque, New Mexico 85 67,700 Carlisle, Pennsylvania (West) 140 66,484 Pico Rivera, California 94 52,900 Leased from non-affiliate: Winston-Salem, North Carolina 150 160,700 Salt Lake City, Utah 92 35,910
(1) Includes shop and driver room square footage. G.I. TRUCKING G.I. Trucking currently operates out of 70 terminal facilities of which 33 are company operated and 37 are agent terminals. G.I. Trucking owns 11 facilities, leases 3 facilities from an affiliate and the remainder of the facilities are leased from non-affiliates. CLIPPER Clipper operates from 32 service centers, geographically dispersed throughout the United States. Clipper leases all of its facilities. TREADCO Treadco currently operates from 59 locations. Treadco owns 26 production and sales facilities and leases the remainder of its production and sales facilities from non-affiliates. 11 12 ITEM 3. LEGAL PROCEEDINGS Various legal actions, the majority of which arise in the normal course of business, are pending. None of these legal actions is expected to have a material adverse effect on the Company's financial condition or results of operations. The Company maintains liability insurance against most risks arising out of the normal course of its business. On October 30, 1995, Treadco filed a lawsuit in Arkansas State Court, alleging that Bandag Incorporated ("Bandag") and certain of its officers and employees had violated Arkansas statutory and common law in attempting to solicit Treadco's employees to work for Bandag or its competing franchisees and attempting to divert customers from Treadco. The Federal District Court ruled that under terms of Treadco's franchise agreements with Bandag, all of the issues involved in Treadco's lawsuit against Bandag were to be decided by arbitration. The arbitration hearing began September 21, 1998, and in December 1998, prior to the completion of the arbitration, to avoid the uncertainty, cost and burden of continuing the arbitration action, Treadco entered into a settlement with Bandag, and certain of Bandag's current and former employees, resolving all disputes and liabilities arising between them. Under the settlement terms, Treadco received a one-time payment of $9,995,000 in settlement of all the Company's claims. The settlement agreement represented a compromise in settlement of disputed liabilities, obligations and claims and did not constitute an admission of liability by either Treadco or Bandag. The settlement resulted in other income for Treadco of $9,124,000. The settlement payment was used to reduce Treadco's outstanding borrowings under its Revolving Credit Agreement, which was terminated on June 25, 1999. Treadco has been, in 1999, and will continue to be impacted by a provision in the settlement agreement that the terms of the settlement remain confidential, except with respect to certain disclosure requirements. Other than the confidentiality provisions of the settlement agreement, Bandag and Treadco's relationship in the future will be governed by the various state and federal laws applicable to competitors. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during the fourth quarter ended December 31, 1999. 12 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information set forth under the Caption "Market and Dividend Information" on page 7 of the registrant's Annual Report to Shareholders for the year ended December 31, 1999, is incorporated by reference under Item 14 herein. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Data" on page 6 of the registrant's Annual Report to Shareholders for the year ended December 31, 1999, is incorporated by reference under Item 14 herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 8 through 16 of the registrant's Annual Report to Shareholders for the year ended December 31, 1999, is incorporated by reference under Item 14 herein. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK "Quantitative and Qualitative Disclosures About Market Risk," appearing on page 17 of the registrant's Annual Report to Shareholders for the year ended December 31, 1999, is incorporated by reference under Item 14 herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors, consolidated financial statements and supplementary information, appearing on pages 19 through 45 of the registrant's Annual Report to Shareholders for the year ended December 31, 1999, are incorporated by reference under Item 14 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 13 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections entitled "Election of Directors," "Directors of the Company," "Board of Directors and Committees," "Executive Officers of the Company" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission ("Definitive Proxy Statement"), set forth certain information with respect to the directors, nominees for election as directors and executive officers of the Company and are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Executive Compensation," "Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values," "Options/SAR Grants Table," "Executive Compensation and Development Committee Interlocks and Insider Participation," "Retirement and Savings Plan," "Employment Contracts and Termination of Employment and Change in Control Arrangements" and the paragraph concerning directors' compensation in the section entitled "Board of Directors and Committees" in the Company's Definitive Proxy Statement, set forth certain information with respect to compensation of management of the Company and are incorporated herein by reference, provided, however, the information contained in the sections entitled "Report on Executive Compensation by the Executive Compensation and Development Committee and Stock Option Committee" and "Stock Performance Graph" are not incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Principal Shareholders and Management Ownership" in the Company's Definitive Proxy Statement sets forth certain information with respect to the ownership of the Company's voting securities and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Transactions and Relationships" in the Company's Definitive Proxy Statement sets forth certain information with respect to relations of and transactions by management of the Company and is incorporated herein by reference. 14 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS The following information appearing in the 1999 Annual Report to Shareholders is incorporated by reference in this Form 10-K Annual Report as Exhibit (13):
Page Market for Registrant's Common Equity and Related Shareholder Matters 7 Selected Financial Data 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 16 Quantitative and Qualitative Disclosures About Market Risk 17 Consolidated Financial Statements 19 - 45 Report of Independent Auditors 19 Selected Quarterly Financial Data 44
With the exception of the aforementioned information, the 1999 Annual Report to Shareholders is not deemed filed as part of this report. Financial statements other than those listed are omitted for the reason that they are not required or are not applicable. The following additional financial data should be read in conjunction with the consolidated financial statements in such 1999 Annual Report to Shareholders. (a)(2) FINANCIAL STATEMENT SCHEDULES Page For the years ended December 31, 1999, 1998 and 1997: Schedule II - Valuation and Qualifying Accounts 18 Schedules other than those listed are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. (a)(3) EXHIBITS The exhibits filed with this report are listed in the Exhibit Index which is submitted as a separate section of this report. (b) REPORTS ON FORM 8-K None (c) EXHIBITS See Item 14(a)(3) above. 10.9 The Company's National Master Freight Agreement covering over-the-road and local cartage employees of private, common, contract and local cartage carriers for the period of April 1, 1998 through March 31, 2003. (d) FINANCIAL STATEMENTS SCHEDULES The response to this portion of Item 14 is submitted as a separate section of this report. 15 16 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. ARKANSAS BEST CORPORATION BY: /s/ David E. Loeffler ------------------------------------ David E. Loeffler Vice President - Chief Financial Officer and Treasurer 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.
Signature Title Date --------- ----- ---- /s/ William A. Marquard Chairman of the Board, Director March 7, 2000 - ------------------------------------- --------------------------- William A. Marquard /s/ Robert A. Young, III Director, Chief Executive Officer March 7, 2000 - ------------------------------------- and President (Principal --------------------------- Robert A. Young, III Executive Officer) /s/ David E. Loeffler Vice President - Chief Financial Officer March 7, 2000 - ------------------------------------- and Treasurer --------------------------- David E. Loeffler /s/ Frank Edelstein Director March 7, 2000 - ------------------------------------- --------------------------- Frank Edelstein /s/ Arthur J. Fritz Director March 7, 2000 - ------------------------------------- --------------------------- Arthur J. Fritz /s/ John H. Morris Director March 7, 2000 - ------------------------------------- --------------------------- John H. Morris /s/ Alan. J. Zakon Director March 7, 2000 - ------------------------------------- --------------------------- Alan J. Zakon
16 17 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES ARKANSAS BEST CORPORATION
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - -------------------------------------------------------------------------------------------------------------------------- ADDITIONS BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS - BALANCE AT DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD - -------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1999: Deducted from asset accounts: Allowance for doubtful accounts receivable............ $ 7,051 $ 2,967 $ 2,664(A) $ 6,907(B) $ 5,775 ========================================================================================================================== Year Ended December 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts receivable............ $ 6,815 $ 4,275 $ 2,980(A) $ 7,019(B) $ 7,051 ========================================================================================================================== Year Ended December 31, 1997: Deducted from asset accounts: Allowance for doubtful ......... 7,926(B) accounts receivable ............ $ 4,750 $ 6,819 $ 3,235(A) $ 63(C) $ 6,815 ==========================================================================================================================
Note A - Recoveries of amounts previously written off. Note B - Uncollectible accounts written off. Note C - The allowance for doubtful accounts for Cardinal Freight Carriers, Inc. as of the date of sale. NOTE: ALL INFORMATION REFLECTED IN THE ABOVE TABLE HAS BEEN RESTATED TO EXCLUDE VALUATION ALLOWANCES OF DISCONTINUED OPERATIONS. 17 18 FORM 10-K -- ITEM 14(c) EXHIBIT INDEX ARKANSAS BEST CORPORATION The following exhibits are filed with this report or are incorporated by reference to previously filed material.
EXHIBIT NO. 3.1* Restated Certificate of Incorporation of the Company (previously filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 3.2* Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 4.1* Form of Indenture, between the Company and Harris Trust and Savings Bank, with respect to $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock (previously filed as Exhibit 4.4 to Amendment No. 2 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on January 26, 1993, Commission File No. 33-56184, and incorporated herein by reference). 4.2* Indenture between Carolina Freight Corporation and First Union National Bank, Trustee with respect to 6 1/4% Convertible Subordinated Debentures Due 2011 (previously filed as Exhibit 4-A to the Carolina Freight Corporation's Registration Statement on Form S-3 filed with the Commission on April 11, 1986, Commission File No. 33-4742, and incorporated herein by reference). 10.1*# Stock Option Plan (previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 10.2* First Amendment dated as of January 31, 1997 to the $346,971,321 Amended and Restated Credit Agreement dated as of February 21, 1996, among the Company as Borrower, Societe Generale as Managing Agent and Administrative Agent, NationsBank of Texas, N.A. as Documentation Agent and the Banks named herein as the Banks (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the Commission on February 27, 1997, Commission File No. 0-19969, and incorporated herein by reference). 10.3* First Amendment dated as of January 31, 1997, to the $30,000,000 Credit Agreement dated as of February 21, 1996, among the Company as Borrower, Societe Generale as Agent, and the Banks named herein as the Banks (previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K, filed with the Commission on February 27, 1997, Commission File No. 0-19969, and incorporated herein by reference).
18 19 FORM 10-K -- ITEM 14(c) EXHIBIT INDEX ARKANSAS BEST CORPORATION (CONTINUED)
EXHIBIT NO. 10.4*# Arkansas Best Corporation Performance Award Unit Program effective January 1, 1996 (previously filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File No. 0-19969, and incorporated herein by reference). 10.5* Second Amendment, dated July 15, 1997, to the $346,971,312 Amended and Restated Credit Agreement among the Company as Borrower, Societe Generale as Managing Agent and Administrative Agent, NationsBank of Texas, N.A., as Documentation Agent, and the Banks named herein as the Banks (previously filed as Exhibit 10.3 to the Company's current Report on Form 8-K, filed with the Commission on August 1, 1997, Commission File No. 0-19969, and incorporated herein by reference). 10.6* Interest-Rate Swap Agreement effective April 1, 1998 on a notional amount of $110,000,000 with Societe Generale (previously filed as Exhibit 10.1 to the Company's Form 10-Q filed with the Commission on May 13, 1998, Commission File No. 0-19969, and incorporated herein by reference). 10.7* $250,000,000 Credit Agreement dated as of June 12, 1998 with Societe Generale as Administrative Agent and Bank of America National Trust Savings Association and Wells Fargo Bank (Texas), N.A., as Co-Documentation Agents (previously filed as Exhibit 10.2 to the Company's Form 10-Q filed with the Commission on August 6, 1998, Commission File No. 0-19969, and incorporated herein by reference). 10.8*# The Company's Supplemental Benefit Plan (previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the Commission on December 22, 1999, Commission File No. 333-93381, and incorporated herein by reference). 10.9 The Company's National Master Freight Agreement covering over-the-road and local cartage employees of private, common, contract and local cartage carriers for the period of April 1, 1998 through March 31, 2003. 13 1999 Annual Report to Shareholders 21 List of Subsidiary Corporations 23 Consent of Ernst & Young LLP, Independent Auditors 27.1 Financial Data Schedule - For Year End - December 31, 1999 27.2 Restated Financial Data Schedule - For Year End - December 31, 1998 27.3 Restated Financial Data Schedule - For Year End - December 31, 1997
* Previously filed with the Securities and Exchange Commission and incorporated herein by reference. # Designates a compensation plan for Directors or Executive Officers. 19 EX-10.9 2 NATIONAL MASTER FREIGHT AGREEMENT 1 EXHIBIT 10.9 NATIONAL MASTER FREIGHT AGREEMENT COVERING OVER-THE-ROAD AND LOCAL CARTAGE EMPLOYEES OF PRIVATE, COMMON, CONTRACT AND LOCAL CARTAGE CARRIERS for the period of April 1, 1998 through March 31, 2003 covering: operations in, between and over all of the states, territories and possessions of the United States, and operations into and out of all contiguous territory. The _____________________________ (Company or Association) hereinafter referred to as the "EMPLOYER" and the TEAMSTERS NATIONAL FREIGHT INDUSTRY NEGOTIATING COMMITTEE representing Local Unions affiliated with the INTERNATIONAL BROTHERHOOD OF TEAMSTERS, and Local Union No. _____ which Local Union is an affiliate of the INTERNATIONAL BROTHERHOOD OF TEAMSTERS, agree to be bound by the terms and conditions of this Agreement. ARTICLE 1. PARTIES TO THE AGREEMENT Section 1. Employers Covered The Employer consists of Associations, members of Associations who have given authorization to the Associations to represent them in the negotiation and/or execution of this Agreement and Supplemental Agreements, and individual Employers who become signator to this Agreement and Supplemental Agreements as hereinafter set forth. The signator Associations enter into this Agreement and Supplemental Agreements as hereinafter set forth. The signator Associations represent that they are duly authorized to enter into this Agreement and Supplemental Agreements on behalf of their members under and as limited by their authorizations as submitted prior to negotiations. Section 2. Unions Covered The Union consists of any Local Union which may become a party to this Agreement and any Supplemental Agreement as hereinafter set forth. Such Local Unions are hereinafter designated as "Local Union." In addition to such Local Unions, the Teamsters National Freight Industry Negotiating Committee representing Local Unions affiliated with the International Brotherhood of Teamsters, hereinafter referred to as the "National Union Committee," is also a party to this Agreement and the agreements supplemental hereto. Section 3. Transfer of Company Title or Interest The Employer's obligations under this Agreement including Supplements shall be binding upon its successors, administrators, executors and assigns. The Employer agrees that the obligations of this Agreement shall be included in the agreement of sale, transfer or assignment of the business. In the event an entire active or inactive operation, or a portion thereof, or rights only, are sold, leased, transferred or taken over by sale, transfer, lease, assignment, receivership or bankruptcy proceedings, such operation or use of rights shall continue to be subject to the terms and conditions of this Agreement for the life thereof. Transactions covered by this provision include stock sales or exchanges, mergers, consolidations, spin-offs or any other method by which a business is transferred. It is understood by this Section that the signator Employer shall not sell, lease or transfer such run or runs or rights to a third party to evade this Agreement. In the event the Employer fails to require the purchaser, transferee, or lessee to assume the obligations of this Agreement, as set forth above, the Employer (including partners thereof) shall be liable to the Local Union(s) and to the employees covered for all damages sustained as a result of such failure to require the assumption of the terms of this Agreement until its expiration date, but shall not be liable after the purchaser, the transferee or lessee has agreed to assume the obligations of this Agreement. The obligations set forth above shall not apply in the event of the sale, lease or transfer of a portion of the rights comprising less than all of the signator Employer's rights to a non-signator company unless the purpose is to evade this Agreement. Corporate reorganizations by a signatory Employer, occurring during the term of this Agreement, shall not relieve the signatory Employer or the re-organized Employer of the obligations of this Agreement during its term. When a signator to this Agreement purchases rights from another signator, the provisions of Article 5 shall apply. The applicable layoff provisions of this Agreement shall apply. The Employer shall give notice of the existence of this Agreement to any purchaser, transferee, lessee, assignee, or other entity involved in the sale, merger, consolidation, acquisition, transfer, spin-off, lease or other transaction by which the operation covered by this Agreement or any part thereof, including rights only, may be transferred. Such notice shall be in writing, with a copy to the Local Union, at the time the seller, transferor or lessor makes the purchase and 2 sale negotiation known to the public or executes a contract or transaction as herein described, whichever first occurs. The Local Union shall also be advised of the exact nature of the transaction, not including financial details. The term rights shall include routes and runs. ARTICLE 2. SCOPE OF AGREEMENT Section 1. Master Agreement The execution of this National Master Freight Agreement on the part of the Employer shall apply to all operations of the Employer which are covered by this Agreement and shall have application to the work performed within the classifications defined and set forth in the Agreements supplemental hereto. Section 2. Supplements to Master Agreement (a) There are several segments of the trucking industry covered by this Agreement and for this reason Supplemental Agreements are provided for each of the specific types of work performed by the various classifications of employees controlled by this Master Agreement. All such Supplemental Agreements are subject to and controlled by the terms of this Master Agreement and are sometimes referred to herein as "Supplemental Agreements." All such Supplemental Agreements are to be clearly limited to the specific classifications of work as enumerated or described in each individual Supplement. In all cases involving the transfer of work and/or the merger of operations subject to the provisions of Article 8, Section 6 or Article 5, Section 2, where more than one Supplemental Agreement is involved and one or more of them contains provisions contrary to those set forth in Article 8, Section 6 or Article 5, Sections 2, the applicable terms and conditions of the NMFA shall supersede those of the contrary Supplemental Agreements, including the resolution of any seniority related grievances that may arise following approval of the involved transfer of work and/or merger of operations. (b) The parties shall establish four (4) Regional Area Iron and Steel and/or Truckload Supplements to the National Master Freight Agreement. The Employer and the Local Union, parties to this Agreement, may enter into an agreement whereby road drivers working under an Over-The-Road Supplemental Agreement have the opportunity to perform work covered by and subject to the above Regional Area Supplements, under conditions agreed upon. Such Supplement shall be submitted to the appropriate Regional Joint Area Committee. (c) The jurisdiction covered by the National Master Freight Agreement and its various Supplements thereto includes, without limitation, stuffing, stripping, loading and discharging of cargo or containers. This does not include loading or discharging of cargo or containers to or from vessels except in those instances where such work is presently being performed. Existing practices, rules and understandings, between the Employer and the Union, with respect to this work shall continue except to the extent modified by mutual agreement. Section 3. Non-covered Units This Agreement shall not be applicable to those operations of the Employer where the employees are covered by a collective bargaining agreement with a Union not signatory to this Agreement, or to those employees who have not designated a signatory Union as their collective bargaining agent. Card Check (a) When a majority of the eligible employees performing work covered by an Agreement designated by the National Negotiating Committee to be Supplemental to the National Master Freight Agreement execute a card authorizing a signatory Local Union to represent them as their collective bargaining agent at the terminal location, then, such employees shall automatically be covered by this Agreement and the applicable Supplemental Agreements. If an Employer refuses to recognize the Union as above set forth and the matter is submitted to the National Labor Relations Board or any mutually agreed upon process for determination, and such determination results in certification or recognition of the Union, all benefits of this Agreement and applicable Supplements shall be retroactive to the date of demand for recognition. In such cases the parties may by mutual agreement negotiate wages and conditions, subject to Regional Joint Area Committee approval. The parties agree that a constructive bargaining relationship is essential to efficient operations and sound employee relations. The parties recognize that organizational campaigns occur in bargaining relationships and that both parties are free to accurately state their respective positions concerning the organization of certain groups of employees. However, the parties also recognize that campaigns must be waged on the facts only. Accordingly, the parties will not engage in any personal attacks against Union or Company representatives or attacks against the Union or Company as an institution during the course of any such campaign. Additions to Operations: Over-The-Road and Local Cartage Supplemental Agreements (b) Notwithstanding the foregoing paragraph, the provisions of the National Master Freight Agreement and the applicable Over-the-Road and Local Cartage Supplemental Agreements shall be applied without evidence of union representation of the employees involved, to all subsequent additions to, and extensions of, current operations which adjoin and are controlled and utilized as a part of such current operation, and newly established terminals and consolidations of terminals which are controlled and utilized as a part of such current operation. If an Employer refuses to recognize the Union as above set forth and the matter is submitted to the National Labor Relations Board or any mutually agreed-upon process for determination, and such determination results in certification or recognition of the Union, all benefits of this Agreement and applicable Supplements shall be retroactive to the date of demand for recognition. The provisions of Article 32 - Subcontracting, shall apply to this paragraph. Extensions or additions to current operations, etc., which adjoin and are controlled and utilized as part of such current operation shall be subject to the jurisdiction of the appropriate Change of Operations Committee for the purpose of determining whether the provisions of Article 8, Section 6 - Change of Operations, apply and, if so, to what extent. 3 Section 4. Single Bargaining Unit The employees, Unions, Employers and Associations covered under this Master Agreement and the various Supplements thereto shall constitute one (1) bargaining unit and contract. It is understood that the printing of this Master Agreement and the aforesaid Supplements in separate Agreements is for convenience only and is not intended to create separate bargaining units. This National Master Freight Agreement applies to city and road operations, and other classifications of employment authorized by the signatory Employers to be represented by Employer Associations or Employers, where applicable, participating in national collective bargaining. The common problems and interest, with respect to basic terms and conditions of employment, have resulted in the creation of the National Master Freight Agreement and the respective Supplemental Agreements. Accordingly, the Associations and Employers, parties to this Agreement, acknowledge that they constitute a single national multi-employer collective bargaining unit, composed of the Associations named hereinafter and those Employers authorizing such associations to represent them for the purpose of collective bargaining, and solely to the extent of such authorization, and such other individual employers which have, or may, become parties to this Agreement. Section 5. Riders Upon the effective date of this Agreement, all existing or previously adopted Riders which provide less than the wages, hours, and working conditions specifically established by this Agreement and Supplemental Agreements shall become null and void. Thereafter, the specific provisions of this Agreement and applicable Supplemental Agreements shall apply without being subject to variance by Riders. This Section shall not be applied or interpreted to eliminate operational, dispatch, or working rules not specifically set forth in this Agreement and Supplemental Agreements. ARTICLE 3. RECOGNITION, UNION SHOP AND CHECKOFF Section 1. Recognition (a) The Employer recognizes and acknowledges that the Teamsters National Freight Industry Negotiating Committee and Local Unions affiliated with the International Brotherhood of Teamsters are the exclusive representatives of all employees in the classifications of work covered by this National Master Freight Agreement, and those Supplements thereto approved by the Joint National Negotiating Committees for the purpose of collective bargaining as provided by the National Labor Relations Act. Subject to Article 2, Section 3 - Non-covered Units, this provision shall apply to all present and subsequently acquired over-the-road and local cartage operations and terminals of the Employer. This provision shall not apply to wholly-owned and wholly independently operated subsidiaries which are not under contract with local IBT unions. "Wholly independently operated" means, among other things, that there shall be no interchange of freight, equipment or personnel, or common use, in whole or in part, of equipment, terminals, property, personnel or rights. Union Shop (b) All present employees who are members of the Local Union on the effective date of this subsection or on the date of execution of this Agreement, whichever is the later, shall remain members of the Local Union as a condition of employment. Union membership for purposes of this Agreement, is required only to the extent that employees must pay either (i) the Union's initiation fees and periodic dues or (ii) service fees which in the case of a regular service fee payer shall be equal to the Union's initiation fees and periodic dues, and in the case of an objecting service fee payer shall be the proportion of the initiation fees and dues corresponding to the portion of the Union's total expenditures that support representational activities. All present employees who are not members of the Local Union and all employees who are hired hereafter shall become and remain members of the Local Union as a condition of employment on and after the thirty-first (31st) calendar day following the beginning of their employment or on and after the thirty-first (31st) calendar day following the effective date of this subsection or the date of this Agreement, whichever is the later. An employee who has failed to acquire, or thereafter maintain, membership in the Union as herein provided, shall be terminated seventy-two (72) hours after his/her Employer has received written notice from an authorized representative of the Local Union, certifying that membership has been, and is continuing to be, offered to such employee on the same basis as all other members and, further, that the employee has had notice and opportunity to make all dues or initiation fee payments. This provision shall be made and become effective as of such time as it may be made and become effective under the provisions of the National Labor Relations Act, but not retroactively. For purposes of this Article, "present employees" and "employees who are hired hereafter" shall include "casual employees" as defined in Article 3, Section 2 of this Agreement. Such "casual employees" will be required to join the Union prior to their employment on or after the thirty-first (31st) calendar day following their first (1st) day of employment for any Employer signatory to this Agreement. Hiring (c) When the Employer needs additional employees, it shall give the Local Union equal opportunity with all other sources to provide suitable applicants, but the Employer shall not be required to hire those referred by the Local Union. Violations of this subsection shall be subject to the Grievance Committee. Any employment examination for applicants must test skills or physical abilities necessary for performance of the work in the job classification in which the applicant will be employed. Violations of this subsection shall be subject to the Grievance Committee. State Law (d) No provision of this Article shall apply in any state to the extent that it may be prohibited by state law. If under applicable state law additional requirements must be met before any such provisions may become effective, such additional requirements shall be first met. 4 Agency Shop (e) If any agency shop clause is permissible in any state where the provisions of this Article relating to the Union Shop cannot apply, the following Agency Clause shall prevail: (1) Membership in the Local Union is not compulsory. Employees have the right to join, not join, maintain, or drop their membership in the Local Union, as they see fit. Neither party shall exert any pressure on, or discriminate against, an employee as regards such matters. (2) Membership in the Local Union is separate, apart and distinct from the assumption by one of his/her equal obligation to the extent that he/she receives equal benefits. The Local Union is required under this Agreement to represent all of the employees in the bargaining unit fairly and equally without regard to whether or not an employee is a member of the Local Union. The terms of this Agreement have been made for all employees in the bargaining unit and not only for members in the Local Union, and this Agreement has been executed by the Employer after it has satisfied itself that the Local Union is the choice of a majority of the employees in the bargaining unit. Accordingly, it is fair that each employee in the bargaining unit pay his/her own way and assume his/her fair share of the obligations along with the grant of equal benefits contained in this Agreement. (3) In accordance with the policy set forth under subparagraphs (1) and (2) of this Section, all employees shall, as a condition of continued employment, pay to the Local Union, the employee's exclusive collective bargaining representative, an amount of money equal to that paid by other employees in the bargaining unit who are members of the Local Union, which shall be limited to an amount of money equal to the Local Union's regular and usual initiation fees, and its regular and usual dues. For present employees, such payments shall commence thirty-one (31) days following the effective date or on the date of execution of this Agreement, whichever is the later, and for new employees, the payment shall start thirty-one (31) days following the date of employment. Savings Clause (f) If any provision of this Article is invalid under the law of any state wherein this Agreement is executed, such provision shall be modified to comply with the requirements of state law or shall be renegotiated for the purpose of adequate replacement. If such negotiations shall not result in mutually satisfactory agreement, either party shall be permitted all legal or economic recourse. Employer Recommendation (g) In those instances where subsection (b) hereof may not be validly applied, the Employer agrees to recommend to all employees that they become members of the Local Union and maintain such membership during the life of this Agreement, to refer new employees to the Local Union representative, and to recommend to delinquent members that they pay their dues since they are receiving the benefits of this Agreement. Business agents shall be permitted to attend new employee orientations in right-to-work states. The sole purpose of the business agent's attendance is to encourage employees to join the Union. Future Law (h) To the extent such amendment may become permissible under applicable federal and state law during the life of this Agreement as a result of legislative, administrative or judicial determination, all of the provisions of this Article shall be automatically amended to embody the greater Union security provisions contained in the 1947-1949 Central States Area Over-The-Road Motor Freight Agreement, or to apply or become effective in situations not now permitted by law. No Violation of Law (i) Nothing contained in this Section shall be construed so as to require the Employer to violate any applicable law. Section 2. Probationary and Casual Employees (a) Probationary Employees (1) A probationary employee shall work under the provisions of this Agreement, but shall be employed on a trial basis as provided for in each Supplement. (2) During the probationary period, the employee may be terminated without further recourse; provided, however, that the Employer may not terminate the employee for the purpose of evading this Agreement or discriminating against Union members. A probationary employee who is terminated by the Employer during the probationary period and is then worked again at any time during the next full twelve (12) months at any of that Employer's locations within the jurisdiction of the Local Union covering the terminal where he/she first worked, except in those jurisdictions where the Local Union maintains a hiring hall or referral system, shall be added to the regular seniority list with a seniority date as of the date that person is subsequently worked. The rules contained in subsection (a)(2) are subject to provisions in the Supplements to the contrary. (3) Probationary employees shall be paid at the new hire rate of pay during the probationary period; however, if the employee is terminated by the Employer during such period, he/she shall be compensated at the full contract rate of pay for all hours worked retroactive to the first (1st) day worked in such period. (4) The Union and the Employer may agree to extend the probationary period for no more than thirty (30) days, but the probationary employee must agree to such extension in writing. (b) Casual Employees (1) A casual employee is an individual who is not on the regular seniority list and who is not serving a probationary period. A casual may be either a replacement casual or a supplemental casual as hereinafter provided. Casuals shall not have seniority status. Casuals shall not be discriminated against for future employment. 5 (2)a. Replacement casuals may be utilized by an Employer to replace regular employees when such regular employees are off due to illness, vacation or other absence, except when an absence of a regular employee continues beyond three (3) consecutive months, a replacement casual shall not thereafter be used to fill such absence, unless the Employer and the Local Union mutually agree to the continued use of a replacement casual. b. Where the Company is using casuals as vacation replacements for regular employees, and the Area Supplemental Agreement does not provide a method to add regular employees based on the use of casuals to replace vacation absence, the vacation schedules shall be broken into yearly quarters beginning January 1st, and subsequent vacation quarters shall begin on April 1st, July 1st, and October 1st thereafter. Starting with the quarter beginning April, 1991, and continuing each quarter thereafter, the Employer shall add one (1) additional employee to the regular seniority list for each sixty-five (65) vacation replacement days worked by a casual during each vacation quarter. The application of this formula shall not result in pyramiding. New employees shall be placed on the respective seniority lists on the first (1st) day of the following quarter unless there are employees in layoff status, in which case such new employees shall be placed on the respective seniority list at the time the laid-off employees are recalled from layoff status. Employees shall first be added to the regular seniority list from the preferential list, if applicable. Thereafter, employees to be added to the regular seniority list shall be determined by the respective Supplement and shall be subject to the probationary provisions of that Supplement. In the application of this formula, employees specifically designated under an appropriate reporting procedure to replace absence other than vacations shall not be included as vacation replacements. It is the intent of the parties, in the application of this formula, to add regular employees to the seniority list to replace employees on vacation where there is regular work opportunity for such additional employees. The implementation of this provision may raise issues particular to a respective Supplemental Agreement. Failure to resolve the issues, such Supplemental Negotiating Committee may agree to waive this provision, or submit the disputed issues to the National Grievance Committee. (3) Supplemental casuals may be used to supplement the regular work force as provided for in each respective Supplement. Once the number of new employees to be added as required in the Supplement is determined, the Employer must initiate the processing of the new probationary employees immediately, and complete such processing as provided for in the Supplements. (4) Unless waived in writing by any Joint Supplemental Negotiating Committee, all Supplements shall provide for a preferential casual hiring list and shall provide the qualifications for placement on such list. Casuals on the preferential hiring list shall be offered available extra work and future regular employment in seniority order by classification as among themselves. A preferential casual employee's seniority date shall be the date he/she becomes a regular employee; and such employee shall not be subject to any probationary period. Casual employees on the preferential hiring list shall have full access to the grievance procedure. The provisions of Article 3, Section 3, shall apply to casual employees on the preferential hiring list who are paid on the regular payroll. Local Unions employing an exclusive hiring hall under the terms of the Supplemental Agreement may petition the respective Joint Area Supplemental Negotiating Committee for approval to waive this subparagraph (4). (5) Casual road employees, where permitted by Supplemental Agreement, may only be used within the jurisdiction of their respective Regional Area and shall gain preferential status and/or regular seniority status as provided in the respective Supplement. (6) Any casual employee who declines regular employment shall be terminated without recourse and will not be used by the Employer for any further work. (7) a. Casual Employment The Employer agrees to give first opportunity for work as a casual employee to those employees on letter of layoff from an Employer member of the TMI multi-employer unit. This obligation shall apply only at terminals located within the jurisdiction of the employee's Local Union. The Local Union will furnish each Employer with the names, addresses, and telephone numbers of those laid off employees interested in casual work opportunity and the job each employee is qualified to perform. Where applicable, casual employment may not be offered to laid off employees under this provision ahead of preferential casuals, nor shall this provision supersede an established order of call in a supplemental agreement. b. Regular Employment The Employer agrees to offer regular employment to those employees on letter of layoff from an Employer member of the TMI multi-employer unit at other terminals located within the jurisdiction of the employees' Local Union who have made application for regular employment at the terminal offering regular employment. Employment shall be offered in accordance with the following order, unless the Supplemental Agreement or an agreed to practice provides a different order of call, in which case such other order of call shall prevail: 1. Preferential casuals, where applicable. 2. Employees of the Employer, on a seniority basis. 3. Employees of other TMI Employer members based on the date such employees made application. Employees hired into regular employment shall be paid in accordance with the new hire rate set forth in Article 36, herein and shall establish seniority in accordance with the applicable Supplemental Agreement. Employees who accrue seniority under this provision who are on layoff from another Employer shall forfeit all seniority rights at the terminal they are laid off from. Employees who accrue seniority under this provision who are on layoff from another terminal of the same Employer shall retain their seniority at the terminal they are laid off from until such time as recalled to that terminal. At that time, the employee must either accept recall and forfeit seniority at the new terminal or refuse recall and forfeit seniority at the terminal he/she is being recalled to. In order to be eligible for either casual or regular employment opportunity under this provision, the laid off employee must meet the minimum hiring standards established by the Employer and be otherwise qualified to perform the work available and must be able to report for work in compliance with the Employer's established call-time procedures. The Employer's hiring standards and examinations shall be applied uniformly to all applicants for employment. The Employer shall provide the hiring standards and examinations upon written request of the Local Union. Employees who are offered work opportunity under this provision must be able to furnish proof of their qualification to perform the work available. Any employment examination for applicants must test skills or physical abilities necessary for performance of the work in the job classification in which the applicant will be employed. Violation of this subsection shall be subject to the grievance procedure. 6 (8) Fringe benefits will be paid on casuals in accordance with the terms of the Supplemental Agreement. Minimum daily guarantees will be governed by the respective Supplemental Agreement. (9) A monthly list of all casual and/or probationary employees used during that month shall be submitted to the Local Unions by the tenth (10th) day of the following month. Such list shall show: a. the employee's name, address, and social security number; b. the date worked; c. the classification of work performed each date, and the hours worked; and, d. the name, if applicable, of the employee replaced. This list shall be compiled on a daily basis and shall be available for inspection by a Union representative and/or job shop steward. (c) Employment Agency Fees If employees are hired through an employment agency, the Employer is to pay the employment agency fee. However, if the Local Union was given equal opportunity to furnish employees under Article 3, Section ( 1) (c), and if the employee is retained through the probationary period, the fee need not be paid until the thirty-first (31st) day of employment. Section 3. Checkoff The Employer agrees to deduct from the pay of all employees covered by this Agreement the dues, initiation fees and/or uniform assessments of the Local Union having jurisdiction over such employees and agrees to remit to said Local Union all such deductions. Where laws require written authorization by the employee, the same is to be furnished in the form required. The Local Union shall certify to the Employer in writing each month a list of its members working for the Employer who have furnished to the Employer the required authorization, together with an itemized statement of dues, initiation fees (full or installment), or uniform assessments owed and to be deducted for such month from the pay of such member. The Employer shall deduct such amount within two (2) weeks following receipt of the statement of certification of the member and remit to the Local Union in one (1) lump sum within three (3) weeks following receipt of the statement of certification. The Employer shall add to the list submitted by the Local Union the names and Social Security numbers of all regular new employees hired since the last list was submitted and delete the names of employees who are no longer employed. Checkoff shall be on a monthly or quarterly basis at the option of the Union. The Local Union and Employer may agree to an alternative option to deduct Union dues bi-monthly. When an Employer actually makes a deduction for dues, initiation fees and assessments, in accordance with the statement of certification received from an appropriate Local Union, the Employer shall remit same no later than three (3) weeks following receipt of the statement of certification and in the event the Employer fails to do so, the Employer shall be assessed ten percent (10%) liquidated damages. All monies required to be checked off shall become the property of the entities for which it was intended at the time that such checkoff is required to be made. All monies required to be checked off and paid over to other entities under this Agreement shall become the property of those entities for which it was intended at the time that such payment or checkoff is required to be made. Where an employee who is on checkoff is not on the payroll during the week in which the deduction is to be made, or has no earnings or insufficient earnings during that week, or is on leave of absence, the employee must make arrangements with the Local Union and/or the Employer to pay such dues in advance. The Employer agrees to deduct from the paycheck of all employees covered by this Agreement voluntary contributions to DRIVE. DRIVE shall notify the Employer of the amounts designated by each contributing employee that are to be deducted from his/her paycheck on a weekly basis for all weeks worked. The phrase "weeks worked" excludes any week other than a week in which the employee earned a wage. The Employer shall transmit to DRIVE National Headquarters on a monthly basis, in one (1) check, the total amount deducted along with the name of each employee on whose behalf a deduction is made, the employee's social security number and the amount deducted from that employee's paycheck. The International Brotherhood of Teamsters shall reimburse the Employer annually for the Employer's actual cost for the expenses incurred in administering the weekly payroll deduction plan. The Employer will recognize authorization for deductions from wages, if in compliance with state law, to be transmitted to Local Union or to such other organizations as the Union may request if mutually agreed to. No such authorization shall be recognized if in violation of state or federal law. No deduction shall be made which is prohibited by applicable law. In the event that an Employer has been determined to be in violation of this Article by the decision of an appropriate grievance committee, and if such Employer subsequently is in violation thereof after receipt of seventy-two (72) hours' written notice of specific delinquencies, the Local Union may strike to enforce this Article. However, such strike shall be terminated upon the delivery thereof. Errors or inadvertent omissions relating to individual employees shall not constitute a violation. Upon written request of an employee, the Employer shall make payroll deductions for the purchasing of U. S. Savings Bonds. The Employer hereby agrees to participate in the Teamsters National 401(k) Savings Plan (the "Plan") on behalf of all employees represented for purposes of collective bargaining under this agreement. The Employer is not required to participate in the Teamsters National 401(k) if Teamsters employees were eligible to participate in an Employer sponsored 401(k) as of January 1, 1998. The Employer will make or cause to be made payroll deductions from participating employees' wages, in accordance with each employee's salary deferral election subject to compliance with ERISA and the relevant tax code provisions. The Employer will forward withheld sum to State Street Bank or its successor at such time, in such form and manner as required pursuant to the Plan and Declaration of Trust (the "Trust"). The Employer will execute a Participation Agreement with TNFINC and the Trustees of the Plan evidencing Employer participation in the Plan effective prior to any employee deferral being received by the Plan. Section 4. Work Assignments The Employers agree to respect the jurisdictional rules of the Union and shall not direct or require their employees or persons other than the employees in the bargaining units here involved, to perform work which is recognized as the work of the employees in said units. This is not to interfere with bona fide contracts with bona fide unions. 7 Section 5. The term "Local Union" as used herein refers to the IBT Local Union which represents the employees of the particular Employer for the purpose of collective bargaining at the particular place or places of business to which this Agreement and the Supplements thereto are applicable, unless by agreement of the Local Union involved, or a Change of Operations Committee, or a jurisdictional award under Article 30 herein, jurisdiction over such employees, or any number of them, has been transferred to some other Local Union, in which case the term Local Union as used herein shall refer to such other Local Unions. Nothing herein contained shall be construed to alter the multi-employer, multi-union unit or single contract status of this Agreement. Section 6. Electronic Funds Transfer If the Employer institutes an electronic funds transfer (EFT) system, employees may participate. ARTICLE 4. STEWARDS The Employer recognizes the right of the Local Union to designate job stewards and alternates from the Employer's seniority list. The authority of job stewards and alternates so designated by the Local Union shall be limited to, and shall not exceed, the following duties and activities: (a) The investigation and presentation of grievances with his/her Employer or the designated company representative in accordance with the provisions of the collective bargaining agreement; (b) The collection of dues when authorized by appropriate Local Union action; (c) The transmission of such messages and information, which shall originate with and are authorized by the Local Union or its officers, provided such message and information; (1) have been reduced to writing; or, (2) if not reduced to writing, are of a routine nature and do not involve work stoppages, slowdowns, refusal to handle goods, or any other interference with the Employer's business. Unless waived in writing, there shall be a steward or available bargaining unit member of the employee's choice present whenever the Employer meets with the employee about grievances or discipline or to conduct investigatory interviews. If a steward is unavailable, the employee may designate a bargaining unit member who is available at the terminal at the time of the meeting to represent him/her. Meetings or interviews shall not begin until the steward or designated bargaining unit member is present. An employee who does not want a Union steward or available bargaining unit member present at any meeting or interview where the employee has a right to Union representation must waive Union representation in writing. If the Union requests a copy of the waiver, the Employer shall promptly furnish it. Job stewards and alternates have no authority to take strike action, or any other action interrupting the Employer's business, except as authorized by official action of the Local Union. The Employer recognizes these limitations upon the authority of job stewards and their alternates, and shall not hold the Local Union liable for any unauthorized acts. The Employer in so recognizing such limitations shall have the authority to impose proper discipline, including discharge, in the event the job steward or his/her designated alternate has taken unauthorized strike action, slowdown or work stoppage in violation of this Agreement. The job steward, or his/her designated alternate, shall be permitted reasonable time to investigate, present and process grievances on the company property without loss of time or pay during his/her regular working hours without interruption of the Employer's operation by calling group meetings; and where mutually agreed to by the Local Union and the Employer, off the property or other than during his/her regular schedule without loss of time or pay. Such time spent in handling grievances during the job steward's or his/her designated alternate's regular working hours shall be considered working hours in computing daily and/or weekly overtime if within the regular schedule of the "job steward." The job steward, or his/her designated alternate, shall be permitted reasonable time off without pay to attend Union meetings called by the Local Union. The Employer shall be given twenty-four (24) hours' prior notice by the Local Union. ARTICLE 5. Section 1. Seniority Rights (a) The application of seniority which has been accrued herein shall be established in the Supplemental Agreements. (b) Seniority shall be broken only by discharge, voluntary quit, retirement, or more than a five (5) - year layoff. (c) This Section shall apply to all Supplemental Agreements. Section 2. Mergers of Companies-General (a) In the event the Employer is a party to a merger of lines, seniority of the employees who are affected thereby shall be determined by mutual agreement between the Employer and the Local Unions involved. In the application of this Section, it is immaterial whether the transaction is called a merger, purchase, acquisition, sale, etc. Further, it is also immaterial whether the transaction involves merely the purchase of stock of one (1) corporation by another, with two (2) separate corporations continuing in existence. (b) If such merger of companies results in the combination of terminals or over-the-road operations, a change of operations shall be submitted to the Co-Chairmen of the National Grievance Committee for assignment to an appropriate Change of Operations Committee established pursuant to Article 8, Section 6. The Change of Operations Committee shall retain jurisdiction for one (1) year after the effective date of the Committee decision and shall have the authority to amend its decision in the event of a substantial change in the amount of work to be performed at the terminals or over-the-road operations which were combined. 8 Combining of Terminals or Operations as a Result of Merger of Companies (c) In the application of this Section, when terminals or operations of two (2) or more companies are combined, as referred to above, the following general rules shall be applied by the Employer and the Local Unions, which general rules are subject to modification pursuant to the provisions of Section 4 of this Article: Active Seniority List (1) The active employee seniority rosters (excluding those employees on letter of layoff) shall be "dovetailed" by appropriate classification (i.e., road or city) in the order of each employee's full continuous classification (road or city) seniority date that the employee is currently exercising. (The term "continuous classification seniority" as used herein is defined as that seniority which the employee is currently exercising and has not been broken in the manner provided in Section 1 of this Article or by voluntary changes in domicile not directed, approved or ordered by a Change of Operations Committee.) The active "dovetailed" seniority roster shall be utilized first and until exhausted to provide employment at such combined terminal or operational location. Layoff Seniority list (2) In addition, the inactive seniority rosters (employees who are on letter of layoff) shall be similarly "dovetailed" by appropriate classification. If additional employees are required after the active list is exhausted, they shall be recalled from such inactive seniority roster and after recall such employees shall be "dovetailed" into the active seniority roster with their continuous classification (road or city) seniority dates they are currently exercising which shall then be exercised for all purposes. Seniority rosters previously combining job classifications shall be continued unless otherwise agreed. Temporary Authority (d) Where only temporary authority is granted in connection with any of the transactions described above, then separate seniority lists shall continue only when terminals or operations are not merged, unless otherwise agreed. The Employer which is to survive will assume the obligations of both collective bargaining agreements during the period of the temporary authority. In the event of temporary merger of operations which are contingent upon approval by regulatory agencies or on other stated conditions, the seniority of the involved employees shall continue to accrue with their original Employer during the period of temporary merger, so that if there is no final consummation of the merger, the seniority of such employees shall be continued with their respective employers. However, if, on the failure of final consummation and dissolution of the merger, one of the parties to the proposed merger discontinues the operations which were subject to such merger, the employees of such Employer shall be granted seniority rights for all purposes with the other Employer only for the period of time they were employed in such temporary merged operations. Purchase of Rights (e) If a merger, purchase, acquisition, sale, etc., constitutes merely the acquisition of permits or rights, without the purchase or acquisition of equipment or terminals, and/or without the consolidation of terminals or operations, or in the event of the purchase of rights during bankruptcy proceedings, the following shall apply: Where the purchasing company has a terminal operation at the domicile of the employees of the seller, the employees of the selling company shall be placed on a master seniority list, and the purchasing company or companies shall hire, after recall of the purchasing company's employees from layoff, such employees as needed for regular employment within the first twelve (12) calendar months after purchase or acquisition of permits and/or rights, and they shall be dovetailed with full seniority. If an employee refuses a bona fide offer of regular work opportunity with any of the purchasing companies, his/her name shall be removed from the list. No employee hired under this provision shall be required to serve a probationary period. After the expiration of the aforementioned twelve (12) calendar month period, the purchaser shall have no further obligation to the employees of the seller. However, if the purchasing or acquiring company does not have and/or continue a terminal or operation at the domicile of the employees of the seller, resulting in their layoff, such Employer shall place the laid-off employees on a master seniority list and such Employer shall, if and when additional regular employees are required, within a twelve (12) - calendar month period after purchase or acquisition, and providing its employees on layoff have been recalled, offer employment to such laid-off employees at the terminal locations or operations to which the work has been transferred. Any such laid-off employees accepting transfer shall be dovetailed in accordance with their terminal seniority for work purposes, including layoff, and holding company seniority for all fringes. If an employee refuses a bona fide offer of regular work opportunity with any of the purchasing companies, his/her name shall be removed from the list. No employee hired under this provision shall be required to serve a probationary period. After the expiration date of the aforementioned twelve (12) - calendar month period, the purchaser shall have no further obligation to the employees of the seller. The transferring employee shall be responsible for lodging and moving expenses. Exclusive Cartage Operations (f) If in connection with the transactions described in these rules the successor Employer determines to discontinue the use of a local cartage company, the employees of that local cartage company who have worked exclusively on the pickup and delivery service which is retained by the successor Employer shall be given the opportunity to continue to perform such service as an employee of such successor Employer, and shall have their seniority "dovetailed" as described in the above rules. Committee Authority (g) Area and/or State Committees created pursuant to Local Supplements which have previously established rules of seniority, not contrary to the provisions of such Supplements, and approved by the Joint Area Committee, may continue to apply such rules if such rules are reduced to writing. Section 3. Intent of Parties (a) The parties acknowledge that the above rules are intended solely as general standards and further that many factual situations will be presented which necessitate different application, modification or amendment. Accordingly, the parties acknowledge that questions of the application of seniority rights may arise which require different treatment and it is anticipated and understood that the Employers and Unions jointly involved and/or the respective grievance committees may mutually agree to such disposition of questions of seniority which in their judgment is appropriate under the circumstances. 9 (b) In all instances, the disposition of questions involving the application of seniority rights made by the parties pursuant to this Section may be presented to the appropriate grievance committees provided herein whose decisions shall be final and binding. Section 4. Equipment Purchases (a) The Employer shall not require as a condition of continued employment, that an employee purchase truck, tractor and/or tractor and trailer or other vehicular equipment, or that any employees purchase or assume any proprietary interest or other obligation in the business, except as referred to in Article 6, Section 2. The requirements of this provision shall be maintained during the renegotiation of this Agreement unless either party has terminated the Agreement in the manner provided. Highest Rates Prevail (b) If the minimum wage, hours and working conditions in the Company absorbed differ from those minimums set forth in this Agreement and Supplements thereto, the higher of the two shall remain in effect for the employees so absorbed. Cutting Seniority Board (c) The Union reserves the right to cut the road seniority board when the average weekly earnings fall to seven hundred dollars ($700.00) or less. This is not to be construed as imposing a limitation on earnings. After the Union notifies the Employer to cut the board and in the event that Employer refuses, the Union shall immediately submit the matter to the grievance procedure. In determining whether average weekly earnings will fall to seven hundred dollars ($700.00) or less, only the earnings of the lower twenty-five percent (25%) of the drivers on the seniority board, counting from the bottom up, shall be considered. The average shall be calculated for the thirty (30) day period preceding the Union's original request. After such calculation is made, the average earnings of the drivers for the top seventy-five percent (75%) of the seniority board must also average more than seven hundred dollars ($700.00) per week, or layoff shall be made in accordance with seniority. The above provisions shall also apply to extra board for sleeper drivers exclusively. Posting Seniority List (d) The Employer shall give the Local Union a seniority list at least every six (6) months. The Employer shall also post a seniority list at least once every six (6) months and shall maintain a current seniority roster at the terminal. Protest of any employee's seniority date or position on such list must be made in writing to the Employer within thirty (30) days after such seniority date or position first appears, and if no protests are timely made, the dates and positions posted shall be deemed correct. Any such protest which is timely made may be submitted to the grievance procedure. Section 5. Work Opportunity Over-the-road employees, who are on letter of layoff, shall be given an opportunity to transfer to permanent over-the-road employment (prior to the employment of new hires) occurring at other over-the-road domiciles of the Employer located within the Regional area provided they notify the Employer in writing of their interest in a transfer opportunity. The offer of transfer will be made in the order of continuous over-the-road seniority of the laid-off drivers domiciled within the Regional area. The Employer shall be required to make additional offers of transfer to an employee who has previously rejected a transfer opportunity provided the employee again notifies the Employer in writing of his/her continued interest in additional transfer opportunities. However, the Employer will only be required to make one transfer offer in any six (6) calendar month period. Any employee accepting such offer shall be paid at the employee's applicable rate of pay and shall be placed at the bottom of the seniority board for bidding and layoff purposes, but shall retain company seniority for fringe benefits only. A transferring employee shall pay his/her own moving expenses and shall, upon reporting to such new domicile, be deemed to have relinquished his/her right to return with seniority to the domicile from which he/she transferred. The provisions of this Section shall not supersede an established order of call/hiring in the Supplemental Agreement. ARTICLE 6. Section 1. Maintenance of Standards The Employer agrees, subject to the following provisions, that all conditions of employment in his/her individual operation relating to wages, hours of work, overtime differentials and general working conditions shall be maintained at not less than the highest standards in effect at the time of the signing of this Agreement, and the conditions of employment shall be improved whenever specific provisions for improvement are made elsewhere in this Agreement. Local Standards (a) The Local Unions and the Employer shall, within one hundred eighty (180) days following ratification of this Agreement, identify and reduce to writing, and submit to the appropriate Regional Joint Area Committee, those local standards and conditions practiced under this Article. Such standards and conditions when submitted in accordance with this Section shall be currently dated. Those local standards and conditions previously practiced hereunder which are not so submitted shall be deemed to have expired. The appropriate Regional Joint Area Committee shall, not later than ninety (90) days following ratification, adopt a procedure to consider the disposition of the local standards and conditions submitted including the right to appoint a subcommittee to make recommendations. The Regional Joint Area Committee shall provide to the parties the opportunity to present their views. The Regional Joint Area Committee shall have the sole discretion to determine the disposition of the submitted local standards and conditions which determination shall be final and binding. Individual Employer Standards (b) Individual Employers may during the life of this Agreement file with the appropriate Regional Joint Area Committee and request review of those individual standards and conditions claimed or practiced under this Article which exceed the provisions of this Agreement and Supplemental Agreements. The Regional Joint Area Committee shall develop a procedure to review the filing including the right to appoint a subcommittee to make recommendations. The Committee shall make every effort to adjust the matter. If the Committee reaches agreement concerning the disposition of the individual standards or conditions, the decision of the Committee shall be final and binding. In the event of deadlock, the submitted standards and/or conditions shall continue as practiced. 10 General (c) It is agreed that the provisions of this Article shall not apply to inadvertent or bona fide errors made by the Employer or the Union in applying the terms and conditions of this Agreement. Such bona fide errors may be corrected at any time. No other Employer shall be bound by the voluntary acts of another Employer when he/she may exceed the terms of this Agreement. Any disagreement between the Local Union and the Employer with respect to this matter shall be subject to the grievance procedure. This provision does not give the Employer the right to impose or continue wages, hours and working conditions less than those contained in this Agreement. Section 2. Extra Contract Agreements (a) The Employer agrees not to enter into any agreement or contract with its employees, individually or collectively, which in any way conflicts with the terms and provisions of this Agreement. Any such agreement shall be null and void. (b) Consistent with past interpretations made by the National Grievance Committee, wage reduction-job security plans or other programs which comply with guidelines established by the Teamsters National Freight Industry Negotiating Committee are not violative of this Section. Current wage reduction-job security plans established prior to April 1, 1998, shall be subject to a revote of the unit employees as provided in this Section within thirty (30) days of notice of ratification of the NMFA or as soon as is legally permissible after having been approved by TNFINC to conform with the guidelines established under this Section. Such current plans shall remain in effect until the later of expiration of the plan or until a replacement plan is approved by a unit employee vote as provided in this Section. Failure to obtain the required unit employee vote under this Section will result in restoration of full NMFA wages and wage related fringes effective April 1, 1998, or when legally permissible. Wage deduction under any Plan hereinafter adopted shall not exceed fifteen percent (15%) of the applicable wage rates, and such Plan shall be adopted only if approved by seventy-five percent (75%) of the employees voting by secret ballot (in which case all unit employees shall be covered by such Plan). See Wage Reduction-Job Security Plan Guidelines - Appendix A The new hire rate provided for in Appendix A - Wage Reduction-Job Security Plan shall be based on the designated percentage of the current wage rate. (c) Every profit-sharing plan, condition, or incentive plan of any type, whether or not it alters or amends the economic conditions contained in this Agreement, must be negotiated and agreed to by TNFINC prior to implementation. Nothing in this Section shall be construed to apply to existing safety programs or other prizes or bonus items the receipt of which do not alter the economic terms of this Agreement. Section 3. Workweek Reduction If either the Fair Labor Standards Act or the Hours of Service Regulations are subsequently amended so as to result in substantial penalties to either the employees or the Employer, a written notice shall be sent by either party requesting negotiations to amend those provisions which are affected. Thereafter, the parties shall enter into immediate negotiations for the purpose of arriving at a mutually satisfactory solution. In the event the parties cannot agree on a solution within sixty (60) days, or mutually agreed extensions thereof, after receipt of the stated written notice, either party shall be allowed economic recourse. Section 4. New Equipment Where new types of equipment and/or operations for which rates of pay are not established by this Agreement are put into use after April 1, 1998, within operations covered by this Agreement, rates governing such operations shall be subject to negotiations between the parties. In the event agreement cannot be reached within sixty (60) days after date such equipment is put into use, the matter may be submitted to the National Grievance Committee for final disposition. Rates agreed upon or awarded shall be effective as of the date equipment is put into use. The above provisions shall also apply in the event the law (state or federal) is changed to permit longer combination vehicles or aggregate weight increases of 8,000 pounds or more in the weight limits that are currently provided in the Surface Transportation Assistance Act of 1982. Employees expected to use computers will be trained to use them and will be paid for all training time. Employees expected to use computers will be given sufficient time to learn to use them. ARTICLE 7. LOCAL AND AREA GRIEVANCE MACHINERY Section 1. (a) Provisions relating to local, state and area grievance machinery are set forth in the applicable Supplements to this Agreement. Each Supplemental Agreement shall provide for a Regional Joint Area Review Committee. The Committee shall review and consider any case deadlocked by the Regional Joint Area Committee except suspension and discharge cases. The Regional Joint Area Review Committee shall consist of the Freight Coordinator from the applicable Region or a designee of the TNFINC Chairman and a designee of the Executive Director of TMI. The Committee shall have the authority to resolve any such deadlocked case either by review of the evidence presented to the Regional Joint Area Committee or by rehearing the case. The decisions of the Committee shall be final and binding. In the event the Committee is unable to resolve the deadlock, the case shall be referred to the National Grievance Committee. Unless otherwise provided in a Supplemental Agreement, discharge and suspension cases deadlocked by a Regional Joint Area Committee shall be automatically referred to the applicable Regional Arbitration Panel, whose decision shall be final and binding. The Regional Arbitration Panel shall consist of a Union representative designated by the Chairman of TNFINC and the Employer Chairman of the Regional Joint Area Committee or his/her designee and an impartial arbitrator. The procedures for selection of the arbitrator for the Regional Arbitration Panel and the cost of arbitration shall be determined by the Rules of Procedure of the Regional Joint Area Committee. Arbitration of discharge and suspension deadlocks will take place during the Regional Joint Area Committee session at which the cases were deadlocked. At the arbitration hearing before the Regional Arbitration Panel, the Employer's case will be 11 presented by a full-time employee of the Employer and the Union's case by a full-time employee of the Local Union, and the Rules of Procedure of the Regional Joint Area Committee shall apply. The Regional Arbitration Panel shall issue a "bench decision" at the conclusion of the grievance hearing. Either party, however, may request a clarification or further explanation of the previous decision rendered by the Regional Arbitration Panel. Where Supplements under the 1994-1998 NMFA provided for arbitration in discharge cases, the procedures for such arbitration shall be maintained under the 1998-2003 Agreement. (b) All grievances arising under the provisions of the Master Agreement (Articles 1-39) shall be filed directly with the appropriate Regional Joint Area Committee. The Regional Joint Area Committee shall have the authority to render a final and binding decision or direct the grievance to the appropriate lower level committee for hearing if the grievance is not properly claimed under the provisions of the Master Agreement. The Regional Joint Area Committee must hear and decide such cases within ninety (90) days of the filing of the grievance. Grievances arising under Article 9 - Protection of Rights, Article 29, Sections 1 or 2(a) and (b) - Substitute Service and Article 32, Subcontracting shall be expeditiously processed and may be heard at either regularly scheduled or specially called hearings. A grievance may be filed by any Region whose members are adversely affected by an alleged violation of Article 32, Section 4(b) occurring within its jurisdiction. (c) It is mutually agreed that the procedures for processing complaints concerning matters of highway and equipment safety shall be incorporated in the applicable Supplemental Agreement, in accordance with the guidelines established by the National Master Freight Safety and Health Committee provided for in Article 16. Special Joint Area Committees shall also be created in compliance with the provisions of Article 35, Sections 3 and 4. The procedure set forth in the local, state and area grievance machinery and in the national grievance procedure may be invoked only by the authorized Union representative or the Employer representative. Authorized representatives of the Union and/or Employer may file grievances alleging violation of this Agreement, under local grievance procedure, or as provided herein, unless provided to the contrary or otherwise mutually agreed in the Supplemental Agreement and/or respective committee rules of procedure. Time limitations regarding the filing of grievances, if not set forth in the respective Supplemental Agreements, must appear in the Rules of Procedure of the various grievance committees and shall apply equally to Employers and employees. The Rules of Procedure of the various committees established under the Agreement shall be subject to the review and approval of the National Grievance Committee. Section 2. Grievant's Bill of Rights All employees who file grievances under this Agreement and its Supplemental Agreements are entitled to have their cases decided fairly and promptly. In order to satisfy these objectives and promote confidence in the integrity of the grievance procedures, all employees who file grievances are entitled to the following Rights: 1. Grievants and stewards shall be informed by their Local Union of the time and place of the hearing. 2. Grievants and stewards are permitted to attend, at their own expense, the hearing in cases in which they are involved. 3. The Employer shall provide any information relevant to a grievance containing specific factual allegations within fifteen (15) days of receipt of a written request by the Local Union, steward or grievant. The Local Union or grievant shall provide any information relevant to such a grievance within fifteen (15) days of receipt of a written request by the Employer. 4. All cases involving a discharge or suspension shall be recorded, except for executive sessions. Transcriptions of these proceedings shall be prepared in response to written requests by the Local Union at the reasonable cost of transcription. No recording devices shall be used in any grievance committee proceeding except as specifically authorized under the Rules of Procedure or by mutual consent of the co-chairpersons. 5. All Employer and Union panel members for each case shall be identified prior to the hearing. No Employer or Union representative who is directly involved in a case may serve as a panel member except at a local level committee where there is only one Local Union subject to the jurisdiction of the committee. 6. A grievant or steward may request permission to present evidence or argument in support of the case in addition to the evidence or argument presented by the Local Union. 7. All grievance committees shall, upon request, issue a copy of the grievance decision or transcript pages containing the hearing proceedings and the decision to the grievant and/or a Local Union. 8. The Local Union and the Employer may postpone a case once each, and any further postponements must be approved by the co-chairpersons of the grievance committee. In those areas where there are presently local grievance committees, each party shall be entitled to one additional postponement at the local grievance committee level only. 9. Unless mutually agreed by the Local Union and the Company, Local Unions shall file all approved grievances with the appropriate grievance committee or association for decision no later than thirty (30) days after the date the Local Union receives the grievance. 10. A copy of the grievance committee Rules of Procedure, including the Grievant's Bill of Rights, must be provided, upon request, to the grievant prior to the commencement of the grievance hearing. Section 3. All Local, State and Area Grievance Committees established under Supplemental Agreements shall revise their Rules of Procedure to include the "Grievant's Bill of Rights" set forth in Section 2 above and shall submit their revised Rules of Procedure to the National Grievance Committee for approval no more than ninety (90) days after the effective date of this Agreement. The National Grievance Committee may revise, delete or add to the Rules of Procedure for a Supplemental Grievance Committee in any manner necessary to ensure conformity with the purposes and objectives of the Grievant's Bill of Rights. The decisions of the National Grievance Committee in this regard shall be final and binding. Section 4. Except in cases involving "cardinal" infractions under the applicable Supplemental Agreement, an employee to be discharged or suspended shall be allowed to remain on the job until the discharge or suspension is sustained under the grievance procedure. 12 Non-cardinal intent to discharge cases shall be docketed and scheduled to be heard at the next regularly scheduled Joint State/Supplemental Committee meeting. Section 5. Timely Payment of Grievances All monetary grievances that have been resolved either by decision or through settlement shall be paid within twenty-one (21) calendar days of formal notification of the decision or date of settlement. If an Employer fails to pay a monetary grievance in accordance with this Section, the Employer shall pay as liquidated damages to each affected grievant eight (8) hours straight time pay for each day the Employer delays payment, commencing the date the grievant(s) notified the Employer of such non-payment. ARTICLE 8. NATIONAL GRIEVANCE PROCEDURE Section 1. All grievances or questions of interpretations arising under this National Master Freight Agreement or Supplemental Agreements thereto shall be processed as set forth below. If such Supplemental Agreements provide for arbitration of discharges, such procedure shall be continued. (a) All factual grievances or questions of interpretation arising under the provisions of the Supplemental Agreement (or factual grievances arising under the National Master Freight Agreement), shall be processed in accordance with the grievance procedure of the applicable Supplemental Agreement. If upon the completion of the grievance procedure of the Supplemental Agreement the matter is deadlocked, the case shall be immediately forwarded to both the Employer and Union secretaries of the National Grievance Committee, together with all pertinent files, evidence, records and committee transcripts. Any request for interpretation of the National Master Freight Agreement shall be submitted directly to the Regional Joint Area Committee for the making of a record on the matter, after which it shall be immediately referred to the National Grievance Committee. Such request shall be filed with both the Union and Employer secretaries of the National Grievance Committee with a complete statement of the matter. (b) Any matter which has been referred pursuant to Section 1 (a) above, or any question concerning the interpretation of the provisions contained in the National Master Freight Agreement, shall be submitted to a permanent National Grievance Committee which shall be composed of an equal number of employer and union representatives. The National Grievance Committee shall meet on a regular basis, for the disposition of grievances referred to it, or may meet at more frequent intervals, upon call of the chairman of either the Employer or Union representatives on the National Grievance Committee. The National Grievance Committee shall adopt rules of procedure which may include the reference of disputed matters to subcommittees for investigation and report, with the final decision or approval, however, to be made by the National Grievance Committee. If the National Grievance Committee resolves the dispute by a majority vote of those present and voting, such decisions shall be final and binding upon all parties. Cases deadlocked by the National Grievance Committee shall be referred as provided in Section 2(b) below. Procedures relating to such referrals shall be included in the Rules of Procedure of the National Grievance Committee. The Employer may request the co-chairmen of the National Grievance Committee to appoint and convene a joint Employer and Union Committee which shall have the authority to approve uniform dispatch procedures and rules which shall apply to the individual company's over-the-road operations. No Employer signatory to this Agreement shall be permitted to have its own grievance procedure. Section 2. (a) The National Grievance Committee by majority vote may consider and review all questions of interpretation which may arise under the provisions contained in the National Master Freight Agreement which are submitted by either the Chairman of TNFINC or the Executive Director of TMI. The National Grievance Committee by majority vote shall have the authority to reverse and set aside all resolutions of grievances by any lower level grievance committee, arbitration panel or review committee involving or affecting the interpretation(s) of Articles 1-39 of the National Master Freight Agreement, in which case the decision of the National Grievance Committee shall be final and binding. A failure by the National Grievance Committee to reach a majority decision on a question concerning interpretation or on a review of a decision by a lower level grievance committee, arbitration panel or review committee shall not be considered a deadlock and will not be referred to the National Review Committee. In case of a failure to reach a majority decision in reviewing the decision of a lower level grievance committee, arbitration panel, or review committee, the decision of the lower level grievance committee, arbitration panel, or review committee shall stand as final and binding. (b) All grievances deadlocked at the National Grievance Committee shall be processed as set forth below. 1. All grievances shall be automatically referred to the National Review Committee, which shall consist of the Chairman of TNFINC, or his/her designee and the principal officer of TMI, or his/her designee. The National Review Committee shall have the authority to resolve any such deadlocked case either by review of the record presented to the National Grievance Committee or by rehearing the case. The decision of the Committee shall be final and binding. 2. In the event the National Review Committee is unable to resolve the deadlock, the case shall be referred to the National Dispute Resolution Panel whose decision shall be final and binding on all parties. 3. The National Dispute Resolution Panel shall consist of the Chairman of TNFINC or his/her designee and the Employer Chairman of the National Grievance Committee, or his/her designee, and an impartial neutral with recognizable freight industry background, including experience in working under the National Master Freight Agreement. The procedures for the selection of the neutral for the National Dispute Resolution Panel and the cost of the proceedings shall be determined by the Rules of Procedure of the National Grievance Committee. 4. At the hearing before the National Dispute Resolution Panel, the Employer's case will be presented by a full-time employee of the Employer and/or Employer representative on the National Grievance Committee and the Union's case by a designee of the Chairman of TNFINC and the Rules of Procedure of the National Grievance Committee shall apply. 5. The National Dispute Resolution Panel shall issue a "bench decision" at the conclusion of the grievance hearing. Either party, however, may request a clarification or further explanation of a previous decision rendered by the National Dispute Resolution Panel. 6. No lawyers will be permitted to present cases at any step of the grievance procedure. 13 7. The decision of any grievance committee or panel shall be specifically limited to the matters submitted to it and the grievance committee or panel shall have no authority in any manner to amend, alter or change any provision of the Agreement. 8. If the Employer or Union challenges in court a decision issued by any arbitrator, arbitration or dispute resolution panel provided for under this Agreement, the cost of the challenge, including the court costs and attorneys' fees, shall be paid by the losing party. Section 3. Work Stoppages (a) The parties agree that all grievances and questions of interpretation arising from the provisions of this Agreement shall be submitted to the grievance procedure for determination. Accordingly, no work stoppage, slowdown, walkout or lockout shall be deemed to be permitted or authorized by this Agreement except as provided in Section 3(b) and (c) below. A "representation dispute" in circumstances under which the Employer is not required to recognize the Union under this Agreement is not subject to the grievance procedure herein and the provisions of this Article do not apply to such dispute. (b) In the event an Employer is delinquent in its health & welfare or pension payments in the manner required by the applicable Supplemental Agreement, the Local Union shall have the right to take whatever action it deems necessary until such delinquent payments are made. The Local Union shall give the Employer a seventy-two (72) hour, (excluding Saturdays, Sundays, and holidays), prior written notice of the Local Union's authorization of strike action which notice shall specify the failure to make health & welfare or pension payments providing the basis for such strike authorization. In no event shall the Union have the right to strike over a dispute concerning the eligibility and/or payment of health & welfare or pension contributions by an Employer on behalf of specific individuals, and such disputes shall be subject to the grievance procedure. (c) Failure to comply with a decision rendered by a grievance committee, panel or arbitrator. The Local Union shall give the Employer a seventy-two (72) hour (excluding Saturday, Sunday and holidays) prior written notice of the Local Union's authorization of strike action, which notice shall specify the basis for the compliance failure. If the Employer believes that it is in compliance or that there is a clarification needed in order to comply, the matter of compliance and/or clarification shall be submitted to the grievance committee, panel or arbitrator that decided the case. The question of compliance or clarification shall be determined by the grievance committee, panel or arbitrator within forty-eight (48) hours after receipt of the Employer request. The forty-eight (48) hour period for the grievance committee, panel or arbitrator to determine the question of compliance or clarification shall run concurrently with the seventy-two (72) hour notice prior to a strike. The grievance committee, panel or arbitrator may meet telephonically to consider and decide questions of compliance or clarification. Section 4. (a) It is mutually agreed that the Local Union will, within two (2) weeks of the date of the signing of this Agreement, serve upon the Employer a written notice listing the Union's authorized representatives who will deal with the Employer, make commitments for the Local Union generally and, in particular, those individuals having the sole authority to act for the Local Union in calling or instituting strikes or any stoppages of work which are not in violation of this Agreement. The Local Union may from time to time amend its listing of authorized representatives by certified mail. The Local Union shall not authorize any work stoppages, slowdown, walkout, or cessation of work in violation of this Agreement. It is further agreed that in all cases of an unauthorized strike, slowdown, walkout, or any unauthorized cessation of work which is in violation of this Agreement the Union shall not be liable for damages resulting from such unauthorized acts of its members. In the event of a work stoppage, slowdown, walkout or cessation of work, not permitted by the provisions of Article 8, Section 3(a), alleged to be in violation of this Agreement, the Employer shall immediately send a wire or fax to the Freight Coordinator in the appropriate Regional Area and to the Chairman of TNFINC to determine if such strike, etc., is authorized. No strike, slowdown, walkout or cessation of work alleged to be in violation of this Agreement shall be deemed to be authorized unless notification thereof by telegram has been received by the Employer and the Local Union from such Regional Area. If no response is received by the Employer within twenty-four (24) hours after request, excluding Saturdays, Sundays, and holidays, such strike, etc., shall be deemed to be unauthorized for the purpose of this Agreement. In the event of such unauthorized work stoppage or picket line, etc., in violation of this Agreement, the Local Union shall immediately make every effort to persuade the employees to commence the full performance of their duties and shall immediately inform the employees that the work stoppage and/or picket line is unauthorized and in violation of this Agreement. The question of whether employees who refuse to work during such unauthorized work stoppages, in violation of this Agreement, or who fail to cross unauthorized picket lines at their Employer's premises, shall be considered as participating in an unauthorized work stoppage in violation of this Agreement may be submitted to the grievance procedure, but not the amount of suspension herein referred to. It is specifically understood and agreed that the Employer during the first twenty-four (24) - hour period of such unauthorized work stoppage in violation of this Agreement, shall have the sole and complete right of reasonable discipline, including suspension from employment, up to and including thirty (30) days, but short of discharge, and such employees shall not be entitled to or have any recourse to the grievance procedure. In addition, it is agreed between the parties that if any employee repeats any such unauthorized strike, etc., in violation of this Agreement, during the term of this Agreement, the Employer shall have the right to further discipline or discharge such employee without recourse for such repetition. After the first twenty-four (24) - hour period of an unauthorized stoppage in violation of this Agreement, and if such stoppage continues, the Employer shall have the sole and complete right to immediately further discipline or discharge any employee participating in any unauthorized strike, slowdown, walkout, or any other cessation of work in violation of this Agreement, and such employees shall not be entitled to or have any recourse to the grievance procedure. The suspension or discharge herein referred to shall be uniformly applied to all employees participating in such unauthorized activity. The Employer shall have the sole right to schedule the employee's period of suspension. The International Brotherhood of Teamsters, the Teamsters National Freight Industry Negotiating Committee, Joint Councils and Local Unions shall make immediate efforts to terminate any strike or stoppage of work as aforesaid which is not authorized by such organizations, without assuming liability therefor. For and in consideration of the agreement of the International Brotherhood of Teamsters, Teamsters National Freight Industry Negotiating Committee, Joint Councils and Local Unions affiliated with the International Brotherhood of Teamsters to make the aforesaid efforts to require Local Unions and their members to comply with the law or the provisions of this Agreement, including the provisions limiting strikes or work stoppages, as aforesaid, the Associations and Employers who are parties hereto agree that they will not hold the International Brotherhood of Teamsters, the Teamsters National Freight Industry Negotiating Committee, Joint Councils and Local Unions liable or sue them in any court or before any administrative tribunal for undertaking such efforts to terminate unauthorized strikes or stoppages of work as aforesaid or for undertaking such efforts to require Local Unions and their members to 14 comply with the law or the provisions of this Agreement, or for taking no further steps to require them to do so. It is further agreed that signator Associations and Employers will not hold the International Brotherhood of Teamsters, Teamsters National Freight Industry Negotiating Committee, Joint Councils or Local Unions liable or sue them in any court or before any administrative tribunal for such unauthorized work stoppages alleging condonation, ratification or assumption of liability for undertaking such efforts to terminate strikes or stoppages of work, or requiring Local Unions and their members to comply with the law or the provisions of this Agreement. The provisions of this Article shall continue to apply during that period of time between the expiration of this Agreement and the conclusion of the negotiations or the effective date of the successor Agreement, whichever occurs later, except as provided in Article 39. It is understood and agreed that failure by the International Brotherhood of Teamsters, Teamsters National Freight Industry Negotiating Committee, and/or Joint Councils to authorize a strike by a Local Union shall not relieve such Local Union of liability for a strike authorized by it and which is in violation of this Agreement. (b) The question of whether the International Union, Teamsters National Freight Industry Negotiating Committee, Joint Council or Local Union have met its obligation set forth in the immediately preceding paragraphs, or the question of whether the International Union, Teamsters National Freight Industry Negotiating Committee, and Joint Council or the Local Union, separately or jointly, participated in an unauthorized work stoppage, slowdown, walkout or cessation of work in violation of this Agreement by calling, encouraging, assisting or aiding such work stoppage, etc., in violation of this Agreement, or the question of whether an unauthorized strike provided by Article 8, Section 3(b) or (c) is in violation of this Agreement, or whether an Employer engaged in a lockout in violation of this Agreement, shall be submitted to the grievance procedure at the national level, prior to the institution of any damage suit action. When requested, the co-chairmen of the National Grievance Committee shall immediately appoint a subcommittee to develop a record by collecting evidence and hearing testimony, if any, on the questions of whether the International Union, Teamsters National Freight Industry Negotiating Committee, Joint Council or Local Union have met its obligations as aforesaid, or of Union participation or Employer lockout in violation of this Agreement. The record shall be immediately forwarded to the National Grievance Committee for decision. If a decision is not rendered within thirty (30) days after the co-chairmen have convened the National Grievance Committee, the matter shall be considered deadlocked. A majority decision of the National Grievance Committee on the questions presented as aforesaid shall be final and binding on all parties. If such majority decision is rendered in favor of one (1) or more of the Union entities, or the Employer, in the case of lockout, no damage suit proceedings on the issues set forth in this Article shall be instituted against such Union entity or such Employer. If, however, the National Grievance Committee is deadlocked on the issues referred to in this subsection 4(b), the issues must be referred to the National Dispute Resolution Panel for resolution prior to either party instituting damage suit proceedings. If the National Dispute Resolution Panel decides that a strike was unlawful, it shall not have the authority to assess damages. Except as provided in this subsection 4(b), agreement to utilize this procedure shall not thereafter in any way limit or constitute a waiver of the right of the Employer or Union to commence damage suit action. However, the use of evidence in this procedure shall not waive the right of the Employer or Union to use such evidence in any litigation relating to the strike or lockout, etc., in violation of this Agreement. There shall not be any strike, slowdown, walkout, cessation of work or lockout as a result of a deadlock of the National Grievance Committee on the questions referred to under this subsection 4(b) and any such activity shall be considered a violation of this Agreement. (c) In the event that an Employer, party to this Agreement, commences legal proceedings against the Union after the Union's compliance with the provisions of Article 8, Section 3(b) or (c), the Employer Associations will cooperate in the presentation to the court of the applicable majority grievance committee decision. (d) Nothing herein shall prevent the Employer or Union from securing remedies granted by law except as specifically set forth in subsection 4(b). Section 5. (a) In the event of strikes, work stoppages, or other activities authorized by Article 8, Section 3(b) or (c) of this Agreement, no interpretation of this Agreement or any Supplement thereto relating to the Employer's obligation to make health & welfare and/or pension contributions by any tribunal shall be binding upon the Union or affect the legality or lawfulness of the strikes unless the Union stipulates to be bound by such interpretation, it being the intention of the parties to resolve all questions of interpretation by mutual agreement. (b) It is the intention of the parties to resolve all grievances and requests for interpretation arising under this Agreement through the grievance procedure. However, it is understood and agreed that nothing herein shall prevent the Employer or Union from securing remedies in those circumstances where the application of this Agreement is contrary to law. Section 6. Change of Operations Change of Operations Committee (a) Present terminals, breaking points or domiciles shall not be transferred, changed or modified without the approval of an appropriate Change of Operations Committee. Such Committee shall be appointed in each of the Regional Areas, equally composed of Employer and Union representatives. The Change of Operations Committee shall have the authority to determine the seniority of the employees affected and such determination shall be final and binding. In the event a proposed change of operations includes the establishment of either a new or satellite terminal as a "combination" facility with a common city driver and dock seniority roster, when such change of operations results in the relocation or movement of city drivers and dock employees from an existing terminal recognizing separate (split) seniority rosters for city drivers and dock employees, the Change of Operations Committee shall have the authority to determine the conditions under which such a combination facility may be established, including but not limited to, the number of city drivers and dock employees who qualify, be allowed to follow the work to the new or satellite combination terminal, the implementation of training programs to qualify dock employees as city drivers and the seniority right of affected employees to either return to the "mother" terminal and/or claim additional driving positions at the satellite terminal within reasonable time periods following the establishment of such combination terminal, as determined by the Committee. Existing terminals that recognize separate city driver and dock seniority rosters (split terminals) shall not be converted to "combination" terminals unless and until such time as a majority of those affected employees agree to such conversion, in which case the Change of Operations Committee shall have the authority to determine the conditions under which such conversion shall be implemented. Such Committee, however, shall observe the Employer's right to designate domiciles and the operational requirements of the business. Where the Union raises the question as to whether or not certain proposed runs of excessive length can be made, the Employer must be prepared to submit objective evidence including DOT certification or logs and tapes that such runs have been tested and were made within the DOT hours of service regulations. Individual employees shall not be redomiciled more than once during the term of this Agreement as the result of an approved change of operations unless a merger, purchase, sale, acquisition or consolidation of employers is involved, or unless there is proven economic need as determined by the Change of Operations Committee based on factual evidence presented. 15 Pension and health & welfare contributions paid on behalf of a redomiciled employee shall be paid to the Funds to which the contributions were made prior to the employee's change of domicile, and the decisions of the Change of Operations Committee shall so specify. This Section does not apply to employees who voluntarily transfer to new domiciles, unless such transfer is a result of a Change of Operations Committee decision. Any dispute concerning the appropriate fund for an Employer's contribution on behalf of a redomiciled employee, pursuant to a Change of Operations Committee decision, shall be referred to the National Grievance Committee. The decision of the National Grievance Committee shall to the extent permitted by law, be final and binding on all affected parties, including the Trust Funds. The Change of Operations Committee shall also have jurisdiction for a period of twelve (12) months following the opening of a new terminal to consider the redomicile of employees who are laid off as a direct result of such opening of a terminal. The Committee shall also have jurisdiction over the closing of a terminal in regard to seniority, as well as to determine the conditions under which freight may or may not be interlined into the area of a vacated operations when necessary to retain major customers, including mandating the use of union carriers where available. In no event will the Employer be granted the authority to vacate a facility and interline the freight on a non-union subsidiary of the parent company. The above shall not apply within a twenty-five (25)-mile radius. The Change of Operations Committee shall have the authority to require a definition of primary and shared lanes, where applicable. The Change of Operations Committee shall not grant the Employer authority to relocate U.S. operations, work, or terminals to Mexico. Change of Operations Committee Procedure (b) The National Grievance Committee shall adopt Rules of Procedure concerning the application and administration of this Article. The Employer shall notify all affected Local Unions of the proposed change of operations at least twenty (20) calendar days prior to the hearing at the Regional Joint Area Committee, and the Employer and the Local Unions involved shall have a mutual responsibility to inform the employees subject to redomicile prior to such hearing in accordance with the practice and procedures agreed to in the respective Area Committee. Any exception or waiver of the aforesaid twenty (20) day period shall be mutually agreed to between the Employer and the Local Unions involved and approved by the Regional Area Change of Operations Committee. Moving Expenses (c) Where an employee is required to transfer to another domicile in order to follow employment as a result of a change of operations, the Employer shall move the employee and assume the responsibility for proven loss or damage to household goods due to such move, including insurance against loss or damage. Should any employee possess household items of unusual or extraordinary value which will be included in the move, such items shall be declared and an appraised value determined prior to the move. The Employer shall provide packing materials for the employee's household goods when requested or at the employee's request pay all costs and expenses of moving such household goods, including packing. The Employer shall pay reasonable expenses to demount and remount an employee's mobile home, if used as his/her residence and in such instance shall pay normal expenses to move such mobile home, including the use of other modes of transportation where required by law. An employee shall have a maximum of one (1) year to move in accordance with the provisions of an approved change of operations unless, prior to the expiration of such year, he/she requests, in writing, an extension for a reasonable period of time due to an unusual or special problem. The Employer shall provide lodging for the employee at the point of redomicile, not to exceed ninety (90) calendar days, and in addition, shall reimburse the employee thirty-five cents (35o) per mile to transport one (1) personal automobile to the new location. The Employer shall not be responsible for moving expenses if the employee changes his/her residence as a result of voluntary transfer. None of the Employer obligations set forth in this Subsection (c) - Moving Expenses shall apply to transfers of domiciles within a fifty (50)-mile radius. Change of Operations Seniority (d) The Change of Operations Committee established herein shall have the sole authority to determine questions of the application of seniority in those situations presented to it and in connection therewith the following general rules shall apply, subject, however, to modification as provided by Section 6(g) below: Closing, Partial Closing of Terminals-Transfer of Work (1)a. When branches, terminals, divisions or operations (hereinafter "terminal(s)") are closed or partially closed and the work of such terminal(s) is transferred, in whole or in part, to another terminal(s), the active employees (excluding those employees on letter of layoff) at the closed or partially closed terminal(s) shall have the right to bid into a master seniority roster (road or city) comprised of bidders from the active seniority rosters of closed or partially closed terminal(s) in the order of their continuous classification (road or city) seniority. Continuous classification seniority shall be defined as that seniority which the employee is currently exercising and has not been broken in the manner provided by Article 5, Section 1, or by voluntary changes in domicile not directed, approved or ordered by a Change of Operations Committee. Employees shall bid from the combined master seniority roster into openings at the terminal(s) into which work is being transferred. Employees so transferring shall be "dovetailed" into the appropriate active seniority roster at the new terminal(s) in the order of their continuous classification seniority. Such transfers shall be permitted prior to the recall of laid-off employees at such gaining terminal(s). If and when additional employees are required in excess of those who formed the combined active roster at the point of redomicile, employees on letter of layoff at that location shall be recalled. If recalled, such employees shall be "dovetailed" with their continuous classification seniority. In addition, the inactive seniority rosters (employees who are on letter of layoff) at the terminal(s) from which employees are being redomiciled shall be "dovetailed" into a master "laid off" seniority roster and such employees shall have the same opportunities to transfer to terminal(s) within the area of the Supplemental Agreement which are afforded to employees covered by the provisions of subparagraph 2(b) below. These inactive employees at the losing terminal(s) shall also be offered first work opportunity, in seniority order, at terminals into which work was transferred within the regional area where such employees were employed. Such inactive employees shall gain active seniority in accordance with the provisions of the applicable supplemental agreement. The use of such employees shall be subject to the order of call of the supplement. The employees' seniority date for bidding and layoff purposes shall be the date which they gain active status. The employee shall retain company seniority for fringe benefits only as of that date. 16 The senior driver voluntarily laid off at a losing domicile will be restored to the active board each time foreign drivers or casuals (where applicable) make ten (10) trips (tours of duty) within any thirty (30) calendar day period on a primary run of such domicile, not affected by a Change of Operations. b. The following seniority bidding procedures are to be applied in all change of operations cases that involve master pool bidding: 1. The Change of Operations Committee shall have the authority to establish a date for purposes of determining active and inactive (on letter of layoff or the equivalent thereof) employees at both gaining and losing locations. 2. Affected employees at losing locations shall be allowed to bid onto an active master pool seniority list on a dovetailed seniority basis. 3. At the time of the original bid, an employee on the active master pool seniority list shall be afforded the opportunity to bid any available position for which he/she is qualified at a gaining location in accordance with his/her seniority on the master pool seniority list. In the event the active employees at any given location elect not to bid the number of positions being lost at that particular location, inactive employees at that location, in accordance with their seniority, shall then be afforded the opportunity to bid as an active employee until the number of positions being lost at that particular location are filled. An employee who elects to "hold" as set forth in paragraph 4 below shall not be considered as filling a losing position. A successful bidder shall be dovetailed on the seniority list at the location he/she bids into. The number of successful bidders from any losing location shall not exceed, at the time of the original bid, the number of positions lost at that location as approved by the Change of Operations Committee. 4. An employee on the active master pool seniority list who does not have seniority to bid the location he/she desires in the initial bid may hold for such desired location and remain at his/her present domicile in such status as his/her bidding seniority will allow. Should an opening occur during the window period as set forth in the Change of Operations decision at the location to which he/she desired to transfer, he/she shall be afforded transfer opportunity in line with his/her bidding seniority. A successful bidder under this provision shall be dovetailed on the applicable seniority list at the location into which he/she bids and his/her moving expenses shall be paid in accordance with other transferring employees. The transfer provisions of this Section shall apply only during the window period as set forth in the Change of Operations decision. 5. An employee who elects to hold as set forth in Paragraph 4 above may hold for only one (1) location and must designate that location at the time of the original bid and may hold only for a position within the classification the employee has seniority to bid. If an employee refuses to accept an opportunity to claim a position he/she is holding for, the employee shall have no further claim to a position that may become available during the window period. 6. An employee who elects to hold, shall also be entitled to exercise seniority to claim a voluntary move under the provisions of Article 5, Section 5 herein, and in the event the employee accepts such a voluntary move, he/she shall retain his/her hold position at his/her home domicile during the remainder of the window period but shall forfeit any other seniority rights at his/her home domicile. Should a position become available at the location such employee is holding for and which the employee has seniority to successfully claim, moving expenses set forth in Article 8, Section 6(c) shall be computed from the employee's original home domicile. 7. There shall be a maximum one hundred twenty (120) calendar day window period from the date of implementation in all Changes of Operations only when the number of positions offered at gaining terminals do not equal the number of positions lost at the losing terminals. (a) Any openings which may occur at a gaining terminal during the window period shall be offered to those employees on the Master Pool Seniority list who have not been offered transfer opportunity under the provisions of Article 8, Section 6 before they are offered to employees who may have elected to "hold" as set forth in paragraph 4 above. (b) The window period established by the Change of Operations decision shall close if either of the following conditions is met: (a) the number of days and/or months of the window period as set forth in the Change of Operations decision has expired; or (b) all employees on the Master Pool Seniority list have been offered work opportunities pursuant to Article 8, Section 6. (c) However, with respect to those who bid to "hold", it is understood that such bids must remain open and any job opportunities that are clearly identifiable as a direct result of the Change of Operations must be offered, by seniority, to those qualified employees who bid to hold for that specific location for the length of the window period(s) (road/cartage) set forth in the Change of Operations decision even if the window period is closed as set forth in paragraph (b) above. (d) The Company shall determine whether an additional job opportunity is the direct result of the Change of Operations at the specific gaining domicile for which the employee is "holding". The Company shall so notify the employee's current Local Union and the gaining Local Union. The Company shall have the burden of proof in establishing whether or not an additional job opportunity is clearly the direct result of the Change of Operations at the specific gaining domicile for which the employee is "holding". Any grievance filed regarding the Company's decision to permit or deny a "hold" transfer shall be filed with the appropriate Regional Joint Area Committee to be heard by the Multi-Region Change of Operations Committee that held jurisdiction. 8. Employees who are qualified bidders on Long-Term Disability (LTD) at the time of bid shall be allowed to bid. If successful LTD bidders are unable to claim their bid on the date of implementation, a hold-down bid will be allowed. This hold-down bid will be offered to those remaining active employees at the LTD's current location, by classification, who have not been offered transfer opportunity under the Change of Operations. The successful hold-down bidder shall be dovetailed. When the LTD employee returns to work and claims his/her bid, the hold-down employee may either remain at the hold-down location with a bidding seniority date consistent with the date of transfer under the Change of Operations or return to his/her original location with his/her original bidding seniority date. The hold-down employee may not return to a location where the classification from which he/she bid has been eliminated. The Company shall not be responsible for the moving expense of the employee filling the hold-down bid, unless and until such time as it is determined that the employee on LTD will never be able to claim his bid and the hold-down bidder becomes a regular permanent employee at the hold-down location. Closing of Terminals-Elimination of Work (2)a. When a terminal(s) is closed and the work of such terminal(s) is eliminated, an employee who was formerly employed at another terminal shall have the right to return to such former terminal and exercise his/her continuous classification (road or city) seniority, provided he/she has not been away from such former terminal for more than a five (5)-year period. Layoff b. When a terminal(s) is closed and the work of such terminal (s) is eliminated, employees who are laid-off thereby shall be given first (1st) opportunity for available regular employment in the classification in which they are employed at the time of such layoff (prior to the employment of new hires but subject to the order of call/hiring of the Supplemental Agreement) occurring at any other terminal(s) of the Employer within the area of the Supplemental Agreement where such employee was employed provided they notify the Employer in writing of their interest in a transfer opportunity. The offer of transfer will be made in the order of continuous classification seniority of the laid off employees within the area of the Supplemental Agreement. The Employer shall be 17 required to make additional offers of transfer to an employee who has previously rejected a transfer opportunity provided the employee again notifies the Employer in writing of his/her continued interest in additional transfer opportunities. However, the Employer will only be required to make one transfer offer in any six (6) calendar month period. The obligation to offer such employment shall continue for a period of five (5) years from the date of closing. Any employee accepting such offer shall be employed at his/her applicable rate of pay and shall be placed at the bottom of the seniority board for bidding and layoff purposes, but shall retain company seniority for fringe benefits only. A transferring employee shall pay his/her own moving expenses. Opening of Terminals (3) When a new terminal(s) is opened (except as a replacement for existing operations or a new division in a locality where there are existing operations), the Employer shall offer to those employees, if any, affected thereby the opportunity to transfer to regular positions in the new terminal(s) in the order of such employee's continuous classification (road or city) seniority date as defined herein. Upon arrival at such new location, such employees shall be "dovetailed" with their continuous classification (road or city) seniority date together with other employees so transferring. This provision is not intended to cover situations where there is replacement of an existing operation or where a new division is opened in a locality where there is an existing terminal. In these latter situations, those employees laid off at the existing facilities shall have first (1st) opportunity for employment at the new operation in accordance with their continuous classification (road or city) seniority date, and upon arrival shall be similarly "dovetailed." If all regular full-time positions are not filled in this manner, then the provisions of the preceding paragraph shall apply. (4) When a Company which has an established Local Cartage Operation, which has been cleared by system OTR drivers, seeks to establish a new OTR domicile there, the Company shall first file for a Change of Operations giving transfer opportunity, with regard to the initial complement, to OTR drivers from those system OTR domiciles that previously serviced such Local Cartage Operation with reasonable regularity. Such transfer opportunity shall remain in effect for any additions to the initial complement for a period of not less than 120 calendar days, after which further additions to such complement shall be hired at the locality where such new OTR domicile was established. (5) Any employee redomiciled by an approved change of operations to another domicile shall upon reporting to such new domicile be deemed to have relinquished his/her right to return, with seniority, to the domicile from which he/she was transferred, except under another approved change of operations. Employees who avail themselves of the transfer privileges because they are on layoff at their original terminal may exercise their seniority rights if work becomes available at their original terminal during the five (5) year layoff period allowed them at their original terminal. (6) When an Employer's proposed Change of Operations offers a specific number of road positions at a gaining domicile, the Employer shall be required to make every good faith effort and use all practical means to hire qualified applicants to fill such offered positions that are left vacant because other employees affected by the Change have elected not to bid into that gaining domicile. The Employer's duty to hire under this provision is to use every reasonable means to advertise for qualified applicants and to meet with the affected Local Union(s) to seek qualified applicants. Nothing in this provision shall be construed to create an obligation that the Employer maintain or otherwise guarantee a specific number of employees at a gaining domicile. Any grievance concerning any issue which may arise under this provision shall be filed directly with the Multi-Region Change of Operations Committee. In the event it is determined by the Multi-Region Change of Operations Committee that the Employer has not made every good faith effort and used all practical means to hire qualified applicants for road positions as required under this provision, the Committee may require the Employer to hire qualified applicant(s) as outlined above. Definition of Terms (e) The term "continuous classification seniority" as used in this Agreement is defined as that seniority which the employee is currently exercising and has not been broken in the manner provided in Article 5, Section 1, or by voluntary changes in domicile not directed, approved or ordered by a Change of Operations Committee. Qualifications and Training (f) Employees, who are presently non-CDL qualified and elect to bid to transfer to a gaining terminal that requires CDL qualified employees, shall be provided a sixty (60) day training period in order to become CDL qualified. The training period shall commence from the date the employee becomes a successful bidder and the Company shall furnish training personnel and equipment at the location where the employee is currently domiciled or otherwise as mutually agreed to. If the employee fails to qualify during such sixty (60) day period, the employee shall forfeit his/her right to fill the bid and shall remain on the seniority list of the current domicile. Intent of Parties (g) The parties acknowledge that the above rules are intended solely as general standards and further that many factual situations will be presented which necessitate different application, modification or amendment. Accordingly, the parties acknowledge that questions of the application of seniority rights may arise which require different treatment and it is anticipated and understood that the Employers and Unions jointly involved and/or the respective grievance committees may mutually agree to such disposition of questions of seniority which in their judgment is appropriate under the circumstances. The Change of Operations Committees, as provided herein or in the Supplemental Agreements, shall have the authority to determine the application of seniority in those situations presented to them. In all cases, the seniority decisions of the Joint Committees, including the Change of Operations Committees and subcommittees established by the National Master Freight Agreement and the respective Supplemental Agreements, shall be final and binding. Section 7. Any grievance committee or panel, as constituted under this Agreement, shall have the jurisdiction and power to decide grievances which arose under the preceding agreements and supplements thereto. In doing so, the committees or panels shall follow the grievance procedure set forth in the 1998-2003 Agreement, but apply the contract under which the grievance arose. Section 8. Sleeper Cab Operations Unless specifically addressed in this Section, the provisions of the applicable Supplemental Agreement relating to Sleeper Cab Operations remain in full force and effect. 18 A. Solo Driving In cases where one driver is used to complete a sleeper cab trip, the drivers so used shall receive the full mileage rate of pay per unit mile traveled. In instances where such solo length of trip requires a rest period, as required by DOT hours of service, such driver shall be provided lodging for such rest period. However, in those instances where the driver is required to layover more then eight (8) hours to pick up sufficient hours to run, he will be paid for all time spent over eight (8) hours, provided such solo trip is not the result of sickness and/or accident. B. Work Rules The Local Union and Company shall meet and negotiate dispatch and/or work rules. If no agreement is reached, disputes shall be subject to the grievance machinery. C. Lay Point and Layover 1. The layover provision of this Section shall apply at only one (1) away-from-home terminal, and all times spent at all other points touched on a round trip from the home terminal, exclusive of meal time, shall be paid for at the full hourly rate to each driver. On any dispatch from the home terminal, the destination point, at which the layover provisions of this Section shall apply, shall be designated at the time of departure and shall not be changed, unless otherwise mutually agreed to by the parties. Drivers will be advised upon arrival whether they will turn or go to bed. If drivers are advised they are turning, the Company will have one (1) free hour at the lay point, in which to dispatch the drivers, provided there are safe, sanitary shower facilities, equipped with hot and cold water for showering. If the drivers are not dispatched within the above mentioned one (1) hour period, after arrival, they shall be paid for all time spent in excess of the one (1) hour free time at the applicable rate. If the team is relieved of duty on arrival and signs for eight (8) hours off and then is recalled within four (4) hours, they shall be compensated for all time spent. 2. Where sleeper cab drivers are required to layover away from their home terminal, layover pay shall commence following the twelfth (12th) hour after the end of the run. If a driver is held over the twelfth (12th) hour, the driver shall be guaranteed two (2) hours' pay, in any event for layover time. If the driver is held over more than two (2) hours, the driver shall receive layover pay for each hour held over up to eight (8) hours in the first twenty (20) of layover period, commencing after the run ends. This pay shall be in addition to the pay to which the driver is entitled if the driver is put to work at any time within the twenty (20) hours after the run ends. The same principle shall apply to each succeeding eighteen (18) hours, and layover pay shall commence after the tenth (10th) hour. D. Abuse of Free Time Whenever any Employer arbitrarily abuses the free time allowed in this Section, then this shall be considered to be a dispute and the same shall be subject to being handled in accordance with the grievance procedure set forth in this contract. E. Bedding and Linen Bedding and fresh linen for sleeper cabs shall be furnished and maintained by the Employer in a clean and sanitary condition. Complaints with respect to width, depth and condition of mattresses shall be subject to the grievance procedure. F. Sleeper Cab Equipment All sleeper cab equipment must be provided with air conditioning and heating appliances in accordance with Article 16, Section 6 of this Agreement. In the event of mechanical failure of such air conditioning and heating appliances, repairs shall be made at the first point of repair en route where qualified service is offered but drivers will not receive breakdown pay for repairs to air conditioners en route. G. Sleeper Cab Occupants Only two (2) drivers shall be permitted in sleeper cab equipment at any one time except in case of emergency, an Act of God, or where new type equipment is put into operation. In no event shall a master driver be in the cab in addition to the two (2) regular drivers for more than 300 miles or ten (10) hours. H. 1. Mark-off Procedure for Sleeper Cab Drivers In the event the Company and Local Union are unable to agree to a mark-off procedure, the following shall apply: (a) For purposes of time off, 1200 miles equals one (1) sleeper trip. (b) After completion of four (4) consecutive trips, the drivers will be entitled to forty-eight (48) hours off, plus an additional eight (8) hours DOT rest. The drivers may waive the forty-eight (48) hours off. (c) After completion of six (6) consecutive trips, the drivers will be entitled to seventy-two (72) hours off, plus an additional eight (8) hours DOT rest. Where drivers fail to exercise time off privilege after six (6) trips, they shall forfeit such time off, and the cycle will revert back to subsection (b). (d) Time off privileges may be exercised only at the completion of the fourth (4th), or sixth (6th) trips, or upon the drivers returning home. (e) The only exception to the above is that the Employer shall provide in the dispatch rules and/or procedures for thirty-six (36) consecutive hours off duty at the home terminal at least once a week unless otherwise agreed to, provided the driver has been on the board and required to be available. (f) Where only one driver of an established team marks off for any reason, other than (g) below, he shall remain off until his partner returns to the home terminal, except as otherwise mutually agreed. In those instances where an extra board driver makes a combination of single operation and sleeper operation trips, the driver(s) will earn two (2) tours for a complete sleeper trip. (g) Bid Team Drivers must take their earned time off at the same time as outlined in (b), (c) and (e). 2. Clearance Time Home Terminal Sleeper drivers are entitled to ten (10) hours off duty at their home domicile upon completion of each round trip exclusive of the two (2) hour call. 19 3. Turning in the Yard - Home Terminal When mutually agreed between the sleeper team and the Employer, sleeper teams may be allowed to turn in the yard at their home domicile provided the dispatch wheel is exhausted and/or there are no other sleeper teams rested and available for dispatch. When the Employer turns a sleeper team at their home domicile, any delay in excess of one (1) hour shall be compensable. I. Method of Dispatch - Foreign Domiciles Foreign Domiciled Sleeper teams shall be placed on a common rotating wheel at the time they arrive at a foreign domicile and shall be dispatched off that wheel on a first-in first-out basis; provided however, a team may be dispatched out of rotation when receiving a direct dispatch back to their home domicile. Such direct dispatch may include a drop and pick en route. When more than one team from a common home domicile is on the foreign wheel, the first team in shall be the team dispatched out of rotation. Sleeper teams who are put to bed at a foreign domicile shall be dispatched in accordance with the procedure herein; provided however, it shall not be a violation or the basis of a runaround claim, when a foreign team, whose home domicile is common to that of another team who is in bed at the foreign domicile, has been pre-dispatched on a via or to drop or pick through the foreign domicile in route to their home domicile. A foreign team may not however, be dispatched from a home domicile to a foreign domicile and then back to their home domicile (A-B-A) when another team from the same home domicile is in bed at the foreign domicile. J. Foreign Power Courtesy Dispatch It shall not be a violation or the basis of a runaround claim when a sleeper team is dispatched on a VIA or drop and pick through a foreign domicile where other sleeper teams or single drivers are domiciled when continuing in motion over their designated sleeper lane, or being dispatched to their home domicile. K. All sleeper teams must be sent to their home terminal on the third (3rd) dispatch unless otherwise mutually agreed to. L. National Sleeper Cab Grievance Committee The parties shall establish a National Sleeper Committee composed of four (4) Union representatives appointed by the Chairman of TNFINC and four (4) Employer representatives appointed by the Employer Chairman of the National Grievance Committee. The National Sleeper Committee shall establish rules of procedure to govern the manner in which proposed sleeper operations are to be heard, procedures for resolving sleeper issues and procedures for establishing prehearing guidelines. Any grievance concerning the application or interpretation of this Section shall be referred to the National Sleeper Committee for resolution. If the National Sleeper Committee is unable to reach a decision on an interpretation or grievance, the issue will be referred to the National Grievance Committee. ARTICLE 9. PROTECTION OF RIGHTS Section 1. Picket Lines: Sympathetic Action It shall not be a violation of this Agreement, and it shall not be cause for discharge, disciplinary action or permanent replacement in the event an employee refuses to enter upon any property involved in a primary labor dispute, or refuses to go through or work behind any primary picket line, including the primary picket line of Unions party to this Agreement, and including primary picket lines at the Employer's places of business. Section 2. Struck Goods It shall not be a violation of this Agreement and it shall not be cause for discharge, disciplinary action or permanent replacement if any employee refuses to perform any service which his/her Employer undertakes to perform as an ally of an Employer or person whose employees are on strike and which service, but for such strikes, would be performed by the employees of the Employer or person on strike. Section 3. Subject to Article 32 - Subcontracting, hereof, the Employer agrees that it will not cease or retrain from handling, using, transporting, or otherwise dealing in any of the products of any other Employer or cease doing business with any other person, or fail in any obligation imposed by the Motor Carriers Act or other applicable law, as a result of individual employees exercising their rights under this Agreement or under law, but the Employer shall, notwithstanding any other provision in this Agreement, when necessary, continue doing such business, including pickup or delivery to or from the Employer's terminal and to or from the premises of a shipper or consignee. Section 4. The layover provision of the applicable Supplemental Agreement shall apply when the Employer knowingly dispatches a road driver to a terminal at which a primary picket line has been posted as a result of the exhaustion of the grievance procedure, or after proper notification of a picket line permitted by the collective bargaining agreement, or economic strikes occurring after the expiration of collective bargaining agreements, or to achieve a collective bargaining agreement. In such event and upon his/her request, a driver shall be provided first class public transportation to his/her home terminal, plus be paid a minimum of eight (8) hours or actual time spent while returning, whichever is greater. The Employer shall determine the mode of transportation to be utilized. ARTICLE 10. LOSS OR DAMAGE Section 1. In the event loss, damage or theft of freight, equipment, materials, or supplies is incurred as a direct result of a willful gross negligent act by an employee in the performance of assigned work, when such act knowingly may result in such loss, damage or theft, the employee may be held responsible for such acts and may be required to assume liability for any such loss, damage or theft, in whole or in part. The term "willful, gross negligent acts" is intended to 20 describe independent actions of any employee who knowingly violates established rules or policies that, when adhered to, clearly prevent loss, damage or theft described herein. Employees shall not be held responsible or required to assume liability for loss or damage or theft unless clear proof of willful, gross negligence is shown. In no event will an employee be held responsible for, or required to assume any liability for any loss, damage or theft when performing assigned work in a manner as specifically instructed by a supervisor. This Article shall not be utilized in any manner to hold an employee liable for any loss or damage of equipment under any conditions or for any damage to cargo as a result of a vehicular accident. Section 2. Prior to an employee being charged with the responsibility and liability for any loss, damage or theft because of willful gross negligent acts on the part of the employee, a hearing shall be held with the Local Union, the employee and the Employer. Employees who are found to be liable and required to make restitution for such liability, shall not then be subject to any further disciplinary action. Any disputes between the parties may be referred to the grievance procedure of the applicable Area Supplemental Agreement and the National Master Freight Agreement. ARTICLE 11. BONDS AND INSURANCE Should the Employer require any employee to give bond, cash bond shall not be compulsory, and any premium involved shall be paid by the Employer. The primary obligation to procure the bonds shall be on the Employer. If the Employer cannot arrange for a bond within ninety (90) days, it must so notify the employee in writing. Failure to so notify shall relieve the employee of the bonding requirement. If proper notice is given, the employee shall be allowed thirty (30) days from the date of such notice to make his/her own bonding requirements, standard premiums only on said bond to be paid by the Employer. A standard premium shall be that premium paid by the Employer for bonds applicable to all other of its employees in similar classifications. Any excess premium is to be paid by the employee. Cancellation of a bond after once issued shall not be cause for discharge unless the bond is cancelled for cause which occurs during working hours, or due to the employee having given a fraudulent statement in obtaining said bond. Every driver must maintain a valid chauffeur's license and be covered by insurance. If an Employer cannot cover a driver under an existing fleet policy, the Employer will promptly apply to the state assigned risk-pool to provide any comparable coverage. During the pendency of the application and until insurance is obtained, the driver will not be terminated, but will be taken out of driving service. When any comparable insurance is obtained, the employee will be responsible for paying any excess over the standard charges. ARTICLE 12. UNIFORMS The Employer agrees that if any employee is required to wear any kind of uniform as a condition of his/her continued employment, such uniform shall be furnished and maintained by the Employer, free of charge, at the standard required by the Employer. Said uniforms shall be made in the United States by union vendors, if possible. The Employer shall replace all clothing, glasses, hearing aids and/or dentures not covered by company insurance or worker's compensation which are destroyed or damaged in a wreck or fire with company equipment. The Employer has the right to establish and maintain reasonable standards for wearing apparel and personal grooming. ARTICLE 13. PASSENGERS No driver shall allow anyone, other than employees of the Employer who are on duty, to ride on his truck except by written authorization of the Employer, or except in cases of emergency arising out of disabled commercial equipment or an Act of God. No more than two (2) people shall ride in the cab of a tractor unless required by government agencies or the necessity of checking of equipment. This shall not prohibit drivers from picking up other drivers, helpers or others in wrecked or broken down motor equipment and transporting them to the first (1st) available point of communication, repair, lodging or available medical attention. Nor shall this prohibit the transportation of other drivers from the driver's own company at a delivery point or terminal to a restaurant for meals. ARTICLE 14. COMPENSATION CLAIMS Section 1. Compensation Claims (a) The Employer agrees to cooperate toward the prompt disposition of employee on-the-job injury claims. The Employer shall provide worker's compensation protection for all employees even though not required by state law, or the equivalent thereof, if the injury arose out of or in the course of employment. (b) At the time an injury report is turned in, the Employer shall provide the injured employee with an information sheet briefly outlining the procedure for submitting a worker's compensation claim to include the name, address and phone number of the company's worker's compensation representative and other pertinent information relative to claim payment. (c) An employee who is injured on the job, and is sent home, or to a hospital, or who must obtain medical attention, shall receive pay at the applicable hourly rate for the balance of his/her regular shift on that day. An employee who has returned to his/her regular duties after sustaining a compensable injury who is required by the worker's compensation doctor to receive additional medical treatment during his/her regularly scheduled working hours shall receive his/her regular hourly rate of pay for such time. (d) Road drivers sustaining an injury while being transported in company-provided transportation for Company purposes at a layover terminal shall be considered as having been injured on the job. 21 (e) In the event that an employee sustains an occupational illness or injury while on a run away from his/her home terminal, the Employer shall provide transportation by bus, train, plane, or automobile to his/her home terminal if and when directed by a doctor. (f) The Employer agrees to provide any employee injured locally transportation at the time of injury, from the job to the medical facility and return to the job, or to his/her home if required. (g) In the event of a fatality arising in the course of employment, while away from the home terminal, the Employer shall return the deceased to his/her home at the point of domicile. (h) The Employer may publish reasonable safety rules and procedures and provide the Local Union with a copy. Failure to observe such reasonable rules and/or procedures shall subject the employee to disciplinary action in accordance with the disciplinary procedures in the applicable Supplemental Agreement. However, the time limitation relative to prior offenses shall be waived to permit consideration of the employee's entire record of failure to observe reasonable safety rules and/or procedures resulting in lost time personal injuries. This provision does not apply to vehicular accidents. Section 2. Modified Work (a) The Employer may establish a modified work program designed to provide temporary opportunity to those employees who are unable to perform their normal work assignments due to a disabling on-the-job injury. Recognizing that a transitional return-to-work program offering both physical and mental therapeutic benefits will accelerate the rehabilitative process of an injured employee, modified work programs are intended to enhance worker's compensation benefits and are not to be utilized as a method to take advantage of an employee who has sustained an industrial injury, nor are they intended to be a permanent replacement for regular employment. (b) Implementation of a modified work program shall be at the Employer's option and shall be in strict compliance with applicable federal and state worker's compensation statutes. Acceptance of modified work shall be on a voluntary basis at the option of the injured employee. However, refusal to accept modified work by an employee, otherwise entitled to worker's compensation benefits, may result in a loss or reduction of such benefits as specifically provided by the provisions of applicable federal or state worker's compensation statutes. Employees who accept modified work shall continue to be eligible to receive "temporary partial" worker's compensation benefits as well as all other entitlements as provided by applicable federal or state worker's compensation statutes. (c) At facilities where the Employer has a modified work program in place, temporary modified assignments shall be offered in seniority order to those regular full time employees who are temporarily disabled due to a compensable worker's compensation injury and who have received a detailed medical release from the attending physician clearly setting forth the limitations under which the employee may perform such modified assignments. Once a modified work assignment is made and another person is injured, the second person must wait until a modified work opening occurs, regardless of seniority. All modified work assignments must be made in strict compliance with the physical restrictions as outlined by the attending physician. All modified work program candidates must be released for eight (8) hours per day, five (5) days per week. The Employer at its option, may make a modified work offer of less than eight (8) hours per day where such work is expected to accelerate the rehabilitative process and the attending physician recommends that the employee works back to regular status or up to eight (8) hours per day by progressively increasing daily hours. A copy of any release for modified work must be given to the employee before the modified work assignment begins. It is understood and agreed that those employees who, consistent with professional medical evaluations and opinion, may not be expected to receive an unrestricted medical release, or whose injury has been medically determined to be permanent and stationary, shall not be eligible to participate in a modified work program. In the event of a dispute related to conflicting medical opinion, such dispute shall be resolved pursuant to established worker's compensation law and/or the method of resolving such matters as outlined in the applicable Supplemental Agreement. In the absence of a provision in the Supplemental Agreement, the following shall apply: When there is a dispute between two (2) physicians concerning the release of an employee for modified work, such two (2) physicians shall immediately select a third (3rd) neutral physician within seven (7) days, whose opinion shall be final and binding on the Employer, the Union and the employee. The expense of the third (3rd) physician shall be equally divided between the Employer and the Union. Disputes concerning the selection of the neutral physician or back wages shall be subject to the grievance procedure. For locations where the Employer intends to implement a modified work program or has a modified work program in place, the Local Union shall be provided with a copy of the current form(s) being used for employee evaluation for release and general job descriptions. This information shall be general in nature, not employee specific. When a modified work assignment is made, the employee shall be provided with the hours and days he/she is scheduled to work as well as the nature of the work to be performed in writing. A copy of this notice shall also be submitted to the Local Union. An employee who is placed in a modified work position may be subject to medical evaluation(s) by a physician selected by the Employer to determine if the modified work being performed is accelerating the rehabilitative process as anticipated by Section 2 above. In the event such medical evaluation(s) determine that the rehabilitative process is not being accelerated, the employee shall have the right to seek a second opinion from a physician of his choosing. Any disputes regarding conflicting medical claims shall be resolved in accordance with the provisions outlined above. The employee may be removed from the modified work program based upon final medical findings under this procedure. Employees so removed shall not have their workers' compensation benefits affected because of such removal. In the event the employee's temporary disability workers' compensation benefit is subject to reduction by virtue of an applicable Federal or State statute, the Employer shall pay the difference between the amount of the reduced temporary workers' compensation benefit to which the employee would be entitled. (d) Modified work shall be restricted to the type of work that is not expected to result in a re-injury and which can be performed within the medical limitations set forth by the attending physician. In the event the employee, in his/her judgment, is physically unable to perform the modified work assigned, he/she shall be either reassigned modified work within his/her physical capabilities or returned to full "temporary total" worker's compensation benefits. In the event a third (3rd) party insurance carrier refuses to reinstate such employee to full temporary total disability benefits, the Employer shall be required to pay the difference between the amount of the benefit paid by such third (3rd) party insurer and full total temporary disability benefits. Determination of physical capabilities shall be based on the attending physician's medical evaluation. Under no conditions will the injured employee be required to perform work at that location subject to the terms and conditions of the National Master Freight Agreement or its Area Supplemental Agreements. Prior to acceptance of modified work, the affected employee shall be furnished a written job description of the type of work to be performed. 22 (e) The modified workday and workweek shall be established by the Employer within the limitations set forth by the attending physician. However, the workday shall not exceed eight (8) hours, inclusive of coffee breaks where applicable and exclusive of a one-half (1/2) hour meal period and the workweek shall not exceed forty (40) hours, Monday through Friday, or Tuesday through Saturday, unless the nature of the modified work assignment requires a scheduled workweek to include Sunday. Whenever possible, the Employer will schedule modified work during daylight hours, Monday through Friday, or during the same general working hours and on the same workweek that the employee enjoyed before he/she became injured. In the case of an employee whose workdays and/or hours routinely varied, the Employer will schedule the employee based on the availability of the modified assignment being offered. Any alleged abuse of the assignment of workdays and work hours shall be subject to the grievance procedure. (f) Modified work time shall be considered as time worked when necessary to satisfy vacation and sick leave eligibility requirements as set forth in the National Master Freight Agreement and/or its applicable Area Supplemental Agreements. In addition to earned vacation pay as set forth in the applicable Area Supplemental Agreements, employees accepting modified work shall receive prorated vacation pay for modified work performed based on the weekly average modified work pay. The only time modified work is used in prorating vacation is when the employee did not qualify under the applicable Supplemental Agreement. Holiday pay shall first be paid in accordance with the provisions of the applicable Supplemental Agreement as it relates to on-the-job injuries. Once such contractual provisions have been satisfied, holidays will be paid at the modified work rate which is the modified work wage plus the temporary partial disability benefit. Sick leave and funeral leave taken while an employee is performing modified work will be paid at the modified work rate, which is the modified work wage plus the temporary partial disability benefit. Unused sick leave will be paid at the applicable contract rate where the employee performed modified work and qualified for the sick leave during the contract year. (g) The Employer shall continue to remit contributions to the appropriate health & welfare and pension trusts during the entire time period employees are performing modified work. The payment of health & welfare and pension contributions while the employee is on modified work is not included in the health & welfare and pension contributions required by the Supplement when an employee is off work on workers' compensation. Continuation of such contributions beyond the period of time specified in the Supplemental Agreement for on-the-job injury shall be required. Provisions of this Section shall not be utilized as a reason to disqualify or remove an employee from the modified work program. (h) Employees accepting modified work shall receive temporary partial benefits as determined by each respective state workers' compensation law, plus a modified work wage when added to such temporary partial benefit, shall equal not less than eighty-five percent (85%) of forty (40) hours' pay he/she would otherwise be entitled to under the provisions of the applicable Area Supplemental Agreement for the first six (6) months from the date the modified work assignment commences. After this initial six (6) - month period, the percentage shall increase to ninety percent (90%) for the duration of each individual modified work assignment. The Employer shall not refuse to assign modified work to employees based solely on such employees reaching the ninety percent (90%) wage level. Such refusal shall be considered an abuse of the program and shall be subject to the grievance procedure. Modified work assignments beginning or ending within a workweek shall be paid on a prorated basis; one (1) day equals one-fifth (1/5th). Where an employee participates in a wage reduction-job security plan as provided in Article 6, Section 2, the eighty-five percent (85%) and ninety percent (90%) as specified herein shall be based on the wage provisions of the applicable Supplemental Agreement and not the wage reduction-job security plan; provided, however, no such employee shall receive a modified work wage in excess of that provided in the applicable wage reduction-job security plan. (i) Employees accepting modified work shall not be subject to disciplinary action provisions of the Supplemental Agreements unless such violation involves an offense for which no prior warning notice is required under the applicable Supplemental Agreement (Cardinal Sins). Additionally, the provisions of Article 35, Section 3(a), shall apply. (j) Alleged abuses of the modified work program by the Employer and any factual grievance or request for interpretation concerning this Article shall be submitted directly to the Regional Joint Area Committee. Proven abuses may result in a determination by the National Grievance Committee that would withdraw the benefits of this Article from that Employer, in whole or in part, in which case affected employees shall immediately revert to full workers' compensation benefits. Section 3. Americans with Disabilities Act The Union and the Employer recognize their obligations under the Americans with Disabilities Act. It is agreed that the Employer shall determine whether an employee is a qualified individual with a disability under the ADA and, if so, what reasonable accommodations, if any, should be provided. In the event that the Employer determines that a reasonable accommodation is necessary, the Employer shall notify the Local Union before providing the reasonable accommodation to a qualified bargaining unit employee to ensure that the reasonable accommodation selected by the Employer does not impact another employee's seniority or other contract rights. Any dispute over whether the Employer complied with its duty to notify the Local Union before implementing a proposed reasonable accommodation or whether providing the reasonable accommodation violates any employee's rights under any other provision of the NMFA shall be subject to the grievance procedure. Disputes over whether the Employer has complied with its legal requirements under the ADA, including the ADA requirements to provide a reasonable accommodation, however, shall not be subject to the grievance procedure. ARTICLE 15. MILITARY CLAUSE Employees in service in the uniformed services of the United States, as defined by the provisions of the Uniform Services Employment and Reemployment Rights Act (USERRA), Title 38, U.S. Code Chapter 43, shall be granted all rights and privileges provided by USERRA and/or other applicable state and federal laws. This shall include continuation of health coverage to the extent required by USERRA, and continuation of pension contributions for the employee's period of service as provided by USERRA. Employee shall be subject to all obligations contained in USERRA which must be satisfied for the employees to be covered by the statute. In addition to any contribution required under USERRA, the Employer shall continue to pay health & welfare contributions for regular active employees involuntarily called to active duty status from the military reserves or the National Guard for military-related service, excluding civil domestic disturbances or emergencies. Such contributions shall only be paid for a maximum period of twelve (12) months. 23 ARTICLE 16. EQUIPMENT, SAFETY AND HEALTH Preamble It is agreed that all parties covered by this Agreement shall comply with all applicable federal, state and local regulations pertaining to worker safety and health and subjects covered by Article 16. Failure to do so shall be subject to the grievance procedure, in accordance with Articles 7 and 8 of the NMFA, and any other remedies prescribed by law after the procedures contained in this Agreement are exhausted. Section 1. Safe Equipment The Employer shall not require employees to take out on the streets or highways any vehicle that is not in a safe operating condition, including, but not limited to, equipment which is acknowledged as overweight or not equipped with the safety appliances prescribed by law. It shall not be a violation of this Agreement or basis for discipline where employees refuse to operate such equipment unless such refusal is unjustified. It shall also not be a violation of this Agreement or considered an unjustified refusal where employees refuse to operate a vehicle when such operation constitutes a violation of any federal rules, regulations, standards, or orders applicable to commercial motor vehicle safety or health, or because of the employee's reasonable apprehension of serious injury to himself/herself or the public due to the unsafe condition of such equipment. The unsafe conditions causing the employee's apprehension of injury must be of such nature that a reasonable person, under the circumstances then confronting the employee, would conclude that there is a bona fide danger of an accident, injury, or serious impairment of health, resulting from the unsafe condition. In order to qualify for protection under this provision, the employee must have sought from the Employer, and have been unable to obtain, correction of the unsafe condition. All equipment which is refused because it is not mechanically sound or properly equipped shall be appropriately tagged so that it cannot be used by other employees until the maintenance department has adjusted the complaint. After such equipment is repaired, the Employer shall place on such equipment an "OK" in a conspicuous place so the employee can see the same. Section 2. Dangerous Conditions Under no circumstances will an employee be required or assigned to engage in any activity involving dangerous conditions of work, or danger to person or property or in violation of any applicable statute or court order, or in violation of a government regulation relating to safety of person or equipment. The term "dangerous conditions of work" does not relate to the type of cargo which is hauled or handled. Section 3. Accident Reports Any employee involved in any accident or cargo spill incident, involving any hazardous or potentially polluting product, shall immediately report said accident or spill incident and any physical injury sustained. When required by his/her Employer, the employee, before starting his/her next shift, shall make out an accident or incident report in writing on forms furnished by the Employer and shall turn in all available names and addresses of witnesses to the accident or incident. The employee shall receive a copy of the accident or incident report that he/she submits to his/her Employer. Failure to comply with this provision shall subject such employee to disciplinary action by the Employer. Section 4. Equipment Reports Employees shall immediately, or at the end of their shift, report all defects of equipment. (a) Such reports shall be made on a suitable form furnished by the Employer and shall be made in multiple copies, one (1) copy to be retained by the employee and one (1) copy to be made available for inspection by the next driver operating the unit. Such copy will remain in the truck. Any alleged violation of the above shall not be cause for refusal of the equipment, but shall be subject to the grievance procedure. The Employer shall not ask or require any employee to take out equipment that has been reported by any other employee as being in an unsafe operating condition until the same has been repaired or is certified by a mechanical department that no repairs are needed and the unit is safe to drive. (b) When the occasion arises where an employee gives written report on forms in use by the Employer of a vehicle being in an unsafe working or operating condition and receives no consideration from the Employer, he/she shall take the matter up with the officers of the Union who will take the matter up with the Employer. However, in no event shall an employee be required to take out on the streets or highways a vehicle that is not in a safe operating condition or in violation of any federal rules, regulations, standards, or orders applicable to commercial motor vehicle safety as provided in Section 1 of this Article. Section 5. Qualifications on Equipment If the Employer or government agency requests a regular employee to qualify on equipment requiring a classified or special license, or in the event an employee is required to qualify (recognizing seniority) on such equipment in order to obtain a better job opportunity with his/her Employer, the Employer shall allow such regular employee the use of the equipment so required in order to take the examination on the employee's own time. Costs of such license required by a government agency will be paid for by the employee. An employee unable to successfully pass the DOT Commercial Driver's License (CDL) examination will be allowed to take a leave of absence for a period not to exceed one (1) year provided the employee makes a bona fide effort to pass the test each time the opportunity presents itself. Section 6. Equipment Requirements (a) All tractors must be equipped as necessary to allow the driver to safely enter and exit the cab, and hook and unhook the air hoses. All equipment used as city peddle trucks, and equipment regularly assigned to peddle runs, must have steps or other similar device to enable drivers to get in and out of the body. All twin trailers used in LTL pick-up and delivery operation with roll up doors purchased after April 1, 1985 shall be equipped with a hand hold and a DOT bumper which may serve as a step. (b) The Employer shall install heaters and defrosters on all trucks and tractors. 24 (c) There shall be first-line tires on the steering axle of all road and local pick-up and delivery power units. (d) All road equipment regularly assigned to the fleet shall be equipped with an air-ride seat on the driver's side. Such equipment shall be maintained in reasonable operating condition. All new air-ride seats shall oscillate and have an adjustable lumbar support, height, backrest and seat tilt. (e) Tractors added to the road fleet and assigned to road operations on a regular basis, whether newly manufactured or not newly manufactured, shall be air conditioned. The Regional Joint Area Committee may, upon application of either the Employer or the Local Union, waive the installation of such air conditioning equipment as a result of climatic conditions or other standards established by the Committee. (f) When the Employer weighs a trailer, the over-the-road driver shall be furnished the resulting weight information along with his/her driver's orders. (g) All company trailers shall be marked for height. (h) No driver shall be required to drive a tractor designed with the cab under the trailer. (i) All road and city equipment shall have a speedometer operating with reasonable accuracy. (j) The following minimum measurements for fuel tank placement shall apply to tractors added to the fleet after March 1, 1981, with the understanding that there shall be no retrofit of equipment currently in use: (1) front of fuel tank to rear of front tire-not less than 4 inches; (2) rear of fuel tank to front of duals-not less than 4 inches; (3) bottom of fuel tank to ground-provide clearance not less than 7.5 inches, measured on a flat surface; and (4) all fuel tank measurements as stated herein include brackets, return lines, etc. in determining clearance. Any alleged violation of the above requirements shall not be cause for refusal of the equipment, but shall be subject to the grievance procedure as a safety and health issue. (k) The following shall apply to shock absorbers on tractor front axles with the purchase of newly manufactured tractors which are placed in service after March 1, 1981, and with the understanding that there shall be no retrofit of equipment currently in use: Where the manufacturer recommends and provides shock absorbers as standard equipment with the tractor front suspension assembly, properly maintained shocks on such new equipment shall be considered as a necessary and integral part of that assembly. Where the manufacturer does not recommend and provide shock absorbers as standard equipment with the tractor front suspension assembly, shocks shall not be considered as a necessary or integral part of that suspension system. Any alleged violation of the above, including maintenance of existing equipment, shall not be cause for refusal of equipment but shall be subject to the grievance procedure as a safety and health issue. (l)(1) The following shall apply for the minimum interior dimensions of the sleeper berths on newly manufactured over-the-road tractors purchased and placed in service after January 1, 1987. a. Length - 80 inches; b. Width - 34 inches; and, c. Height - 24 inches. It is understood that a "manufacturing tolerance of error" of one inch (1") is permissible, provided the original specifications were in conformity with the above recommended dimensions. It is understood that there shall be no retrofit of equipment currently in service. (2) Interior cab dimensions. Effective January 1, 1988, the Employer, in placing orders for newly manufactured over-the-road tractors, shall request of the manufacturer in writing that there will be compliance with as many of the following October, 1985 SAE recommended practices as possible: J941-E, J1052, J1521, J1522, J1517, J1516, and J1100. The carrier, upon request, will furnish proof to the National Safety and Health Committee that a request was made to the manufacturer for compliance with the aforementioned SAE recommended practices. (m) The Employer and the Union recognize the need for safe and efficient twin-trailer operations. Accordingly, the parties agree to the following: (1) The Employer shall make available to all drivers involved in the twin-trailer operations training in the proper procedures for the safe hooking and unhooking of dollies and jiff-lox. Upon request, the Company will furnish to the Union a copy of their training program. (2) Dollies and jiff-lox shall be counter-balanced or equipped with a crank-down wheel to support the weight of the dolly tongue or jiff-lox. A handle will also be provided on the tongue of the dolly or jiff-lox and shall be maintained. (3) A tractor equipped with a pintle hook will be made available to drivers required to drop and hook twin trailers or triples at closed terminals. The Employer shall make a bona fide attempt to make a telephone available for the driver at closed terminals during the trailer switch. (4) Whenever possible, the Company will hook up the heaviest trailer in front in twin-trailer operations. In those instances where it is not possible because of an intermediate drop of less than one hundred and fifty (150) miles or scaling of the drive axle, the driver after driving the unit at any point on the trip, determines, at his/her sole discretion, the unit does not handle properly, may have the Company switch the unit or authorize the driver to switch the unit and be paid for such time. (n)(1) There will be a moratorium on the purchase of diesel-powered forklifts and sweepers. (2) It shall be standard work practice that every diesel-powered sweeper shall be shut off whenever the operator leaves the seat. Under no circumstances shall diesel-powered sweepers be allowed to idle when not attended. (3) Diesel-powered sweepers shall be tuned and maintained in accordance with schedules recommended by their manufacturers. The Employer shall provide copies of such recommendations to the Union upon request. (4) Improperly maintained diesel-powered sweepers may produce visible emissions after start-up. Therefore, any such diesel-powered sweeper that is found to be smoking shall be taken out of service as soon as possible until repairs are made and that condition corrected. (5) The Employer agrees to cooperate with those government and/or mutually agreed private agencies in such surveys or studies designed to analyze the use and operation of diesel-powered sweepers and diesel-powered sweeper emissions. (o) As of July 1, 1988, as new equipment is ordered or existing equipment requires brake lining replacement, all brake linings shall be of non-asbestos material where available and certifiable. 25 (p) Slack adjuster equipment (snubbers) used in multiple trailer operations, whether on the trailers or on the converters, shall be maintained in proper working order. However, it shall not be a violation of this provision for the unit to be pulled to the next point of repair if the snubber is inoperative. (q) Converter dollies may be pulled on public roads by bobtail tractors if all of the following conditions are met: (1) Tractors used in this type of operation shall have a pintle hook installed which has the proper weight capacity and is designed for highway use; (2) Neither supply nor control air lines are to be connected to the converter dolly when being pulled by a bobtail tractor, and the tractor protection valve shall be set in the normal bobtail position; (3) After October 1, 1991, tractors used to pull converter dollies bobtail must be equipped with a type of bobtail proportioning valve (BPV) in the tractor braking system; (4) It is further agreed such configuration must comply with state and federal law. (r) All newly manufactured road tractors regularly assigned to the fleet after July 1, 1991, shall be equipped with heated mirrors. However, it shall not be a violation of this provision for the tractor to be dispatched to the next Company point of repair if the heated mirror is inoperative. (1) All new diesel tractors and new yard equipment shall be equipped with vertical exhaust stacks. (2) All road and city tractors shall be equipped with large spot mirrors (6" minimum) on both sides of the tractor by January 1, 1995. (3) All road tractors and switching equipment shall be equipped with an operable light of sufficient wattage on the back of the cab. (4) All new road and city equipment shall have operable sun visors. (5) Seats on forklifts and sweepers shall be maintained in good repair. (s) All newly manufactured city tractors regularly assigned to the city pickup and delivery operation after July 1, 1991, shall be equipped with power steering and an air-ride seat on the driver's side. (1) All new road and yard equipment shall have power steering. (2) All new forklifts and sweepers shall be equipped with power steering. (t) All hand trucks and pallet jacks shall be maintained in good repair. (u) All portable and mechanical dock plates shall be maintained in good working condition. (v) The parties will maintain a safe and healthy working environment in sleeper operations. The parties agree to establish a committee composed of four (4) members each to review the comfort and/or safety aspects of sleeper berths pertaining to ride. Such committee shall meet by mutual agreement of the Co-chairmen as to time and place. The committee shall confer with appropriate representatives of equipment manufacturers and/or other experts on this subject as may be available. The intent of the committee is to identify any problems with the comfort and/or safety aspects of sleeper berths pertaining to ride that may exist, and through its deliberations with the manufacturers and/or other experts, develop ways and means to correct such situations. The committee shall report its findings and make recommendations to the National Grievance Committee. (1) All new sleeper tractors purchased or leased after February 8, 1998, shall, at a minimum, be equipped with the manufacturer's original equipment standard dual heat/air conditioning systems. This is not intended to preclude the Company from purchasing newer technology on future purchases, should such become available prior to the expiration of this Agreement. (2) Bunk restraint strap/net buckles on sleeper equipment shall be mounted on the entrance side of the sleeper berth by April 1, 1995. (3) New sleeper equipment purchased on or after April 1, 1995, shall be equipped with a power window on the passenger's side of the cab that is operable from the driver's side of the cab. (w) Employee will not be required to climb on unguarded trailer roofs for snow removal. Section 7. National Safety, Health & Equipment Committee The Employer and the Union shall continue the National Safety, Health &Equipment Committee. Such Committee shall be comprised of qualified representatives to consider safety, health and equipment issues. The Committee shall consult among themselves and/or with appropriate government agencies, state and federal, on matters involving all aspects of trucking operations safety and health and issues related to equipment safety. Such Committee shall convene on a regular basis, with an agenda to be agreed to by the respective chairmen. Any grievance arising under this Article shall be processed through the Regional Joint Area level in accordance with rules and procedures agreed to by the National Safety, Health &Equipment Committee and approved by the National Grievance Committee. Section 8. Hazardous Materials Program The parties have rewritten the "Hazardous Materials Program" to be effective April 1, 1998, and is hereby incorporated by reference in this Agreement. The Program will be printed and distributed to all members/employees in line with regulatory guidelines. The parties further agree that as new federally mandated changes occur, they too will become part of this Agreement. The Guidelines contained in the printed Program are minimums, and are not intended to prevent the Employer from providing additional training or protection which would enhance safety and health to the employees. All regular employees shall be paid for such training at their regular straight time hourly rate. Section 9. Union Liability Nothing in this Agreement or its Supplements relating to health, safety or training rules or standards shall create any liability or responsibility on behalf of the Union for any job-related injury or accident to any employee or any other person. Further, the Employer will not commence legal action against the Union as a result of the Union's negotiation of safety standards contained in this Agreement or failure to properly investigate or follow-up Employer compliance with those safety standards. 26 Section 10. Government Required Safety & Health Reports The Employer shall provide, upon written request by the Local Union, a copy of any occupational incident report that is required to be filed with a federal government agency on safety and health subjects addressed by Article 16 only. Such reports shall be free of charge for one (1) copy. Employees and authorized Union representatives shall have access to written occupational safety and health programs. Upon request, the Employer shall provide one (1) copy of the programs to the authorized Union representative free of charge. Section 11. Facilities Dock floors shall be maintained in good repair and reasonably free from potholes. Yards shall be maintained reasonably free from potholes and reasonably effective dust control measures shall be implemented as necessary. Breakrooms, and storage areas for linens, mattresses and individual towels shall be maintained in a sanitary condition. Restrooms and showers shall be maintained in a sanitary condition. Showers, where provided, shall have body soap or other appropriate cleansing agents and clean individual towels. ARTICLE 17. PAY PERIOD The Joint Area Committee or the National Grievance Committee and the Employer may, by mutual agreement, waive the provisions of Local Supplements dealing with pay periods upon a satisfactory showing of necessity by the Employer, provided such waiver is not a violation of a state or federal law or regulation. ARTICLE 18. OTHER SERVICES In the event an Employer, party to this Agreement, may require the services of employees coming under the jurisdiction of this Agreement in a manner and under conditions not provided for in this Agreement, then and in such instances the Local Union and the Employer concerned may negotiate such matters for such specific purposes, subject to the approval of the Joint Area Committee and then ratified by the affected members. ARTICLE 19. POSTING Section 1. Posting of Agreement A copy of this Agreement shall be posted in a conspicuous place in each garage and terminal. Section 2. Union Bulletin Boards The Employer agrees to provide suitable space for the union bulletin board in each garage, terminal or place of work. Postings by the Union on such boards are to be confined to official business of the Union. ARTICLE 20. UNION AND EMPLOYER COOPERATION Section 1. Fair Day's Work for Fair Day's Pay The parties agree at all times as fully as it may be within their power to cooperate so as to protect the long-range interests of the employees, the Employers signatory to this Agreement, the Union and the general public served by the members of the trucking industry party to this Agreement. The Union and the Employer recognize the principle of a fair day's work for a fair day's pay; that jobs and job security of employees working under this Agreement are best protected through efficient and productive operations of the Employer and the trucking industry; and that this principle shall be recognized in the administration of this Agreement and its Supplements and the resolution of all grievances thereunder. Section 2. Joint Industry Development Committee The parties recognize that the unionized LTL industry is losing market share and jobs to competitors. The parties recognize that it is in the interest of the Union and the Employers to return the LTL industry to health and to foster its growth. Only if the industry prospers and grows will the industry's employees, whom the Union represents, achieve true job and economic security. Only if the industry prospers and grows will the industry have access to the resources it needs to capitalize and be competitive. Recognizing that returning the industry to health should be a cooperative, long-term effort, the Teamsters National Freight Industry Negotiating Committee ("TNFINC") and the Employer Association agree to establish a Joint Industry Development Committee to serve as a vehicle for this effort. The purpose of the Committee will be to perform the following tasks: address the principles of an intermodal truckload agreement as a means of capturing new market and creating additional city/P&D jobs; develop data to evaluate and monitor industry and competitor productivity, costs and operations; catalogue, compare and evaluate work rules, practices and procedures among the various NMFA supplements and the Employer Association's companies; make joint recommendations to the parties about any changes in the NMFA and its supplements that the Committee believes should be considered in the next round of negotiations for the new NMFA; solicit grants for joint activities that benefit the industry and its bargaining unit employees, such as driver training schools; 27 and monitor pending legislation and executive action on the national, state and local level that may affect the welfare of the industry and, where appropriate, jointly recommend actions that further the interests of the industry and its bargaining unit employees and jointly present the views of the Joint Committee to legislative and executive bodies. The Committee shall operate as a labor-management committee within the meaning of Section 302(c)(9) of the LMRA, as amended, established and functioning so as to fulfill one or more of the purposes set forth in Section 6(c)(2) of the Labor Management Cooperation Act of 1978. The Committee shall have the full support of both the International Brotherhood of Teamsters and the Employer Association in the Committee's efforts to identify problems, formulate plans to solve those problems and, where appropriate, conduct joint activities designed to implement the plans. The Chairman of TNFINC will appoint five (5) Union representatives to the Joint Committee. The Employer Association will appoint five (5) Employer representatives to the Joint Committee. Appointments to the Joint Committee will be made in a manner to assure that there are persons serving who are familiar with the full range of operations undertaken by Employer Association's carriers under all supplemental agreements. The Joint Committee shall meet at least quarterly and may appoint continuing subcommittees to carry out specific tasks. The Union and Employer representatives to the Joint Committee will establish procedures for the operation of this Committee. Section 3. Benefits Joint Committee The Union and the Employers will establish a Benefits Joint Committee to review the provision of health & welfare and pension benefits to employees covered by this Agreement. This Committee is charged with the critical responsibility of ensuring that employee health & welfare and pension benefits are made available to employees covered by the terms of the NMFA in a secure and cost-efficient manner. It is anticipated that this Committee shall serve as a source of continuing study regarding the most efficient manner of providing benefits to covered employees. The Union and the Employers will establish procedures for the operation of this Committee. The Committee will make periodic reports and recommendations to TNFINC and TMI. ARTICLE 21. UNION ACTIVITIES Any employee, member of the Union, acting in any official capacity whatsoever shall not be discriminated against for his/her acts as such officer of the Union so long as such acts do not interfere with the conduct of the Employer's business, nor shall there be any discrimination against any employee because of Union membership or activities. A Union member elected or appointed to serve as a Union official shall be granted a leave of absence during the period of such employment, without discrimination or loss of seniority rights, and without pay. ARTICLE 22. OWNER-OPERATORS Section 1. This Agreement governs the use of "owner-operators" (as defined below) by all Employers signatory to this Agreement. The parties recognize that there are two (2) distinct types of "owner-operators" covered by this Agreement: employee owner-operators and non-employee owner-operators. Generally, employee owner-operators are drivers who work exclusively for a single Employer on a regular basis and who perform the same type of work as the Employer's regular employee drivers, and it is only that kind of owner-operator that is covered by this Article. Conversely, there are owner-operators who do hauling work on an intermittent basis (e.g., trip leases) for several different Employers. As such, the latter may be utilized only to perform work which may be properly subcontracted under Article 32 (e.g., overflow loads). Section 2. For purposes of this Article, the term "owner-operators" means any employee driver who performs unit work and who operates trucking equipment which he/she owns and leases to an Employer signatory to this Agreement. The certificate and title to the leased equipment of an owner-operator must be in the name of the owner-operator (or the owner-operator's secured creditor) not the Employer. Further, it is understood and agreed that whenever the term "owner-operator" is used in this Article, it means employee owner-driver only, and nothing in this Article shall apply to any equipment leased except when the owner is also employed as a driver. However, it is expressly understood that in the case of equipment under permanent lease (with a minimum thirty (30)-day cancellation clause) from a fleet owner, individuals operating such equipment shall operate it as employees of the Employer. Section 3. For purposes of this Article, hired or leased equipment shall be operated by an employee of the Employer. The performance of unit work by owner-operators shall be governed by the provisions of this Agreement and Supplements relating to owner-operators. The Employer expressly reserves the right to control the manner, means and details of, and by which, the owner-operator performs his/her services, as well as the ends to be accomplished, and shall not permit others or delegate to others the authority to do so. All employee owner-operators shall be treated under the provisions of this Agreement and any applicable Supplements to this Agreement, in the same manner as other employee drivers. Accordingly, the wages and working conditions of an employee owner-operator (including pension and health & welfare contributions) shall be in full accordance with those provided to other employee drivers under this Agreement. Employee owner-operators, however, shall have seniority under Article 5 of this Agreement only as drivers. Consistent with their "employee" status, employee owner-operators shall be affiliated by permanent lease with their Employer and shall operate exclusively for that Employer and no other interest. Section 4. Employers must use their own available equipment, together with all leased equipment under a permanent lease (with a minimum thirty (30) days cancellation clause) before hiring any extra equipment. The hiring of such extra equipment shall be subject to the provisions of Article 32 - Subcontracting, 28 Section 5. Separate checks shall be issued by the Employer for driver's wage and equipment rental, except as provided in Section 6. At no time shall the equipment check be for less than actual miles operated. Separate checks for drivers shall not be deducted from the minimum truck rental revenue. The driver shall turn in time directly to the Employer. All monies due the owner-operator may be held not longer than two (2) weeks, except where the lease of equipment agreement is terminated, and in such case, all monies due the operator may be held no longer than forty-five (45) days from the date of termination of the operation of the equipment. Section 6. Payment for equipment service shall be handled by the issuance of a check for the full mileage operated, tonnage or percentage, less any agreed advances. A statement of any charges by the Employer shall be issued at the same time, but shall not be deducted in advance. Section 7. The owner-operator shall have complete freedom to purchase gasoline, oil, grease, tires, tubes, etc., including repair work, at any place where efficient service and satisfactory products can be obtained at the most favorable prices. Section 8. There shall be no deduction pertaining to equipment operation for any reason whatsoever. Section 9. The Employer hereby agrees to pay road or mile tax, public liability and property damage insurance, cargo insurance, bridge tolls, fees for certificates, permits and travel orders, fines and penalties for inadequate certificates, license fees, weight tax and wheel tax, and for loss of driving time due to waiting at state lines. The Employer shall also pay social security tax, unemployment insurance tax and worker's compensation insurance, and any other federal or state (or local) payroll tax regularly paid by Employers for and on behalf of employees in the where operations are conducted, and any additional cost for international registration plan plate (IRP) over the base plate cost. It is expressly understood that the owner-driver shall pay the license fees in the state in which title is registered. All tolls, no matter how computed, must be paid by the Employer, regardless of any agreement to the contrary. All taxes or additional charges imposed by law relating to actual truck operation and use of highways, no matter how computed or named, shall be paid by the Employer, excepting only vehicle licensing, as such, in the state where title is registered. Section 10. There shall be no interest or handling charge on earned money advanced prior to the regular payday. Section 11. (a) All Employers hiring or leasing equipment owned and driven by the owner-operator shall file a true copy of the lease agreement covering the owner-driven equipment with the Regional Joint Area Committees. The terms of the lease shall cover only the equipment owned and driven by the owner-operator and shall be in complete accord with the minimum rates and conditions provided herein, plus the full wage rate and supplementary allowances for drivers as embodied elsewhere in this Agreement. (b)(1) It is recognized by the parties to this Agreement that inordinately low equipment rental fees threaten the wage rates of employee drivers covered by this Agreement. Accordingly, the parties have established and set out below the appropriate minimum rental fees for equipment leased by either employee or non-employee owner-operator, excluding owner-operators covered by the Iron and Steel Supplements. a. Single Axle Tractor Only-Effective April 1, 1998 0 to 20,000 lbs. 36.2 cents per mile 20,001 to 25,000 lbs. 38.3 cents per mile 25,001 to 30,000 lbs. 40.5 cents per mile 30,001 lbs. and over 43.7 cents per mile Single axle tractors when utilized to pull double bottoms will be paid under the tandem axle tractor rate schedule. b. Tandem Axle Tractor Only-Effective April 1, 1998 0 to 25,000 lbs. 33.9 cents per mile 25,001 to 30,000 lbs. 35.9 cents per mile 30,001 to 35,000 lbs. 38.1 cents per mile 35,001 to 40,000 lbs. 41.1 cents per mile 40,001 to 45,000 lbs. 43.9 cents per mile 45,001 lbs. and over 45.5 cents per mile c. Single Axle Trailers and 40 to 53 Foot Tandem Trailer Only. Effective April 1, 1998: 6.25 cents per mile (with $8.00 minimum daily guarantee). d. Tandem Axle, 40 Foot or Over, Trailer Only Effective April 1, 1998: 7.25 cents per mile (With $10.00 minimum daily guarantee). Minimum daily guarantee for trailers does not apply to Saturday, Sunday or holidays. It applies to either the first (1st) day or last day of use, but not both. The above rates also apply to deadheading. 29 (2) Future adjustments in the compensation for owner-operator equipment shall be based on the latest available National Average Retail Diesel Fuel Price as reported by the Energy Information Agency of the U.S. Department of Energy (DOE) for diesel fuel prices and shall be adjusted beginning the first (1st) of the month following notice of ratification and the first (1st) of every month thereafter in accordance with the schedule in paragraph 4 of this Section. In the event the DOE publishes a correction in any diesel fuel price, any changes will be made on a prospective basis only. It is understood that where the Employer provides subsidized fuel purchase plans to owner-operators the minimum lease rates, as determined under paragraph 4 of this Section, will reflect the actual fuel price paid by the owner-operator rather than the DOE diesel fuel price. If the DOE discontinues publishing the diesel fuel price series, the parties will meet and agree upon an alternate index. If the parties cannot agree on a suitable replacement diesel fuel price series, the matter shall go immediately to the National Grievance Committee for the establishment of such a diesel fuel price series. (3) This Article excludes owner-operators covered by the Iron and Steel Supplemental Agreements. The terms and conditions of Article 22, Section 9 shall apply to this Article. Nothing herein this Article shall apply to leased equipment not owned by the driver. The minimum rates set forth above result from the joint determination of the parties that such rates represent only the actual cost of operating such equipment. The parties have not attempted to negotiate a profit for the owner-operator. The determination of an appropriate minimum equipment rental rate is intended only to prevent owner-operators from leasing their equipment at a loss and thus forcing owner-operators to undercut the wage rates in this Agreement. The parties agree that the above rates are established for the use of normal freight industry equipment. In the event specialized equipment is required, the rates will be established by the Committee referred to in Article 22, or by other procedures mutually agreeable to the parties. (4) Following are the minimum lease rates to be paid to owner-operator for various levels of diesel fuel prices. SCHEDULE A Single Axle Tractor
cents/mile Diesel Fuel 0- 20,001- 25,001- 30,001- Price per gallon 20,000 lbs. 25,000 lbs. 30,000 N. lbs. and over $1.56-$1.609 37.6 39.8 42.2 45.5 $1.51-$1.559 36.9 39.0 41.4 44.6 $1.46-$1.509 36.2 38.3 40.5 43.7 $1.41-$1.459 35.4 37.5 39.7 42.8 $1.36-$1.409 34.7 36.7 38.9 41.9 $1.31-$1.359 34.0 36.0 38.0 41.0 $1.26-$1.309 33.3 35.2 37.2 40.1 $1.21-$1.259 32.6 34.4 36.4 39.2 $1.16-$1.209 31.9 33.7 35.5 38.3 $1.11-$1.159 31.2 32.9 34.7 37.4 $1.06-$1.109 30.4 32.1 33.9 36.5 $1.01-$1.059 29.7 31.4 33.0 35.6 $0.96-$1.009 29.0 30.6 32.2 34.6 $0.91-$0.959 28.3 29.8 31.4 33.7 $0.86-$0.909 27.6 29.0 30.5 32.8 $0.81-$0.859 26.9 28.3 29.7 31.9 $0.76-$0.809 26.2 27.5 28.9 31.0 $0.71-$0.759 25.4 26.7 28.0 30.1 $0.66-$0.709 24.7 26.0 27.2 29.2 $0.61-$0.659 24.0 25.2 26.4 28.3 $0.56-$0.609 23.3 24.4 25.5 27.4 for any fuel price (+ or - (+ or - (+ or - (+ or - 0.71429) 0.76923) 0.83333) 0.90909)
# as reported by the ICC 30 SCHEDULE B Tandem Axle Tractor
cents/mile Diesel Fuel 0- 25,001- 30,001- 35,001- 40,000- 45,001 Price per gallon 25,000 lbs. 30,000 lbs. 35,000 lbs. 40,000 lbs. 45,000 lbs. lbs. and over $1.56-$1.609 41.1 43.1 45.8 48.8 52.2 54.5 $1.51-$1.559 40.4 42.4 45.0 48.0 51.4 53.6 $1.46-$1.509 39.7 41.7 44.3 47.3 50.5 52.7 $1.41-$1.459 38.9 40.9 43.5 46.5 49.7 51.8 $1.36-$1.409 38.2 40.2 42.8 45.7 48.9 50.9 $1.31-$1.359 37.5 39.5 42.0 45.0 48.0 50.0 $1.26-$1.309 36.8 38.8 41.2 44.2 47.2 49.1 $1.21-$1.259 36.1 38.1 40.4 43.4 46.4 48.2 $1.16-$1.209 35.4 37.4 39.7 42.7 45.5 47.3 $1.11-$1.159 34.7 36.7 38.9 41.9 44.7 46.4 $1.06-$1.109 33.9 35.9 38.1 41.1 43.9 45.5 $1.01-$1.059 33.2 35.2 37.4 40.4 43.0 44.6 $0.96-$1.009 32.5 34.5 36.6 39.6 42.2 43.6 $0.91-$0.959 31.8 33.8 35.8 38.8 41.4 42.7 $0.86-$0.909 31.1 33.1 35.0 38.0 40.5 41.8 $0.81-$0.859 30.4 32.4 34.3 37.3 39.7 40.9 $0.76-$0.809 29.7 31.7 33.5 36.5 38.9 40.0 $0.71-$0.759 28.9 30.9 32.7 35.7 38.0 39.1 $0.66-$0.709 28.2 30.2 32.0 35.0 37.2 38.2 $0.61-$0.659 27.5 29.5 31.2 34.2 36.4 37.3 $0.56-$0.609 26.8 28.8 30.4 33.4 35.5 36.4 for any fuel price (+ or - (+ or - (+ or - (+ or - 0.71429) 0.76923) 0.83333) 0.90909)
# as reported by the ICC (c) The Employer shall not, as a condition of continued employment, require an owner-operator who is hired with tractor and trailer to separate his/her equipment and pull Employer owned or other leased trailers. The Employer will not reduce the equipment rental below the contract percentage to accomplish the above purpose. Section 12. Driver-owner mileage scale does not include use of equipment for pick-up or delivery at point of origin terminal or point of destination terminal, but shall be subject to negotiations between the Local Union and the Employer. Such negotiations shall be only for the purpose of protecting the wage rate of the driver only as an employee. Failure to agree shall be submitted to the grievance procedure. Owner-operator operations are to be terminal-to-terminal, except where there are no local employees to make such deliveries or as otherwise agreed to in this Agreement. Section 13. There shall be no reductions where the present basis of payment is higher than the minimums established herein for this type of operation. Where an owner-operator is paid on a percentage or tonnage basis and the operating company reduces its tariff, the percentage or tonnage basis of payment shall be automatically adjusted so that the owner-operator suffers no reduction in equipment rental or wages, or both. Section 14. It is further agreed that the intent of this clause and this entire Agreement is to assure the payment of the scale of wages as provided in this Agreement and to prohibit the making and carrying out of any plan, scheme or device to circumvent or defeat the payment of wage scales provided in this Agreement. This clause is intended to prevent the continuation of or formation of combinations or corporations or so-called lease of fleet arrangements whereby the driver is required to and does periodically pay losses sustained by the corporation or fleet arrangement, or is required to accept less than the actual cost of the running of his/her equipment, thus, in fact, reducing his scale of pay. Section 15. It is further agreed that if the Employer requires that the owner-operator sell his/her equipment to the Employer, directly or indirectly, the owner-operator shall be paid the fair true value of such equipment. Copies of the instruments of sale shall be filed with the Union and, unless objected to within ten (10) days, shall be deemed satisfactory. If any question is raised by the Union as to such value, the same shall be submitted to grievance, as above set forth, for determination. Section 16. If an employee voluntarily agrees to purchase equipment from the Employer, and if there is a dispute over the value of such equipment, the fair true value of such equipment shall be determined as provided herein. However, no employee may be required to purchase or sell equipment as a condition of employment, nor shall the nature of any operation or business be changed to require such result, unless such change is approved by the Teamsters National Master Committee. No owner-operator lease shall be cancelled for the purpose of depriving employees of employment. 31 Section 17. It shall be considered a violation of this Agreement should any Employer deduct from rental of equipment the increases provided for by the 1994 Amendments, or put into effect any means of evasion to circumvent actual payment of increases agreed upon effective for the period starting April 1, 1998 and ending March 31, 2003. Section 18. All leases, agreements or arrangements between Employers and owner-operators shall contain the following statement: The equipment which is the subject of this lease shall be driven by an employee of the lessee at all times that it is in the service of the lessee. If the lessor is hired as an employee to drive such equipment, he/she shall receive as rental compensation for the use of such equipment no less than the minimum rental rates, allowances and conditions (or the equivalent thereof as approved by the National Committee referred to in Section 11) established by the then current appropriate Area Supplemental Agreement for this type of equipment and, in addition thereto, the full wage rate and supplementary allowances for drivers (or the equivalent thereof as approved by the National Committee referred to in Section 11). The lessee expressly reserves the right to control the manner, means and details of and by which the driver of such leased equipment performs his/her services, as well as the ends to be accomplished, and shall not permit or delegate to others the authority to do so. The lessor (owner-operator) shall not be required to buy or sell any equipment (or separate his/her trailer if covered by this lease) as a condition of employment. To the extent that any provision of this lease may conflict with the provisions of such appropriate Area Supplemental Agreement as it applies to equipment driven by the owner, such provision of this lease shall be null and void and the provisions of such Agreement shall prevail. The Employer shall make available to the Union, upon request, all documents and reports relating to service by owner-operators which are required to be maintained by law. ARTICLE 23. SEPARATION OF EMPLOYMENT Upon discharge, the Employer shall pay earned wages due to the employee during the first (1st) payroll department working day following the date of discharge. Vacation pay for which the discharged employee is qualified shall be paid no later than the first (1st) day following final determination of the discharge. Upon a permanent terminal closing and/or cessation of operations, the Employer shall pay all money due to the employee during the first (1st) payroll department working day following the date of the terminal closing and/or cessation of operations. Failure to comply shall subject the Employer to pay liquidated damages in the amount of eight (8) hours' pay for each day of delay. Upon quitting, the Employer shall pay all money due to the employee on the next regular payday for the week in which the resignation occurs. ARTICLE 24. INSPECTION PRIVILEGES AND EMPLOYER IDENTIFICATION Authorized agents of the Union shall have access to the Employer's establishment during working hours for the purpose of adjusting disputes, investigating working conditions, collection of dues, and ascertaining that the Agreement is being adhered to; provided, however, there is no interruption of the firm's working schedule. Company representatives, if not known to the employee, shall identify themselves to employees prior to taking disciplinary action. Safety or other company vehicles shall be identified when stopping company equipment. ARTICLE 25. SEPARABILITY AND SAVINGS CLAUSE If any article or section of this Agreement or of any Supplements thereto should be held invalid by operation of law or by any tribunal of competent jurisdiction, or if compliance with or enforcement of any article or section should be restrained by such tribunal pending a final determination as to its validity, the remainder of this Agreement and of any Supplements thereto, or the application of such article or section to persons or circumstances other than those as to which it has been held invalid or as to which compliance with or enforcement of has been restrained, shall not be affected thereby. In the event that any article or section is held invalid or enforcement of or compliance with which has been restrained, as above set forth, the parties affected thereby shall enter into immediate collective bargaining negotiations after receipt of written notice of the desired amendments by either Employer or Union for the purpose of arriving at a mutually satisfactory replacement for such article or section during the period of invalidity or restraint. There shall be no limitation of time for such written notice. If the parties do not agree on a mutually satisfactory replacement within sixty (60) days after receipt of the stated written notice, either party shall be permitted all legal or economic recourse in support of its demands notwithstanding any provisions of this Agreement to the contrary. 32 ARTICLE 26. TIME SHEETS, TIME CLOCKS, AND VIDEO CAMERAS Section 1. Time Sheets and Time Clocks In over-the-road or line operations, the Employer shall provide and require the employee to keep a time sheet or trip card showing the arrival and departure at terminal and intermediate stops and cause and duration of all delays, time spent loading and unloading, and same shall be turned in at the end of each trip. In local cartage operations, a daily time record shall be maintained by the Employer at its place of business. All Employers who employ five (5) or more people at any terminal shall have time clocks at such terminals. Employees shall punch their own time cards. The Employer shall maintain sign-in and sign-out records at terminals. All road drivers must record their name, home domicile, origin, destination and arrival and/or departure times. The Employer shall make available upon the written request of a Local Union information regarding the destination of loads and/or where loads were loaded within the time limits set forth in the grievance procedure. The Employer may substitute updated time recording equipment for time cards and time sheets. However, a paper trail shall be maintained. The Employer may computerize the sign-in and sign-out records. However, at all times, the Union shall have reasonable access to a paper record of the sign-in and sign-out records. Section 2. Use of Video Cameras for Discipline and Discharge The Employer may not use video cameras to discipline or discharge an employee for reasons other than theft of property or dishonesty. If the information on the video tape is to be used to discipline or discharge an employee, the Employer must provide the Local Union, prior to the hearing, an opportunity to review the video tape used by the Employer to support the discipline or discharge. Where a Supplement imposes more restrictive conditions upon use of video cameras for discipline or discharge, such restrictions shall prevail. ARTICLE 27. EMERGENCY REOPENING In the event of war, declaration of emergency, imposition of mandatory economic controls, the adoption of national health care or any congressional or federal agency action which has a significantly adverse effect on the financial structure of the trucking industry or adverse impact on the wages, benefits or job security of the employees, during the life of this Agreement, either party may reopen the same upon sixty (60) days' prior written notice and request renegotiation of the provisions of this Agreement directly affected by such action. Upon the failure of the parties to agree in such negotiations within the subsequent sixty (60)-day period, thereafter, either party shall be permitted all lawful economic recourse to support its request for revisions. If governmental approval of revisions should become necessary, all parties will cooperate to the utmost to attain such approval. The parties agree that the notice provided herein shall be accepted by all parties as compliance with the notice requirements of applicable law, so as to permit economic action at the expiration thereof. ARTICLE 28. SYMPATHETIC ACTION In the event of a labor dispute between any Employer, party to this Agreement, and any International Brotherhood of Teamsters Union, parties to this or any other International Brotherhood of Teamsters' Agreement, during the course of which dispute such Union engages in lawful economic activities which are not in violation of this or such other Agreement, then any other affiliate of the International Brotherhood of Teamsters, having an agreement with such Employer shall have the right to engage in lawful economic activity against such Employer in support of the above first-mentioned Union notwithstanding anything to the contrary in this Agreement or the International Brotherhood of Teamsters' Agreement between such Employer and such other affiliate, with all of the protection provided in Article 9. ARTICLE 29. SUBSTITUTE SERVICE Section 1. Piggyback Operations (a) An Employer shall not use piggyback over the same route where the Employer has established relay runs or through runs except to move overflow freight or as otherwise provided in Section 3 herein. (b) It is recognized and agreed that there were two distinct and separate types of rail operations in effect on April 1, 1994: (1) the use of rail to move overflow freight; and (2) approved and/or agreed to rail operations. Accordingly, the provisions of this Section 1 shall apply in its entirety to the overflow rail operations. This Section 1 shall only apply to the approved and/or agreed to rail operations to the extent it has been historically applied prior to April 1, 1994. If a driver is available (which includes the two (2)-hour period of time prior to end of his/her rest period) at point of origin when a trailer leaves the yard for the piggyback ramp, such driver's runaround compensation shall start from the time the trailer leaves the yard. Available regular drivers at relay points shall be protected against runarounds if a violation occurred at the point of origin. If the Employer does not have an over-the-road domicile at the point of origin, the Employer shall protect against runaround the available drivers at the first relay point over which the freight would normally move had it not been placed on the rail. Available regular drivers at relay points shall be protected against runaround if a violation occurred at the first relay point. 33 The Employer shall not reduce or fail to increase the road driver complement, including the addition of equipment, at the point of origin for the purpose of creating an overflow of freight to avoid the application of this Section. (c) When an Employer utilizes Piggyback operations as a substitute service to deliver overflow loads and such substitute service is matched in both directions (East to West and West to East or North to South and South to North), it is understood and agreed by the parties that the Employer will be required to add a sufficient number of employees and the necessary amount of equipment to move trailers over the road when the volume of matched loads reaches a level to insure efficient utilization of equipment and regular work opportunity for the added employees. It is the intent of the parties in this Section 1 to maximize the movement of freight over the Employer's established relay runs, thereby minimizing the use of substitute service. The record keeping requirement set out in Section 2 below will provide the Union with the basis of monitoring the use of such piggyback operation. (d) The Employer agrees the non-employee owner-operators, birdy-back, fishy-back and barge operations will not be used over the same routes where the Employer has established relay runs during the term of this Agreement. Section 2. Maintenance of Records (a) Trailers piggybacked as a substitute service as provided in Section 1 are to be signed in and signed out on the regular dispatch sheet in road operations, and where there are no road operations sign-in and sign-out sheets shall be maintained at an appropriate location, including trailers taken to and from the rail yard by city employees. These sheets will be made available, upon request, to the drivers for a period of thirty (30) days. The Employer shall report in writing on a monthly basis to the Local Union at the rail origin point, or in cases where there are no drivers domiciled at the rail origin point to the Local Union at the first driver relay point affected, the number of trailers put on the rail at the rail origin point. The Employer shall also report the origin, destination, trailer/load number, trailer weight and the time the trailer/load leaves the Employer's yard for the rail yard. The time limits set forth in the Supplemental Agreement for filing claims based upon the monthly report shall commence to run upon the receipt of the report by the Local Union. (b) With regard to use of substitute service as provided in Section 1, full and complete records of handling, dispatch and movement of such units system-wide shall be kept by the Employer and a report, which will include the date of all outbound rail movement, all points of origin and destination, all trailer numbers and the name of each railroad/routing, shall be sent on a quarterly basis to the office of the National Freight Director and the affected Area Regional Freight Director. Where inspection of the records indicates that piggyback is being used as a substitute for road operations, as defined in Section 1 of this Article, over an established relay, rather than handling overflow traffic, the grievance procedure may be invoked at the appropriate Regional Joint Area Committee by the Regional Freight Coordinator or the office of the National Freight Director to provide a reasonable remedy for the improper usage of piggyback, including the revocation of the use of substitute service, for repeated violations over such relay. (c) With regard to trailers moved on rail as an approved intermodal operations set forth in Section 3, the Employer shall report in writing on a monthly basis to each Local Union affected, the number of trailers put on the rail at the rail origin points of the approved intermodal operations. The Employer shall also report the origin, destination, trailer/load number, trailer weight and the time the trailer/load leaves the Employer's yard for the rail yard. In addition, the Employer shall, on a quarterly basis, send to the office of the National Freight Director a report containing the total intermodal rail miles as reported on line 6 of the Bureau of Transportation Statistics (BTS) Schedule 600 annual report and the total miles as reported on line 7 of the BTS Schedule 600 annual report. Section 3. Intermodal Service (a) The parties recognize that in 1991, Congress passed the Intermodal Surface Transportation Efficiency Act of 1991 and declared the policy of the United States to be one of promoting the development of a national intermodal transportation system consisting of all forms of transportation in a unified, interconnected manner. The parties have, therefore, entered into this Agreement to enhance the Employer's opportunities to secure the benefits which flow from this national policy of encouraging intermodal transportation, including long-term stable and secure employment. At the same time, the parties recognize the need to minimize and provide for the impact which intermodal operations may have on certain employees covered by this Agreement. (b) Use of Intermodal Service 1. Subject to the conditions set forth hereinafter, an Employer may establish a new intermodal service over the same route where the Employer has established relay runs or through runs. Present relay or through operations may not be reduced, modified or changed in any other manner as the result of the implementation of a new intermodal service until such time as the proposed intermodal operation has been approved by the National Intermodal Committee. The Employer shall submit to the National Intermodal Committee an application for approval which shall identify the road operation(s) the intended intermodal service will reduce and/or eliminate; a list identifying the name and seniority date of each driver affected by the intended intermodal service(s); and a list by domicile of each of the road drivers' openings available. In the event the National Intermodal Committee is unable to agree on whether or not the Employer's proposed intermodal operations meet the criteria set forth below, the proposed operation shall not be approved until such time as those issues are resolved. This provision shall not be utilized as a method to delay and/or deny a proposed intermodal operation when the criteria set forth below have been clearly satisfied. (a) There shall be no more than two (2) intermodal changes approved during the term of this Agreement; and (b) No more than ten (10) percent of the Employer's total active road driver seniority list as of April 1, 1998 shall be affected by the intermodal changes approved during the term of this Agreement. In the event a proposed intermodal operation also includes the transfer of work that is subject to the provisions of Article 8, Section 6, the proposed intermodal operations and the transfer of work subject to Article 8, Section 6, may be heard by a combined National Intermodal/Change of Operations Committee on a joint record, and the seniority rights of all affected employees shall be determined by such Committee, which shall have the authority granted in Article 8, Section 6(g). 2. An approved intermodal operation that provides service over established relay and/or through operations shall include protection for all bid drivers during each dispatch day and all extra board drivers during each dispatch week at each of the affected domiciles. 34 For purposes of determining the weekly protection for extra board drivers, the affected driver's average weekly earnings during the previous four (4) week period in which the driver had normal earnings shall be considered the weekly protection when violations occur. 3. When transporting any shipment by intermodal service within the Employer's terminal network, the Employer shall utilize its drivers subject to the applicable respective area supplemental agreements to pickup such shipments from the shipper at point of origin and/or the Employer's terminal and deliver them to the applicable intermodal exchange point. The Employer also shall use its drivers to deliver intermodal shipments to the consignee or the Employer's terminal. A driver may be required to drive through other terminal service areas to the intermodal exchange point to pickup and deliver intermodal shipments without penalty. 4. Total intermodal rail miles included on line 6 of the BTS Schedule 600 annual report shall not exceed 28 percent of the Employer's total miles as reported on line 7 of the BTS Schedule 600 annual report during any calendar year. In the event intermodal rail miles exceed this 28 percent maximum, the Employer shall be required to remove an appropriate amount of freight from the rail and add a corresponding number of drivers at each affected domicile. The National Intermodal Committee shall establish rules and guidelines that will allow the Union the opportunity to verify and audit the Employer's BTS rail reports. In the event the Union establishes through the grievance procedure that an Employer has falsified the BTS reports in order to increase the maximum amount of intermodal rail miles permitted under this Article, the remedy for such a violation shall include a cessation of the Employer's affected intermodal service until such time as the issue has been resolved to the satisfaction of the Union. In the event the ICC rail and/or line haul miles reporting requirements are modified and/or eliminated, the parties will meet to develop a substitute reporting procedure consistent with those of the ICC. (c) Job Protections for Current Road Drivers 1. Rail operations that are subject to the provisions of Section 1(b) above shall not result in the layoff or involuntary transfer of any driver at any affected road driver domicile. 2. During the term of this Agreement, an Employer shall be permitted no more than two (2) Intermodal Changes whereby the Employer may reduce and/or eliminate existing road operation(s) through the use of intermodal service. It is specifically agreed that a total of no more than ten (10) percent of the Employer's total active road driver seniority list as of April 1, 1998, shall be affected by the Intermodal Changes during the term of this Agreement. Any road driver who is adversely affected by an approved Intermodal Operation and would thereby be subject to layoff, or who is on layoff at an affected domicile at the time an Intermodal Operation is approved, shall be offered work opportunity at other road driver domiciles within the Employer's system. The Employer shall include in its proposed Intermodal Operations specific facts that adequately support the Employer's claims that there will be sufficient freight to support the work opportunities the Employer proposes at each gaining domicile. In the event there is more than one (1) domicile involved, the drivers adversely affected shall be dovetailed on a master seniority list and an opportunity to relocate shall be offered on a seniority basis, subject to the provisions of Article 8, Section 6. The "hold" procedures set forth in Article 8, Section 6 of the NMFA shall be applicable. Where the source of the proposed work opportunity is presently being performed by bargaining unit employees over the road, the Employer shall be required to make reasonable efforts to fill the offered positions as set forth in Article 8, Section 6(d)(6). Drivers who relocate under this provision shall be dovetailed on the applicable seniority list at the domicile they bid into. Health & welfare and pension contributions shall be remitted in accordance with the provisions of Article 8, Section 6(a) and moving and lodging shall be paid in accordance with Article 8, Section 6(c) of the NMFA. It is understood and agreed that the intent of this provision is to provide the maximum job security possible to those drivers affected by the use of intermodal service. Therefore, the number of drivers on the affected seniority lists at rail origin points at the time an intermodal change becomes effective shall not be reduced during the term of this Agreement other than as may be provided in subsequent changes of operations. Drivers on the affected seniority lists at gaining domiciles at the time an intermodal change becomes effective, shall not be permanently laid off during the term of this Agreement. The senior driver voluntarily laid off at an intermodal losing domicile will be restored to the active board each time foreign drivers or casuals (where applicable) make ten (10) trips (tours of duty) within any thirty (30) calendar day period on a primary run of such domicile, not affected by a Change of Operations. For the purposes of this Section, short-term layoffs (1) that coincide with normal seasonal freight flow reductions that are experienced on a regional basis and that include a reduction in rail freight that corresponds to the reduction in truck traffic, or (2) that are incidental day-to-day layoffs due to reasons such as adverse weather conditions and holiday scheduling, shall not be considered as a permanent layoff. Layoffs created by a documented loss of a customer shall not exceed thirty (30) days. Any layoff for reasons other than as described above shall be considered as a permanent layoff. The Employer shall have the burden of proving that a layoff is not permanent. In order to ensure that the work opportunities of the drivers at the gaining domiciles are not adversely affected by the redomiciling of drivers, the bottom twenty-five percent (25%) of the drivers at a gaining domicile shall not have their earnings reduced below an average weekly earnings of seven hundred dollars ($700). This seven hundred dollar ($700) average wage guarantee shall not start until the fourth (4th) week following the implementation of the approved Intermodal Change of Operation. It is not the intent of this provision to establish a seven hundred dollar ($700) per week as an artificial base wage but rather a minimum guarantee. This provision shall not preclude the short-term layoffs as defined above. The Employer shall have the burden of proving that drivers at the gaining domiciles have not had their work opportunities adversely affected by the redomiciling of drivers. The seven hundred dollar ($700) average wage guarantee shall be determined based on the average four (4) weeks earnings of each active protected driver on the bottom twenty-five percent (25%) of the seniority roster. When the earnings of any active protected driver in the bottom twenty-five percent (25%) of the seniority roster totals less than two thousand, eight hundred dollars ($2,800) during each four (4) week period, the driver shall be compensated for the difference between actual earnings and two thousand, eight hundred dollars ($2,800). The four (4) week average shall be calculated each week on a "rolling" basis. A "rolling" four (4) week period is defined as a base week and the previous three consecutive weeks. Where an Employer makes a payment to an employee to fulfill the guarantee, the amount paid shall be added to the employee's earnings for the base week of the applicable four (4) week period and shall be included in the calculations for subsequent four (4) week "rolling" periods to determine whether any further guarantee payments to the employee are due. 35 Time not worked shall be credited to drivers for purposes of computing earnings in the following instances: a. Where a driver is offered a work opportunity that the driver has a contractual obligation to accept, and the driver elects not to accept such work, the driver shall have an amount equal to the amount of the wages such work would have generated credited to such driver for purposes of determining the seven hundred dollar ($700) average wage guarantee. No driver shall be penalized by having contractual earned time off credited for purposes of determining the seven hundred dollar ($700) average wage guarantee. However, where a driver takes earned time off in excess of forty-eight (48) hours during any work week, that work week shall be excluded from the rolling four (4) week period used to determined the seven hundred dollar ($700) average wage guarantee. b. Where a driver uses a contractual provision to refuse or defer work so as to knowingly avoid legitimate work opportunity and therefore abuse the seven hundred dollar ($700) average wage guarantee, the driver shall have an amount equal to the amount of the wages such work would have generated credited to such driver for purposes of determining the seven hundred dollar ($700) average wage guarantee. Nothing in this subsection applies to or shall be construed to limit claims by any driver on the seniority roster at a gaining domicile alleging that the driver's work opportunity was adversely affected following the implementation of the Intermodal Change of Operations because of the Employer's failure to provide adequate work opportunities for existing and redomiciled drivers. However, after the point that the Employer has provided adequate work opportunities for protected drivers (existing and redomiciled), the wage protection for active drivers in the bottom twenty-five percent (25%) of the seniority roster shall be limited to the seven hundred dollar ($700) guarantee. As soon as a factual determination has been made that a driver in the bottom twenty-five percent (25%) of the seniority roster is entitled to the seven hundred dollar ($700) average wage guarantee, the driver's claim shall be paid. All other types of claims that the driver's work opportunities have been adversely affected shall be held in abeyance until determined through the intermodal grievance procedure. Section 4. National Intermodal Committee The parties shall establish a National Intermodal Committee composed of four (4) Union representatives appointed by the Union Chairman of the National Grievance Committee and four (4) Employer representatives appointed by the Employer Chairman of the National Grievance Committee. In the event a proposed intermodal operation includes the transfer of work subject to the provisions of Article 8, Section 6, the National Intermodal Committee shall then be considered as a combined National Intermodal/Multi-Region Change of Operations Committee with the authority to resolve all seniority issues in accordance with the authority granted by Article 8, Section 6(g). The National Intermodal Committee shall establish rules of procedure to govern the manner in which proposed intermodal operations are to be heard, procedures for resolving intermodal issues and procedures for establishing pre-hearing guidelines. Any grievance concerning the application or interpretation of Article 29, Section 2(c) or concerning any issues that may arise from an approved intermodal operation provided for in this Section 3, shall be first referred to the National Intermodal Committee. If the National Intermodal Committee is unable to reach a decision on an interpretation or grievance, the issue will be referred to the National Grievance Committee. Section 5. The Employer is prohibited from using rail as a subterfuge to transport freight by truck, driven by those outside of the bargaining unit. To this end, all loads tendered to the railroad shall be tendered by the Employer using bargaining unit employees at the point where the load is to be placed on the rail. Once tendered to the railroad, a load may not be transferred to non-bargaining unit personnel for transport by truck except in bona fide emergencies beyond the control of the Employer and/or the railroad. Such emergencies shall not include the Employer tendering loads to the railroad when the Employer knows or should know the load will not meet the scheduled departure time of the train and the railroad then transports the load by truck. The parties agree that this Subsection shall not apply to the Employer's existing rail operations, that have otherwise been permitted prior to February 8, 1998, by written agreement of the parties, or through a grievance decision. The parties further agree that nothing in this Subsection shall be construed to limit or otherwise affect the railroad's movements of loads within the metropolitan area between railroads or between tracks. This provision shall apply to all rail activities permitted under this Article. Section 6. The parties recognize that there may be additional business opportunities in the truckload market which could provide job opportunities, particularly in pick-up and delivery work. Recognizing the need to ensure adequate protection for existing bargaining unit employees, the parties have agreed to use their best efforts to negotiate an intermodal truckload agreement that would permit Employers under this Agreement to compete in the truckload market, which is primarily handled by nonunion companies. Any intermodal truckload agreement must be submitted for approval by the Union designated committee, the Local Unions involved and thereafter, must be ratified in a secret ballot by a majority of all of the Employer's Teamster represented employees in its nationwide bargaining unit. ARTICLE 30. JURISDICTIONAL DISPUTES In the event that any dispute should arise between any Local Unions, parties to this Agreement or Supplements thereto, or between any Local Union, party to this Agreement or Supplements thereto and any other Union, relating to jurisdiction over employees or operations covered by such Agreements, the Employer and the Local Unions agree to accept and comply with the decision or settlement of the Unions or Union bodies which have the authority to determine such dispute, and such disputes shall not be submitted to arbitration under this Agreement or Supplements thereto or to legal or administrative agency proceedings. Pending such determination, the Employer shall not be precluded from seeking appropriate legal or administrative relief against work stoppages or picketing in furtherance of such dispute. 36 ARTICLE 31. MULTI-EMPLOYER, MULTI-UNION UNIT The parties agree to become a part of the multi-employer, multi-union bargaining unit established by this National Master Freight Agreement, and to be bound by the interpretations and enforcement of this National Master Freight Agreement and Supplements thereto. ARTICLE 32. SUBCONTRACTING Section 1. Work Preservation For the purpose of preserving work and job opportunities for the employees covered by this Agreement, the signatory Employer agrees that no operation, work or services of the kind, nature or type covered by, or presently performed by, or hereafter assigned to, the collective bargaining unit by the signatory Employer will be subcontracted, transferred, leased, diverted, assigned or conveyed in full or in part (hereinafter referred to as "divert" or "subcontract"), by the Employer to any other plant, business, person, or non-unit employees, or to any other mode of operation, unless specifically provided and permitted in this Agreement. In addition, the signatory Employer agrees that it will not, as hereinafter set forth, subcontract or divert the work presently performed by, or hereafter assigned to, its employees to non-employee owner-operators or other business entities owned and/or controlled by the signatory Employer, or its parent, subsidiaries or affiliates. Section 2. Diversion of Work - Parent or Subsidiary Companies The parties agree that for purposes of this Article it shall be presumed that a diversion of work in violation of this Agreement occurs when work presently and regularly performed by, or hereafter assigned to, employees of the signatory Employer has been lost and the lost work is being performed in the same manner (including transportation by owner-operators and independent contractors) by an entity owned and/or controlled by the signatory Employer, its parent, or a subsidiary, including logistics companies, within one hundred twenty (120) days of the loss of the work. The burden of overcoming such presumption in the grievance procedure shall be upon the Employer. Section 3. Subcontracting The Employer may subcontract work when all of his/her regular employees are working, except that in no event shall road work presently performed or runs established during the life of this Agreement be farmed out. No dock work shall be farmed out except for existing situations established by agreed-to past practices. Overflow loads may be delivered pursuant to the provisions of Article 29. Loads may also be delivered by other agreed-to methods or as presently agreed to. Other persons performing subcontracted work which is permitted herein shall receive no less than the equivalent of the economic terms and conditions of this Agreement and the applicable Supplement. The signatory Employer shall maintain records identifying persons performing subcontracted work permitted by this Agreement. Said records shall be made available for inspection by the Local Union(s) in the locality affected by such subcontract work. The normal, orderly interlining of freight for peddle on occasional basis, where there are parallel rights, and when not for the purpose of evading this Agreement, may be continued as has been permitted by past practice provided it is not being done to defeat the provisions of this Agreement. Section 4. Expansion of Operations (a) Adjoining Over-The-Road and Local Cartage It is understood and agreed that the provisions of the National Master Freight Agreement shall be applied, without evidence of union representation of the employees involved, to all subsequent additions to, and extensions of, current over-the-road or local cartage operations which adjoin and are controlled and utilized as part of such current operations of the signatory Employer, or any other entity, not operated wholly independently of the signatory Employer within the meaning of Article 3, Section 1 (a). In this regard, the parties agree that newly-established terminals and consolidations of terminals which are controlled and utilized as part of a current operation will be covered by the National Master Freight Agreement and applicable Over-the-Road and Local Cartage Supplemental Agreements. (b) New Pick-Up and Delivery Adjoining Current Operations It shall not, however, be a violation of this Article if, during the term of this Agreement, an Employer commences pick-up and delivery operations which adjoin and are controlled and utilized as part of such current operations with other than its own employees when there is insufficient business to economically justify the establishment of its own employer-operated pick-up and delivery service. However, the above exception shall thereafter terminate when sufficient economic justification develops so as to warrant the establishment and maintenance of the terminal operation by such Employer, in which event, the Employer shall institute a pick-up and delivery operation or continue such operations with companies which maintain wage standards established by this Agreement in the area where the work is conducted. This exception shall not apply in any circumstance where an Employer is presently engaged in pick-up and delivery operations either through his/her own terminal or through companies which maintain such wage standards. (c) Non-Adjoining Pick-Up and Delivery Operations The parties further agree that with respect to all subsequently established over-the-road and local cartage operations and terminals of the signatory Employer which do not adjoin, but are utilized and controlled as part of, current over-the-road and local cartage operations, the provisions of Article 2, Section 3(a) shall govern so that when a majority of the eligible employees of the signatory Employer performing work at that location execute a card authorizing a signatory Local Union to represent them as their collective bargaining agent at the terminal location, then, such employees shall automatically be covered by this Agreement and the applicable Supplemental Agreements. 37 (d) Operations permitted by Article 29, and not in violation of any other provisions of this Agreement, are not to be considered as extensions of current operations within the meaning of Section 4. Section 5. For the purpose of preserving work and job opportunities, the National Grievance Committee may define the circumstances and adopt procedures by which an Employer and a Local Union, parties to this Agreement, may in compliance therewith enter into a Special Circumstance Agreement which does not meet the standards provided herein. Section 6. Grievances arising under this Article shall be processed on an expedited basis pursuant to the procedures contained in Article 8, Section 1(a). ARTICLE 33. COST-OF-LIVING (COLA) All regular employees, subject to this Agreement, shall be covered by the provisions of a cost-of-living allowance as set forth in this Article. The amount of the cost-of-living allowance shall be determined as provided below on the basis of the "Consumer Price Index for Urban Wage Earners and Clerical Workers, CPI-W, (Revised Series Using 1982-84 Expenditure Patterns), All Items (1982-84=100), published by the Bureau of Labor Statistics, U.S. Department of Labor" and referred to herein as the "Index". Cost-of-living allowances shall be effective on April 1, 1999, April 1, 2000, April 1, 2001 and April 1, 2002. The April 1, 1999, adjustment shall be calculated by the difference between the January, 1998, Index and the January, 1999, Index. The April 1, 2000, adjustment shall be calculated by the difference between the January, 1999, Index and the January, 2000, Index. The April 1, 2001, adjustment shall be calculated by the difference between the January, 2000, Index and the January, 2001, Index. The April 1, 2002, adjustment shall be calculated by the difference between the January, 2001, Index and the January, 2002, Index. The cost-of-living increases shall be calculated as follows: For every .2 increase in the Index, there shall be a one cent (1(cent)) per hour or .25 mills per mile increase in the wage rates. However, the parties agree, that in no event, will the hourly and mileage cost-of-living increases payable be lower than thirty-five cents (35 (cents)) per hour or .875 cents per mile on April 1, 1999; thirty-five cents (35 (cents)) per hour or .875 cents per mile on April 1, 2000; thirty-five cents (35 (cents)) per hour or .875 cent per mile on April 1, 2001; thirty-five cents (35 (cents)) per hour or .875 cent per mile on April 1, 2002; and the parties further agree that the maximum hourly and mileage cost-of-living increases payable be thirty-five cents (35 (cents)) per hour or .875 cents per mile on April 1, 1999; thirty- five cents (35 (cents)) per hour or .875 cents per mile on April 1, 2000; thirty-five cents (35 (cents)) per hour or .875 cent per mile on April 1, 2001; thirty-five cents (35 (cents)) per hour or .875 cent per mile on April 1, 2002. For the duration of this Agreement only, all cost-of-living allowances shall become a fixed part of the base rate for all classifications on the effective date of each cost-of-living allowance. A decline in the Index shall not result in a reduction of classification base rates. In the event the appropriate Index figure is not issued before the effective date of the cost-of-living adjustment, the cost-of-living adjustment that is required will be made at the beginning of the first (1st) pay period after receipt of the Index and will be made retroactive to the effective date. In the event the Bureau of Labor Statistics should revise or correct an applicable Index figure, any adjustment that may be required in the cost-of-living adjustment shall be effective at the beginning of the first (1st) pay period after receipt of the revised or corrected Index figure and no retroactive adjustments will be made. In the event that the Index shall be revised or discontinued and in the event the Bureau of Labor Statistics, U.S. Department of Labor, does not issue information which would enable the Employer and the Union to know what the Index would have been had it not been revised or discontinued, then the Employer and the Union will meet, negotiate, and agree upon an appropriate substitute for the Index. Upon the failure of the parties to agree in such negotiations within sixty (60) days, thereafter, each party shall be permitted all lawful economic recourse to support its request. The parties agree that the notice provision provided herein shall be accepted by all parties as compliance with the notice requirements of applicable law, so as to permit economic action at the expiration thereof. ARTICLE 34. GARNISHMENTS In the event of notice to an Employer of a garnishment or impending garnishment, the Employer may take disciplinary action if the employee falls to satisfy such garnishment within a seventy-two (72)-hour period (limited to working days) after notice to the employee. However, the Employer may not discharge any employee by reason of the fact that his earnings have been subject to garnishment for any one (1) indebtedness. If the Employer is notified of three (3) garnishments irrespective of whether satisfied by the employee within the seventy-two (72)-hour period, the employee may be subject to discipline, including discharge in extreme cases. However, if the Employer has an established practice of discipline or discharge with a fewer number of garnishments or impending garnishments, if the employee fails to adjust the matter within the seventy-two (72)-hour period, such past practice shall be applicable in those cases. 38 ARTICLE 35. Section 1. Employee's Bail Employees will be bailed out of jail if accused of any offense in connection with the faithful discharge of their duties, and any employee forced to spend time in jail or in courts shall be compensated at his/her regular rate of pay. In addition, he/she shall be entitled to reimbursement for his/her meals, transportation, court costs, etc.; provided, however, that faithful discharge of duties shall in no case include compliance with any order involving commission of a felony. In case an employee shall be subpoenaed as a company witness, he/she shall be reimbursed for all time lost and expenses incurred. Section 2. Suspension or Revocation of License In the event an employee receives a traffic citation for a moving violation which would contribute to a suspension or revocation or suffers a suspension or revocation of his/her right to drive the companies equipment for any reason, he/she must promptly notify his/her Employer in writing. Failure to comply will subject the employee to disciplinary action up to and including discharge. If such suspension or revocation comes as a result of his/her complying with the Employer's instruction, which results in a succession of size and weight penalties or because he/she complied with his/her Employer's instruction to drive company equipment which is in violation of DOT regulations relating to equipment or because the company equipment did not have either a speedometer or a tachometer in proper working order and if the employee has notified the Employer of the citation for such violation as above mentioned, the Employer shall provide employment to such employee at not less than his/her regular earnings at the time of such suspension for the entire period thereof. When an employee in any job classification requiring driving has his/her operating privilege or license suspended or revoked for reasons other than those for which the employee can be discharged by the Employer, a leave of absence, not to exceed three (3) years, shall be granted for such time as the employee's operating privilege or license has been suspended or revoked. Section 3. Drug Testing PREAMBLE While abuse of alcohol and drugs among our members/employees is the exception rather than the rule, the Teamsters National Freight Industry Negotiating Committee and the Employers signatory to this Agreement share the concern expressed by many over the growth of substance abuse in American society. The parties have agreed that the Drug and Alcohol Abuse Program will be modified in the event that further federal legislation or Department of Transportation regulations provide for revised testing methodologies or requirements. The parties have incorporated the appropriate changes required by the applicable DOT drug testing rules under 49 CFR Part 40, and agree that if new federally mandated changes are brought about, they too will become part of this Agreement. The drug testing procedure, agreed to by labor and management, incorporates state-of-the-art employee protections during specimen collection and laboratory testing to protect the innocent. In order to eliminate the safety risks which result from alcohol or drugs, the parties have agreed to the following procedures: NMFA UNIFORM TESTING PROCEDURE A. Probable Suspicion Testing In cases in which an employee is acting in an abnormal manner and at least one (1) supervisor, two (2) if available, have probable suspicion to believe that the employee is under the influence of controlled substances, the Employer may require the employee (in the presence of a union shop steward, if possible) to undergo a urine specimen collection and a breath alcohol analysis as provided in Section 4B. The supervisor(s) must have received training in the signs of drug intoxication in a prescribed training program which is endorsed by the Employer. Probable suspicion means suspicion based on specific personal observations that the Employer representative(s) can describe concerning the appearance, behavior, speech or breath odor of the employee. The observations may include the indication of chronic and withdrawal effects of controlled substances. The supervisor(s) must make a written statement of these observations within twenty-four (24) hours. A copy must be provided to the shop steward or other union official after the employee is discharged. Suspicion is not probable and thus not a basis for testing if it is based solely on third (3rd) party observation and reports. If requested, the employee will sign a consent form authorizing the urine collection and breath analysis and releasing the results of the urine laboratory testing to his/her Employer's Medical Review Officer and the breath testing results to the Employer. The employee shall not be required to waive any claim or cause of action under the law. For all purposes herein, the parties agree that the terms "probable suspicion" and "reasonable cause" shall be synonymous. A refusal to provide a urine specimen or undertake a breath analysis will constitute a presumption of intoxication and the employee will be subject to discharge without the receipt of a prior warning letter. If the employee is unable to produce 45mL of urine, he/she shall be given up to 40 ounces of fluids to drink and shall remain at the collection site under observation until able to produce a 45mL specimen, for a period of up to three (3) hours. If the employee is still unable to produce a 45mL specimen, the Employer shall direct the employee to undergo an evaluation by a licensed physician concerning the employee's inability to provide an adequate amount of urine. If the physician concludes that there is no medical condition that would preclude the employee from providing an adequate amount of urine, the employee will be considered to have refused the test. If an employee is unable to provide sufficient breath sample for analysis, the procedures outlined in the DOT regulations shall be followed for all employees. Absent a medical condition, as determined by a licensed physician, the employee's failure to provide an adequate amount of breath will be regarded as a refusal to take the test. Contractual time limits for disciplinary action, as set forth in the appropriate Supplemental Agreement, shall begin on the day on which specimens are taken. In the event the Employer alleges only that the employee is intoxicated on alcohol and not drugs, previously agreed-to procedures under the appropriate Supplemental Agreement for determining alcohol intoxication shall apply. In the event the Employer is unable to determine whether the abnormal behavior is due to drugs or alcohol, the drug testing procedure contained herein and the breath alcohol testing procedure contained in Section 4B shall be used. If the laboratory results are not known prior to the expiration of the contractual time period for disciplinary action, the cause for disciplinary action shall specify that the basis for such disciplinary action is for "alcohol and/or drug intoxication." 39 B. DOT Random Testing It is agreed by the parties that random urine drug testing will be implemented only in accordance with the DOT rules under 49 CFR Part 382, Section C. The method of selection for random urine drug testing will be neutral so that all employees subject to testing will have an equal chance to be randomly selected. The term "employees subject to testing" under this agreement is meant to include any employee required to have a Commercial Drivers License (CDL) under the Department of Transportation regulations. Employees out on long term injury or disability for any reason shall not be tested. The provisions of Article 35, Section 3 F 3 (Split Sample Procedures), and Article 35, Section 3 J 1 (One-Time Rehabilitation), shall apply to random urine drug testing. C. Non-Suspicion-Based Post-Accident Testing Non-suspicion-based post-accident testing is defined as urine drug testing as a result of an accident which meets the definition of an accident as outlined in the Federal Motor Carrier Safety Regulations. Urine drug testing will be required after accidents meeting the following conditions and drivers are required to remain readily available for testing for thirty-two (32) hours following the accident or until tested. Employees subject to non-suspicion-based post-accident drug testing shall be limited to those employees subject to DOT drug testing, who are involved in an accident where there is: (i) a fatality, or; (ii) a citation under State or local law is issued to the driver for a moving traffic violation arising from the accident in which: (a) bodily injury to a person who, as a result of the injury, immediately receives medical treatment away from the scene of the accident, or (b) one or more motor vehicles incurring disabling damage as a result of the accident, requires the vehicle(s) to be transported away from the scene by a tow truck or other vehicle. The driver has the responsibility to make himself/herself available for urine drug testing within the thirty-two (32) hour period in accordance with the procedures outlined in this Subsection. The driver is responsible to notify the Employer upon receipt of a citation and to note receipt thereof on the accident report. Failure to so notify the Employer shall subject the driver to disciplinary action. If a driver receives a citation for a moving violation more than thirty-two (32) hours after a reportable accident, he/she shall not be required to submit to post-accident urine drug testing. The Employer shall make available a urine drug testing kit and an appropriate collection site for the driver to provide specimens. The provisions of Article 35, Section 3 F 3 (Split Sample Procedures), and Article 35, Section 3 J 1 (One-Time Rehabilitation), shall apply to non-suspicion-based post-accident urine drug testing. D. Chain of Custody Procedures Any specimens collected for drug testing shall follow the DHHS/DOT (Department of Health and Human Services/Department of Transportation) specimen collection procedures. At the time specimens are collected for any drug testing, the employee shall be given a copy of the specimen collection procedures. In the presence of the employee, the specimens are to be sealed and labeled. As per DOT regulations, it is the employee's responsibility to initial the specimens, additionally ensuring that the specimens tested by the laboratory are those of the employee. The required procedure follows: When urine specimens are to be provided, at least 30mL of specimen shall be collected and placed in one (1) self-sealing, screw-capped container. A urine specimen of at least 15mL shall be placed in a second (2nd) such container. They shall be sealed, labeled and initialed by the employee without the containers leaving the employee's presence. The employee has the responsibility to identify each container and initial same. Following collection, the specimens shall be placed in the transportation container together with the appropriate copies of the chain of custody form. The transportation container shall then be sealed in the employee's presence. The employee has the responsibility to initial the outside of the container. The container shall be sent to the designated testing laboratory at the earliest possible time by the fastest available means. In this urine collection procedure, the donor shall urinate into a collection container capable of holding at least 60 mL, which shall remain in full view of the employee until transferred to tamper-resistant urine bottles, and sealed and labeled, and the employee has initialed the bottles. It is recognized that the Employer has the right to request the personnel administering a urine collection to take such steps as checking the color and temperature of the urine specimen(s) to detect tampering or substitution, provided that the employee's right to privacy is guaranteed and in no circumstances may observation take place while the employee is producing the urine specimens, unless required by DOT regulations. If it is established that the employee's specimen has been intentionally tampered with or substituted by the employee, the employee is subject to discipline as if the specimen tested positive. In order to deter adulteration of the urine specimen during the collection process, physiologic determinations such as creatinine, specific gravity and/or chloride measurements may be performed by the laboratory. Any findings by the laboratory outside the "normal" ranges for creatinine, specific gravity and/or chloride shall be immediately reported to the Company's Medical Review Officer (MRO). The parties recognize that the key to chain of custody integrity is the immediate sealing and labeling of the specimen in the presence of the tested employee. If each container is received undamaged at the laboratory properly sealed, labeled and initialed, consistent with DOT regulations as certified by the laboratory, the Employer may take disciplinary action based upon properly obtained laboratory results. E. Urine Collection Kits and Forms The contents of the urine collection kit shall be as follows: 1. The kit shall include two (2) screw-capped self-sealing tamper-resistant urine collection bottles of appropriate capacities, one of which contains a temperature reading device affixed to the outside of the container capable of registering the urine temperature specified in the DOT regulations. 40 2. A uniquely numbered (i.e. Specimen Identification Number) DOT approved chain of custody form with similarly numbered Bottle Custody Seals, and a transportation kit seal (e.g., Box Seal) shall be utilized during the urine collection process and completed by the collection site person. The appropriate laboratory copies are to be placed into the transportation container with the urine specimens. The exterior of the transportation kit shall then be secured, e.g., by placing the tamper-proof Box Seal over the outlined area. The employee has the responsibility to initial the sealed transportation container. 3. Shrink-wrapped or similarly protected kits shall be used in all instances. F. Laboratory Requirements 1. Urine Testing In testing urine samples, the testing laboratory shall test specifically for those drugs and classes of drugs and employing the test methodologies and cutoff levels covered in the DOT Regulations 49 CFR, Part 40. 2. Specimen Retention All specimens deemed "positive" by the laboratory, according to the prescribed guidelines, must be retained at the laboratory for a period of one (1) year. 3. Split Sample Procedure There will be a split sample procedure for all employees selected for urine drug testing. When any test kit is received by the laboratory, the "primary" sealed urine specimen bottle shall be immediately removed for testing, and the remaining "split" sealed bottle shall be placed in secured storage. Such specimen shall be placed in refrigerated storage if it is to be tested outside of the DOT mandated period of time. The employee will be given a shrink-wrapped or similarly protected urine collection kit containing two (2) containers for the urine specimen. One (1) container must contain at least 30mL of urine, and a urine specimen of at least 15mL shall be placed in the second (2nd) container. Both shall be sealed in the employee's presence, initialed by the employee, then forwarded to an approved laboratory for testing. If the employee is advised by the MRO that the first (1st) urine sample tested positive, in a random, return to duty, follow-up, probable suspicion or post-accident urine drug test, the employee may, within seventy-two (72) hours of receipt of the actual notice, request from the MRO that the second (2nd) urine specimen be forwarded by the first laboratory to another independent and unrelated approved laboratory of the parties' choice for GC/MS confirmatory testing of the presence of the drug. If the employee chooses to have the second (2nd) sample analyzed, he/she shall at that time execute a special check-off authorization form to ensure payment by the employee. If the employee chooses the optional split sample procedure, and so notifies his Employer, disciplinary action can only take place after the first (1st) laboratory reports a positive finding and the second (2nd) laboratory confirms the presence of the drug. However, the employee may be taken out of service once the first (1st) laboratory reports a positive finding while the second (2nd) test is being performed. If the second (2nd) test is positive, and the employee wishes to use the rehabilitation options of this Section, the employee shall reimburse the Employer for the cost of the second (2nd) sample's analysis before entering the rehabilitation program. If the second (2nd) laboratory report is negative, the employee will be reimbursed for the cost of the second (2nd) test and for all lost time. It is also understood that if an employee opts for the split sample procedure, contractual time limits on disciplinary action in the Supplements are waived. 4. Laboratory Accreditation All laboratories used to perform urine drug testing pursuant to this Agreement must be accredited by the Substance Abuse & Mental Health Services Administration (SAMHSA). G. Laboratory Testing Methodology 1. Urine Testing The initial testing shall be by immunoassay which meets the requirements of the Food and Drug Administration for commercial distribution. The initial cutoff levels used when screening urine specimens to determine whether they are negative or positive for various classes of drugs shall be those contained in the Scientific and Technical Guidelines for Federal Drug Testing Programs (subject to revision in accordance with subsequent amendments to the HHS Guidelines). All specimens identified as positive on the initial test shall be confirmed using gas chromatography/mass spectrometry (GC/MS) techniques. Quantitative GC/MS confirmation procedures to determine whether the test is negative or positive for various classes of drugs shall be those contained in the Scientific and Technical Guidelines for Federal Drug Testing Programs (subject to revision in accordance with subsequent amendments to the HHS Guidelines). All specimens which test negative on either the initial test or the GC/MS confirmation test shall be reported only as negative. Only specimens which test positive on both the initial test and the GC/MS confirmation test shall be reported as positive. When a grievance is filed as a result of a positive drug test, the Employer shall obtain the test results from the laboratory relating to the drug test, and shall provide a copy to the Union. Where Schedule I and II drugs are detected, the laboratory is to report a positive test based on a forensically acceptable positive quantum of proof. All positive test results must be reviewed by the certifying scientist and certified as accurate. 2. Prescription and Non-prescription Medications If an employee is taking a prescription or non-prescription medication in the appropriate described manner he/she will not be disciplined. Medications prescribed for another individual, not the employee, shall be considered to be illegally used and subject the employee to discipline. 3. Medical Review Officer (MRO) The Medical Review Officer (MRO) shall be a licensed physician with the knowledge of substance abuse disorders. The MRO shall review and interpret all urine drug test results, as required by the DOT for all employees tested for drugs under this Agreement, from the laboratory and shall examine alternate medical explanations for such positive tests. Prior to the final decision to verify a positive urine drug test result, all employees shall have the opportunity to discuss the results with the MRO. If the employee has not discussed the results of the positive urine drug test with the MRO within five (5) days after being contacted, or refused the opportunity to do so, the MRO shall proceed with the positive verification. 41 4. Substance Abuse Professional (SAP) The Substance Abuse Professional (SAP), as provided in the regulations, means a licensed physician (Medical Doctor or Doctor of Osteopathy), or a licensed or certified psychologist, social worker, or employee assistance professional, or an addiction counselor (certified by the National Association of Alcoholism and Drug Abuse Counselors Certification Commission or by the International Certification Reciprocity Consortium/Alcohol & Other Drug Abuse). All must have knowledge of and clinical experience in the diagnosis and treatment of alcohol and controlled substance-related disorders. H. Leave of Absence Prior to Testing 1. An employee shall be permitted to take leave of absence in accordance with the FMLA or applicable State leave laws for the purpose of undergoing treatment pursuant to an approved program of alcoholism or drug use. The leave of absence must be requested prior to the commission of any act subject to disciplinary action. 2. Employees requesting to return to work from a voluntary leave of absence for drug use or alcoholism shall be required to submit to testing as provided for in Part J of this Section. Failure to do so will subject the employee to discipline including discharge without the receipt of a prior warning letter. The provisions of this Section shall not apply to probationary employees. I. Disciplinary Action Based on Positive Test Results Consistent with past practice under this Agreement, and notwithstanding any other language in any Supplement, the Employer may take disciplinary action based on the test results as follows: 1. If the MRO reports that a urine drug test is positive, the employee shall be subject to discharge except as provided in Part J. 2. The following actions shall apply in probable suspicion testing based on DOT and contractual mandates. a. If the urine drug test is positive according to the procedures described in Part G, the employee shall be subject to discharge. b. If the breath alcohol test results show a blood alcohol concentration equal to or above the level previously determined by the appropriate Supplemental Agreement for alcohol intoxication, the employee shall be subject to discharge pursuant to the Supplemental Agreement. c. If the breath alcohol test is negative and the urine drug test is negative, the employee shall be immediately returned to work and made whole for all lost earnings. J. Return to Employment After a Positive Urine Drug Test 1. Any employee testing positive for drugs in a urine drug test (other than under probable suspicion testing), thereby subjecting the employee to discipline, shall be granted reinstatement on a one (1)-time lifetime basis if the employee successfully completes a program of evaluation and/or rehabilitation as prescribed by the Substance Abuse Professional (SAP). The SAP will evaluate the employee, and, if necessary, refer him/her to a treatment program which has been approved by the applicable Health and Welfare Fund, where such is the practice. Any cost of evaluation and/or rehabilitation over and above that paid for by the applicable Health and Welfare Fund, must be borne by the employee. 2. Employees electing the one-time lifetime evaluation and/or rehabilitation must notify the Company within ten (10) days of being notified by the Company of a positive urine drug test. The evaluation process and/or rehabilitation program must take a minimum of ten (10) days, The employee must begin the evaluation process and/or rehabilitation program within fifteen (15) days after notifying the Company. The employee must request reinstatement promptly after successful completion of the evaluation process and/or rehabilitation program. After the minimum ten (10) day period, the employee may request reinstatement, but must first provide a negative return to duty urine drug test, to be conducted by a clinic and laboratory of the Employer's choice, before the employee can be reinstated. Any employee choosing to protest the discharge must file protest under the applicable Supplement. After the discharge is sustained, the employee must notify the Company within ten (10) days of the date of the decision, of the desire to enter the evaluation process and/or rehabilitation program. 3. While undergoing treatment, the employee shall not receive any of the benefits provided by this Agreement or Supplements thereto except the continued accrual of seniority. 4. Before reinstatement after the minimum ten (10) day period, the employee must have successfully completed any recommended treatment and submitted to a return-to-duty urine drug test with a negative result. The employee will be subject to at least six (6) unannounced follow-up urine drug tests in the first year, as determined by the SAP. If, at any time, the employee tests positive or refuses to submit to a test, the employee shall be subject to discharge. (a) Return-to-duty drug test is a urine drug test which an employee must complete with a negative result, after having been evaluated by a SAP and having successfully completed treatment. (b) Follow-up drug testing shall mean those unannounced urine drug tests required (minimum of six (6) in a twelve (12) month period) when an employee has tested positive for drugs and has been evaluated by the SAP, completed treatment, and returned to work. The SAP has the authority to order any number of follow-up urine drug tests and to extend the twelve (12) month period up to sixty (60) months. K. Special Grievance Procedure 1. The parties shall together create a Special Region Joint Area Committee consisting of an equal number of employer and union representatives to hear drug-related discipline disputes. All such disputes arising after the establishment of the Special Region Joint Area Committee shall be taken up between the Employer and Local Union involved. Failing adjustment by these parties, the dispute shall be heard by the Special Region Joint Area Committee within ninety (90) days of the Committee's receipt of the dispute. Where the Special Region Joint Area Committee, by majority vote, settles a dispute, such decision shall be final and binding on both parties with no further appeal. Where the Special Region Joint Area Committee is unable to agree on or come to a decision on a dispute, the dispute will be referred to the National Grievance Committee. 2. The procedures set forth herein may be invoked only by the authorized Union Representative or the Employer. 42 L. Paid-for Time 1. Training Employees undergoing substance abuse training as required by the DOT will be paid for such time and the training will be scheduled in connection with the employee's normal work shift, where possible. 2. Testing Employees subject to testing and selected by the random selection process for urine drug testing shall be compensated at the regular straight time hourly rate of pay in the following manner provided that the test is negative: a. Random Drug Tests (1) for all time at the collection site. (2) (a) for travel time one way if the collection site is reasonably en route between the employee's home and the terminal, and the employee is going to or from work; or (b) for travel time both ways between the terminal and the collection site, only if the collection site is not reasonably en route between the employee's home and the terminal. (3) When an employee is on the clock and a random drug test is taken any time during the employee's shift, and the shift ends after eight (8) hours, the employee is paid time and one-half for all time past the eight (8) hours. (4) The Employer will not require the city employee to go for urine drug testing before the city employee's shift, provided the collection site is open during or immediately following the employee's shift. (5) During an employee's shift, an employee will not be required to use his/her personal vehicle from the terminal to and from the collection site to take a random drug test. (6) If a road driver is called at home to take a random drug test at a time when the road driver is not en route to or from work, the driver shall be paid, in addition to all time at the collection site, travel time both ways between the driver's home and the collection site with no minimum guarantee. b. Non-Suspicion-Based Post-Accident Testing (1) In the event of a non-suspicion-based post-accident testing situation, where the employee has advised the Employer of the issuance of a citation for a moving violation, but the Employer does not direct the employee to be tested immediately, but sends the employee for testing at some later time [during the thirty-two (32) hour period], the employee shall be paid for all time involved in testing, from the time the employee leaves home until the employee returns home after the test. (2) When the Employer takes a road driver out of service and directs the employee to be tested immediately, the Employer will make arrangements for the road driver to return to his/her home terminal in accordance with the Supplemental Agreement. Section 4. Alcohol Testing During the negotiation of the 1994-1998 National Master Freight Agreement, the parties agreed, under Article 35, Section 4, to negotiate language consistent with the drug and alcohol testing regulations promulgated by the United States Department of Transportation (DOT) and the Federal Highway Administration (FHWA). The parties agree that in the event of further federal legislation or DOT regulations providing for revised methodologies or requirements, those revisions shall, to the extent they impact this Agreement, unless mandated, be subject to mutual agreement by the parties. A. Employees Who Must be Tested There shall be random, non-suspicion-based post-accident and probable suspicion alcohol testing of all employees subject to DOT-mandated alcohol testing. This includes all employees who, as a condition of their employment, are required to have a DOT physical, a CDL and are subject to testing for drugs under Article 35, Section 3 B. Employees covered by this Collective Bargaining Agreement who are not subject to DOT-mandated alcohol testing are only subject to probable suspicion testing as provided in Article 35, Section 3 of the NMFA or the appropriate article of the applicable supplemental agreement. The alcohol breath testing methodology outlined in this Section will be utilized for all employees required to undergo probable suspicion testing. (For test results and discipline, refer to NMFA, Article 35, Section 3 I 2.) B. Alcohol Testing Procedure All alcohol testing under this Section will be conducted in accordance with applicable DOT/FHWA regulations. Breath samples will be collected by a Breath Alcohol Technician (BAT), who has successfully completed the necessary training course that is the equivalent of the DOT model course. The training shall be specific to the type of Evidential Breath Testing (EBT) device being used for testing. The Employer shall provide the employees with material containing the information required by Section 382.601 of the Federal Motor Carrier Safety Regulations. 43 1. Screening Test The initial screening test uses an Evidential Breath Testing (EBT) device, unless other testing methodologies or devices are mandated or agreed upon, to determine levels of alcohol. The following initial cutoff levels shall be used when screening breath samples to determine whether they are negative or positive for alcohol. Breath Alcohol Levels: Less than 0.02% BAC - Negative 0.02% BAC and above - Positive (Requires Confirmation Test) 2. Confirmatory Test All samples identified as positive on the initial screening test, indicating an alcohol concentration of 0.02% BAC or higher, shall be confirmed using an EBT device that is capable of providing a printed result in triplicate; is capable of assigning a unique sequential number to each test; and is capable of printing out, on each copy of the printed test result, the manufacturer's name for the device, the device's serial number and the time of the test, unless other testing methodologies or devices are mandated or mutually agreed upon. A confirmation test must be performed a minimum of fifteen (15) minutes after the screening test, but not more than thirty (30) minutes after the screening test. The following cutoff levels shall be used to confirm a positive test for alcohol: Breath Alcohol Levels: Less than 0.02% BAC - Negative 0.02% BAC to 0.039% BAC - Positive* 0.04% BAC and above - Positive* *Refer to Section 4 L for Discipline Based on a Positive Test C. Notification All employees subject to DOT-mandated random alcohol testing will be notified of testing by the Employer, in person or by direct phone contact. D. Pre-Qualification Testing for Non-DOT Personnel An employee who transfers from a non-DOT covered position to a safety sensitive position, requiring DOT-mandated alcohol testing, will be subject to an alcohol test as part of the pre-qualification conditions for filling such position. Employees will be advised in writing prior to transferring to a safety sensitive function as defined by DOT, that pre-qualification testing will be conducted to determine the presence of alcohol. Any employee testing positive below the state DWI/DUI limit in a pre-qualification alcohol test shall not be permitted to requalify, for a period of one (1) year. E. Random Testing The method used to randomly select employees for alcohol testing shall be neutral, scientifically valid and in compliance with DOT regulations. The annual random testing rate for alcohol use shall be the rate established by the Administrator of the FHWA. In the event of a grievance or litigation, the Employer shall, upon written request from the employee, release to the employee and the Union (in its capacity as representative of the grievant and as a decision maker in the grievance process), information required to be maintained under the DOT alcohol testing regulations and arising from the results of an alcohol test which is subject to release under the regulations. The parties agree that no effort will be made to cause the system and method of selection to be anything but a true random selection procedure ensuring that all affected employees are treated fairly and equally. Employees subject to random alcohol testing shall be tested within one (1) hour prior to starting the tour of duty, during the tour of duty, or immediately after completing the tour of duty. Employees who are on long-term illness or injury leave of absence, disability or vacation shall not be subject to testing during the period of time they are away from work. F. Non-Suspicion-Based Post-Accident Testing Employees subject to non-suspicion-based post-accident alcohol testing shall be limited to those employees subject to DOT alcohol testing, who are involved in an accident where there is: (i) a fatality, or; (ii) a citation under State or local law is issued to the driver for a moving traffic violation arising from the accident in which: (a) bodily injury to a person who, as a result of the injury, immediately receives medical treatment away from the scene of the accident, or (b) one or more motor vehicles incurring disabling damage as a result of the accident, requires the vehicle(s) to be transported away from the scene by a tow truck or other vehicle. Alcohol testing will be required under the above conditions and employees are required to submit to such testing as soon as practicable. Under no circumstances shall this type of testing be conducted after eight (8) hours from the time of the accident. It shall be the responsibility of the driver to remain readily available for testing after the occurrence of a commercial motor vehicle accident. It is also the responsibility of the employee to not use alcohol for eight (8) hours or until a DOT post-accident alcohol test is performed, whichever occurs first. It is not 44 the intention of this language to require the delay of necessary medical attention or to prohibit the driver from leaving the scene of an accident for the period necessary to obtain assistance in responding to the accident or necessary medical attention. Prior to the effective date of the DOT alcohol testing regulations, the Employer agrees to give each employee subject to DOT non-suspicion-based post-accident testing written notification of the procedures required by the DOT regulations in the event of an accident as defined by the DOT. G. Substance Abuse Professional (SAP) 1. The Substance Abuse Professional (SAP), as provided in the regulations, means a licensed physician (Medical Doctor or Doctor of Osteopathy), or a licensed or certified psychologist, social worker, or employee assistance professional, or an addiction counselor (certified by the National Association of Alcoholism and Drug Abuse Counselors Certification Commission or by the International Certification Reciprocity Consortium/Alcohol & Other Drug Abuse). All must have knowledge of and clinical experience in the diagnosis and treatment of alcohol and controlled substance-related disorders. 2. The Employer will provide the employee with a list of resources available to the driver in evaluating and resolving problems with the misuse of alcohol as soon as practicable but no later than thirty-six (36) hours after the Employer's receipt of notice from the BAT, exclusive of holidays and weekends. The SAP will be the only person responsible for determining, during the evaluation process, whether an employee will be directed to a rehabilitation program, and if so, for how long. 3. Follow-up and return-to-duty tests need not be confined to the substance involved in the violation. If the SAP determines that a driver needs assistance with an alcohol and drug abuse problem, the SAP may require drug tests to be performed along with any required alcohol follow-up and/or return-to-duty tests, if it has been determined that a driver has violated the drug testing prohibition. 4. Any cost of evaluation by the SAP and/or rehabilitation recommended by the SAP associated with the abuse of alcohol while performing or available to perform safety-sensitive functions under this Agreement, over and above that paid for by the applicable Health and Welfare Fund, must be borne by the employee. The Employer shall pay for pre-qualification alcohol testing for employees who transfer from a non-DOT covered position to a safety-sensitive position requiring DOT-mandated alcohol testing provided the employee tests negative. The Employer will also pay for random, non-suspicion-based post-accident and probable suspicion alcohol testing. Return-to-duty and follow-up alcohol testing that is prescribed by the SAP, will be paid for by the Employer, provided the employee tests negative. H. Probable Suspicion Testing Employees subject to DOT probable suspicion alcohol testing under this Section shall be tested in accordance with current, applicable DOT regulations. For all purposes herein, the parties agree that the terms "probable suspicion" and "reasonable cause" shall be synonymous. Probable suspicion is defined as an employee's specific observable appearance, behavior, speech or body odor that clearly indicates the need for probable suspicion alcohol testing. In the event the Employer is unable to determine whether the abnormal behavior or appearance is due to alcohol or drugs, the Employer shall specify that the basis for any disciplinary action or testing is for "alcohol and/or drug intoxication." In such cases, the employee shall be tested in accordance with Article 35, Section 3 A, and applicable DOT alcohol testing regulations. In cases where an employee has specific, observable, abnormal indicators regarding appearance, behavior, speech or body odor, and at least one (1) supervisor, two (2) if available, have probable suspicion to believe that the employee is under the influence of alcohol, the Employer may require the employee, in the presence of a union shop steward or other employee requested by the employee under observation, to submit to a breath alcohol test. Suspicion is not probable and thus not a basis for testing if it is based solely on third party observation and reports. The supervisor(s) must make a written statement of these observations within twenty-four (24) hours. Upon request, a copy must be provided to the shop steward or other union official after the employee is discharged or suspended or taken out of service. All supervisors and Employer representatives designated to determine whether probable suspicion exists to require an employee to undergo alcohol testing shall receive specific training on the physical, behavioral, speech and performance indicators of how to detect probable suspicion alcohol misuse and use of controlled substances as required by DOT regulations. In the event the Employer requires a probable suspicion test, the Employer shall provide transportation to and from the testing location. I. Preparation for Testing All alcohol testing shall be conducted in conformity with the DOT alcohol regulations. Any alleged abuse by the Employer, such as proven harassment of any employee or deliberate violation of the regulations or the contract shall be subject to the grievance procedure to provide a reasonable remedy for the alleged violation. Upon arrival at the testing site, an employee must provide the Breath Alcohol Technician (BAT) with proper identification. If requested, the employee will sign a consent form authorizing the BAT to collect a breath sample and release the result of the breath testing to his/her Employer, but shall not be required to waive any claim or cause of action under the law. A standard DOT approved alcohol testing form will be used by all testing facilities. J. Specimen Testing Procedures All procedures for alcohol testing will comply with Department of Transportation regulations. No unauthorized personnel will be allowed in any area of the testing site. Only one alcohol testing procedure will be conducted by a BAT at the same time. The employee will provide his or her breath sample in a location that allows for privacy. The Employer agrees to recognize all employees' rights to privacy while being subjected to the testing process at all times and at all testing sites. Further, the Employer agrees that in all circumstances the employee's dignity will be considered and all necessary steps will be taken to ensure that the entire process does nothing to demean, embarrass or offend the employee unnecessarily. Testing will be under the direct observation of a Breath Alcohol Technician (BAT). All procedures shall be conducted in a professional, discreet and objective manner. Direct observation will be necessary in all cases. 45 The employee shall provide an adequate amount of breath for the Evidential Breath Testing device. If the individual is unable to provide a sufficient amount of breath, the BAT shall direct the individual to again attempt to provide a complete sample. If an employee is unsuccessful in providing the requisite amount of breath, the Employer then must have the employee obtain, as soon as practical, an evaluation from a licensed physician selected by the Employer and the Local Union concerning the employee's medical ability to provide an adequate amount of breath. If the physician is unable to determine that a medical condition has, or with a high degree of probability could have, precluded the employee from providing an adequate amount of breath, the employee's failure to provide an adequate amount of breath will be regarded as a refusal to take the test and subject the employee to discharge. K. Leave of Absence Prior to Testing An employee shall be permitted to take leave of absence in accordance with the FMLA or applicable State leave laws for the purpose of undergoing treatment pursuant to an approved program of alcoholism or drug use. The leave of absence must be requested prior to the commission of any act subject to disciplinary action. This provision does not alter or amend the disciplinary provision (Article 35, Section 4 L) of this Section. Before returning to work from a voluntary leave of absence, the employee must have completed any recommended treatment and taken a return to duty test, with a result of less than 0.02% BAC, and further be subject to six (6) unannounced follow-up alcohol tests in the first twelve (12) months following the employee's return to work. The Supplemental Agreements shall address the issue of an extra-board driver who, while at his home terminal, has consumed alcohol, is then called for dispatch and requests additional time off. Requesting time off under this provision shall not be used as a subterfuge to avoid taking a random alcohol (and/or drug) test. L. Disciplinary Action Based on Positive Test Results 1. First Positive Test 0.02% BAC-0.039% BAC Out of Service for 24 hours 0.04% BAC-Less than State DWI/DUI Limit Out of Service for the length of time determined by the SAP with a minimum of twenty-four (24) hours State DWI/DUI Limit and Above Subject to discharge 2. Second Positive Test 0.02% BAC-0.039% BAC Out of Service for a five (5) calendar day suspension 0.04% BAC-Less than State DWI/DUI Limit Out of Service for the length of time determined by the SAP with a minimum of a twenty (20) calendar day suspension State DWI/DUI Limit and Above Subject to discharge 3. Third Positive Test 0.02% BAC-0.039% BAC Out of Service for a fifteen (15) calendar day suspension 0.04% BAC-Less than State DWI/DUI Limit Out of Service for the length of time determined by the SAP with a minimum of a thirty (30) calendar day suspension State DWI/DUI Limit and Above Subject to discharge 4. Fourth Positive Test 0.02% BAC-0.039% BAC Subject to discharge 0.04% BAC-Less than State DWI/DUI Limit Subject to discharge State DWI/DUI Limit and Above Subject to discharge 5. An employee who is tested positive in a non-suspicion-based post-accident alcohol testing situation shall be subject to the following discipline for the positive alcohol test or the vehicular accident, whichever is greater: First Non-Suspicion-Based Post-Accident Positive Test - 0.02% BAC - 0.039% BAC - Thirty (30) calendar day suspension. 0.04% BAC and higher - Subject to discharge. Second Non-Suspicion-Based Post-Accident Positive Test - 0.02% BAC and higher - Subject to discharge. 6. An employee's refusal to submit to any alcohol test will subject the employee to discharge. M. Return to Duty After a Positive (Greater than .04 to the State Limit) Alcohol Test Before returning to work the employee must have completed any recommended treatment determined by the SAP and taken a return to duty alcohol test, with a result of less than 0.02% BAC, and further be subject to at least six (6) unannounced follow-up alcohol and/or drug tests as determined by the SAP. 46 N. Paid-for-time - Testing Employees subject to testing and selected by the random selection process for alcohol testing shall be compensated at the regular straight time hourly rate of pay provided that the test is negative: 1. Random Alcohol Tests a. Paid for all time at the collection site. b. (1) for travel time one way if the collection site is reasonably en route between the employee's home and the terminal, and the employee is going to or from work; or (2) for travel time both ways between the terminal and the collection site, only if the collection site is not reasonably en route between the employee's home and the terminal. c. When an employee is on the clock and a random alcohol test is taken any time during the employee's shift, and the shift ends after eight (8) hours, the employee is paid time and one-half for all time past the eight (8) hours. d. The Employer will not require the city employee to go for alcohol testing before the city employee's shift, provided the collection site is open during or immediately following the employee's shift. e. During an employee's shift, an employee will not be required to use his/her personal vehicle from the terminal to and from the collection site to take a random alcohol test. f. If a road driver is called to take a random alcohol test at a time when the road driver is not en route to or from work, the driver shall be paid, in addition to all time at the collection site, travel time both ways between the location of the driver when called and the collection site with no minimum guarantee. 2. Non-Suspicion-Based Post-Accident Testing a. In the event of a non-suspicion-based post-accident testing situation, where the employee has advised the Employer of the issuance of a citation for a moving violation, but the Employer does not direct the employee to be tested immediately, but sends the employee for testing at some later time (during the eight (8) hour period), the employee shall be paid for all time involved in testing, from the time the employee leaves home until the employee returns home after the test. b. When the Employer takes a driver out of service and directs the employee to be tested immediately, the Employer will make arrangements for the driver to return to his/her home terminal in accordance with the Supplemental Agreement. O. Record Retention The Employer shall maintain records in a secure manner so that disclosure of information to unauthorized persons does not occur. Each Employer or its agent is required to maintain the following records for two years: 1. Records of the inspection and maintenance of each EBT used in employee testing; 2. Documentation of the Employer's compliance with the Quality Assurance Program for each EBT it uses for alcohol testing; and 3. Records of the training and proficiency testing of each BAT used in employee testing. The Employer must maintain for five years records pertaining to the calibration of each EBT used in alcohol testing, including records of the results of external calibration checks. P. Special Grievance Procedure 1. The parties shall together create a Special Region Joint Area Committee consisting of an equal number of Employer and Union representatives to hear drug and alcohol related discipline disputes. All such disputes arising after the establishment of the Special Region Joint Area Committee shall be taken up between the Employer and Local Union involved. Failing adjustment by these parties, the dispute shall be heard by the Special Region Joint Area Committee within ninety (90) days of the Committee's receipt of the dispute. When the Special Region Joint Area Committee, by majority vote, settles a dispute, such decision shall be final and binding on both parties with no further appeal. Where the Special Region Joint Area Committee is unable to agree or come to a decision on a dispute, the dispute will be referred to the National Grievance Committee. 2. The Procedures set forth herein may be invoked only by the authorized Union representative or the Employer. ARTICLE 36. NEW ENTRY (NEW HIRE) RATES Effective April 1, 1998, all regular employees hired on or after that date and employees who are in progression shall receive the following hourly and/or mileage rates of pay: (a) Effective first (1st) day of employment - seventy-five percent (75%) of the current rate. (b) Effective first (1st) day of employment plus one (1) year - eighty percent (80%) of the current rate. (c) Effective first (1st) day of employment plus eighteen (18) months - ninety percent (90%) of the current rate. (d) Effective first (1st) day of employment plus two (2) years - one hundred percent (100%) of the current rate. The above rates of pay shall not apply to casual employees. The term current rate is the applicable hourly and/or mileage rate of pay for the job classification payable under this Agreement. 47 ARTICLE 37. NON-DISCRIMINATION The Employer and the Union agree not to discriminate against any individual with respect to hiring, compensation, terms or conditions of employment because of such individual's race, color, religion, sex, age, or national origin nor will they limit, segregate or classify employees in any way to deprive any individual employee of employment opportunities because of race, color, religion, sex, age, or national origin or engage in any other discriminatory acts prohibited by law. This Article also covers employees with a qualified disability under the Americans with Disabilities Act, although whether the Employer has complied with the ADA's statutory requirements shall not be subject to the grievance procedure. ARTICLE 38. Section 1. Sick Leave Effective April 1, 1980 and thereafter, all Supplemental Agreements shall provide for five (5) days of sick leave per contract year. Sick leave not used by March 31 of any contract year will be paid on March 31 at the applicable hourly rate in existence on that date. Each day of sick leave will be paid for on the basis of eight (8) hours' straight-time pay at the applicable hourly rate. Sick leave will be paid to eligible employees beginning on the third (3rd) working day of absence due to sickness or accident except where the employee is hospitalized prior to that date when it will be paid beginning on the date of hospitalization. The additional sick leave days referred to above shall also be included in those Supplements containing sick leave provisions prior to April 1, 1976. The National Negotiating Committees may develop rules and regulations to apply to sick leave provisions negotiated in the 1976 Agreement and amended in this Agreement uniformly to the Supplements. The Committee shall not establish rules and regulations for sick leave programs in existence on March 31, 1976. Section 2. Jury Duty Effective April 1, 1979, all regular employees called for jury duty will receive the difference between eight (8) hours pay at the applicable hourly wage and actual payment received for jury service for each day of jury duty to a maximum of ten (10) days pay for each contract year. When such employees report for jury service on a scheduled workday, they will not unreasonably be required to report for work that particular day. Time spent on jury service will be considered time worked for purposes of Employer contributions to health & welfare and pension plans, vacation eligibility and payment, holidays and seniority, in accordance with the applicable provisions of the Supplemental Agreements to a maximum of ten (10) days for each contract year. Section 3. Family and Medical Leave Act All employees who worked for the Employer for a minimum of twelve (12) months and worked at least 1250 hours during the past twelve (12) months are eligible for unpaid leave as set forth in the Family and Medical Leave Act of 1993. Eligible employees are entitled to up to a total of 12 weeks of unpaid leave during any twelve (12) month period for the following reasons: 1. Birth or adoption of a child or the placement of a child for foster care; 2. To care for a spouse, child or parent of the employee due to a serious health condition; 3. A serious health condition of the employee. The employee's seniority rights shall continue as if the employee had not taken leave under this Section, and the Employer will maintain health insurance coverage during the period of the leave. The Employer may require the employee to substitute accrued paid vacation or other paid leave for part of the twelve (12) week leave period. The employee is required to provide the Employer with at least thirty (30) days advance notice before FMLA leave begins if the need for leave is foreseeable. If the leave is not foreseeable, the employee is required to give notice as soon as practicable. The Employer has the right to require medical certification of a need for leave under this Act. In addition, the Employer has the right to require a second (2nd) opinion at the Employer's expense. If the second opinion conflicts with the initial certification, a third opinion from a health care provider selected by the first and second opinion health care providers, at the Employer's expense may be sought, which shall be final and binding. Failure to provide certification shall cause any leave taken to be treated as an unexcused absence. As a condition of returning to work, an employee who has taken leave due to his/her own serious health condition must be medically qualified to perform the functions of his/her job. In cases where employees fail to return to work, the provisions of the applicable Supplemental Agreement will apply. It is specifically understood that an employee will not be required to repay any of the contributions for his/her health insurance during FMLA leave. No employee will be disciplined for requesting or taking FMLA leave under the contract absent fraud, misrepresentation, or dishonesty. Disputes arising under this provision shall be subject to the grievance procedure. The provisions of this Section are in response to the federal FMLA and shall not supersede any state or local law which provides for greater employee rights. ARTICLE 39. DURATION Section 1. This Agreement shall be in full force and effect from April 1, 1998, to and including March 31, 2003, and shall continue from year to year thereafter unless written notice of desire to cancel or terminate this Agreement is served by either party upon the other at least sixty (60) days prior to date of expiration. 48 When notice of cancellation or termination is given under this Section, the Employer and the Union shall continue to observe all terms of this Agreement until impasse is reached in negotiations, or until either the Employer or the Union exercise their rights under Section 3 of this Article. Section 2. Where no such cancellation or termination notice is served and the parties desire to continue said Agreement but also desire to negotiate changes or revisions in this Agreement, either party may serve upon the other a notice at least sixty (60) days prior to March 31, 2003 or March 31st of any subsequent contract year, advising that such party desires to revise or change terms or conditions of such Agreement. Section 3. The Teamsters National Freight Industry Negotiating Committee, as representative of the Local Unions or the signator Employer or the authorizing Employer Associations, shall each have the right to unilaterally determine when to engage in economic recourse (strike or lockout) on or after April 1, 2003, unless agreed to the contrary. Section 4. Revisions agreed upon or ordered shall be effective as of April 1, 2003 or April 1st of any subsequent contract year. Section 5. In the event of an inadvertent failure by either party to give the notice set forth in Sections 1 and 2 of this Article, such party may give such notice at any time prior to the termination or automatic renewal date of this Agreement. If a notice is given in accordance with the provisions of this Section, the expiration date of this Agreement shall be the sixty-first (61st) day following such notice. Section 6. In those circumstances where the Teamsters National Freight Industry Negotiating Committee, as representative of the Local Union, or the signatory Employer or the authorizing Employer Associations, shall have served a notice of reopening pursuant to this Article and have not been able to arrive at an agreement within six (6) months, then either side shall have the right on sixty (60) days' written notice to terminate this Agreement. 49 IN WITNESS WHEREOF the parties hereto have set their hands and seals this day of ___________, 1998 to be effective April 1, 1998, except as to those areas where it has been otherwise agreed between the parties. NEGOTIATING COMMITTEES FOR THE LOCAL UNIONS: TEAMSTERS NATIONAL FREIGHT INDUSTRY NEGOTIATING COMMITTEE Thomas Sever, Chairman Richard Nelson, Co-Chairman Thomas "Mike" Booth Frank Busalacchi Randy Cammack Samuel M. Carter George Cashman Patrick Flynn Walter A. Lytle James Minisci Ed Mireles Donald Newton Nicholas Picarello Chuck Piscitello Donald Scott Lester Singer W.C. "Willie" Smith Theodore Uniatowski Harold J. Yates Phil Young FOR THE EMPLOYERS: TRUCKING MANAGEMENT, INC. Arthur H. Bunte, Jr., Chairman John Dale Don Little Stan Newman Anthony Simoes Jack Ferrone Pete Hassler Kermit Scarborough Don Emery Jim Roberts Hal Franke 50 APPENDIX A WAGE REDUCTION-JOB SECURITY PLAN GUIDELINES Note: Each Plan Must be Approved by TNFINC. _____________ Corporation, (hereinafter called the "Company") hereby establishes The Wage Reduction - Job Security Plan, (hereinafter the "Plan") for the benefit of all of its employees. These guidelines for establishing this Plan were created for the express purpose of allowing freight companies the ability to compete and provide job security for Teamster bargaining unit employees. This plan has been approved per Article 6, Section 2, of the National Master Freight Agreement. 1. Employee Eligibility. During the period in which the Plan is effective, each full time employee of the Company (Bargaining Unit and/or Non-Bargaining Unit) shall participate in the Plan. For purposes of the Plan, the term "full time employee" means an employee who is on the seniority list and is scheduled to perform work for the Company when called, including probationary employees and regular employees on lay off status but, excluding casual employees. 2. Equal Sacrifice of Non-Bargaining Unit Employees and their Participation. All non-bargaining unit employees will participate equally in the Plan in accordance with its terms. The Company will continue the past and present practice of sharing the burden of sacrifices among all employees. The Company agrees not to increase wages (including bonuses) and benefits of current non-bargaining unit employees as an overall percentage beyond the effective overall percentage increases to be received by the bargaining unit employees. (This would exclude promotions, new hires and, for example, data processing employees, who may be otherwise impossible to hire or retain). In the event it becomes necessary to exceed this overall percentage increase limit in order to retain employees for the efficient continued operation of the business, the Company would request approval from the TNFINC to do so. 3. Relation to Collective Bargaining Agreement. This Plan will be mandatory for all employees, both bargaining unit and non-bargaining unit, since job security is the number one asset we all hope to share equally. This Plan will be effective on the agreed-to date for all those employees in the entire unit. The Plan will be submitted for secret ballot vote of all bargaining unit employees, and shall be put into effect if seventy-five percent (75%) of the bargaining unit employees voting, vote to adopt the plan. 4. Health, Welfare and Pension Contributions. The Company agrees to continue to pay the full Health, Welfare and Pension contributions and other increases set forth in the National Master Freight Agreement and its Supplements and will continue to be signator to the National Master Freight Agreement for the life of the Plan. 5. Dispute Settlement. As part of the Collective Bargaining Agreement, disputes pertaining to the Plan are subject to the grievance procedure contained in the National Master Freight Agreement. However, any grievance filed hereunder, by either party, shall be referred directly to the appropriate Regional Joint Area Committee for initial hearing and disposition. 6. Participation. An employee begins or continues participation in the Plan, on the date of Plan implementation or, the first day of the pay period following his/her first day of regular and/or probationary employment subject to the eligibility rules above. 7. New Hire. Newly hired employees subject to New Hire under the National Master Freight Agreement begin participation in the Plan first day of the pay period as a minimum as follows for a 15% Wage Reduction - Job Security Plan: Maximum Wage Reduction Time of Service from New Hire Rate Effective First Day of Employment Receive 70% of NMFA Wages (%) Effective First Day plus One (1) Year Receive 75% of NMFA Wages (%) Effective First Day plus 18 Months Receive 80% of NMFA Wages (%) Effective First Day plus Two (2) Years Receive 85% of NMFA Wages (%) 8. Term of Plan. The term of the Plan or continued Plan shall begin on or after April 1, 1998 and shall continue in effect through March 31, 2003 or until a replacement Collective Bargaining Agreement is reached between the parties, whichever is the later. All Plan years will commence on January 1 and end on December 31. Distribution of net operating profits will be prorated as appropriate for calendar years 1998 and 2003 and correspond with Plan implementation date and Plan termination date as herein provided. 9. Determination and Sharing Of Net Operating Profit. For the period from date of Plan implementation through date of Plan termination as herein provided for a 15% (maximum) plan:
% of Net Operating % of Net Operating Profit Distributed Overall Expense Profit Retained to Plan Participating Ratio Levels by CompanyEmployees (Profit Pool) - -------------------------------------------------------------------------------- 97.0 or Above 100% 0% 96.9 and Below 50% 50%
(Note: The percentage of profit retention below 97.0 set forth above may vary in Plans calling for less than maximum allowable reduction provided in Item #11, pursuant to TNFINC approval.) (a) As set forth above, the Company will retain all Net Operating Profit amounts on the first three points of the Overall Expense Ratio, i.e., from 97.0 or above, irrespective of what the overall expense ratio is. A substantial portion of such net operating profit on the first three points of the Overall Expense Ratio will be reinvested back into the Company's freight operations for the purpose of continuing to provide job security for all Plan participants. The 51 Company will distribute the requisite percentage of the Net Operating Profit in excess of the first three points of the Overall Expense Ratio, i.e., from 96.9 and below, to the participating employees. (b) Each participant's proportionate share of the Company's Net Operating Profit (Profit Pool) for each Plan year for which a determination is being made shall equal the ratio of the individual participant's earnings for such plan year (after applicable wage reduction) divided by the total earnings by all eligible employees for such plan year, (after applicable wage reduction) multiplied by the amounts of the Company's Net Operating Profit (Profit Pool) which is available for distribution under the Plan. For example, the distribution for an employee for the first full Plan year would be: Individual Participant's Eligible Profit Pool-Net Operating Earnings for the period January 1, Profits (for the period through December 31. from January 1 through X December 31) available for - ------------------------ distribution to Participating Employees Overall Participating Employees' Eligible Earnings (January 1 through December 31.) (c) The term "Earnings" means an employee's wage compensation only as reportable for W-2 purposes for any plan year for which a profit sharing determination is being made, less amounts otherwise includable in wage compensation which are attributable to profit sharing distributions received during such Plan year, but attributable to a preceding Plan year. Earnings attributable to wages shall include vacation, sick pay, holiday pay, funeral leave, jury duty and other paid-for-time not worked. (d) The term "Net Operating Profit" means all operating revenues attributable to the Company's LTL trucking operations minus all operating expenses, including other expenses and debt interest, and any other non-recurring expenses normally incurred by a regulated general freight carrier, excluding any provision for Plan distributions and income taxes, as defined under generally accepted accounting principles. This does not include extraordinary gains or losses as defined under generally accepted accounting principles. (e) The term "Overall Expense Ratio" means all expenses excluding any provision for Plan distributions, income taxes and extraordinary losses divided by total revenues excluding extraordinary gains, as defined under generally accepted accounting principles. (f) The company will provide each employee with an annual report including a basic profit and loss statement, indicating the overall results of the Plan and the individual distribution available to such employee. 10. Distribution of Operating Profit. Distribution of the employees' share of Net Operating Profit as determined under the Plan for each calendar (Plan) year shall be made by the Company within ninety (90) days after the close of the Company's books for such calendar (Plan) year. 11. Wage Reduction. From and after the effective date on which an employee becomes a Participant, each employee will have or will have had his/her gross wages or earnings reduced by %, except for new hires. (See Item 7.) Such wage reduction and/or reduced wages shall include vacation, sick pay, holiday pay, funeral leave, jury duty and other paid for time not worked. Wage or salary increases given during the term of the Plan will be subject to the applicable wage or salary reduction. 12. Income and Employment Tax Withholding. The Company shall withhold all applicable federal, state and local income tax and social security or other tax from employees' wages after the reduction and subsequently from each employee's distribution under the Plan as required by applicable federal, state, or local laws and/or regulations or such greater amount as requested by the employee in writing. 13. Access to Company Financial Records. The Company shall submit an annual operating statement in the format of the ICC report and independent audit to TNFINC, and TNFINC reserves the right on an annual basis to examine the books of the Company or utilize an independent auditor of its choice. In the event an independent auditing firm is utilized by TNFINC, the Company shall pay such independent auditor for such annual audit up to a maximum of five thousand dollars ($5,000). There shall be no inter-company charges initiated under the Plan for the purpose of defeating the Plan. The Company will not change accounting assumptions or practices, except as required to conform to governmental regulation, generally accepted accounting practices or for good business reasons; and in no event will such assumptions or practices be changed to evade or defeat the purposes of this Plan. 14. Past Practices/Company Operations. The existence and maintenance of this Plan shall not limit or otherwise affect the Company's ability to continue to exercise its managerial discretion regarding the running of the Company's business, consistent with the provisions of the Collective Bargaining Agreement. A committee consisting of at least three (3), but not more than six (6) bargaining unit employees selected from among themselves shall have the right to meet and confer with top management on a semi-annual basis for purposes of being apprised and informed concerning the overall progress and results of the Company's continuing operations. TNFINC will appoint the Chairman of this committee and will have the right to send a representative to any meeting of the committee convened by the Company. 15. Work Preservation. Where legally permissible, the Company agrees not to establish any non-union regular route common carrier dry freight LTL entity. For purposes of this paragraph, the term "Company" includes the holding company. In the event the Company acquires a non-union regular route common carrier dry freight LTL entity whose operations are to be combined with those of the Company, it will negotiate with the Union concerning wages, hours and working conditions for the employees of the acquired entity. If the Company acquires a non-union regular route common carrier dry freight LTL entity which is to be operated separately from the Company, it agrees that it will recognize the Union as the representative of employees of that entity in those jobs comparable to those in the present bargaining unit based on, and after, a check by the Company of union recognition cards if signed by a majority of those employees, and the Company will not oppose or obstruct the Union in its efforts to obtain cards, The Company will then negotiate with the Union concerning wages, hours and working conditions for those employees. 16. Company Agrees Not to Terminate Plan before Termination Date Without Approval of the Union. However, if the Plan is terminated at any time, wage levels will revert or snap back to the full National Master Freight Agreement on a prospective basis and participating employees are fully vested in the pro-rated share of the profits for period of wage reduction. 52 17. Bankruptcy Protection. If the Company files Chapter 7 or I 1 petition or is placed in involuntary bankruptcy proceeding, this Plan is automatically terminated and wages reverted to full National Master Freight Agreement on a prospective basis unless the Union agrees to continue the Plan. 18. Voluntary Termination of Operation. If the company voluntarily terminates operations before the expiration of the current Collective Bargaining Agreement, the participating employees are fully vested in the prorated share of the profits for the period of wage reduction. 19. Type of Agreement. NMFA with all applicable supplements and all IBT Agreements, whether or not supplemental to the NMFA. 20. Transfer of Ownership. If for any reason the Company is sold, the participating employees are fully vested in the prorated share of the profits for the period of wage reduction. 21. Resignation, Retirement or Other Termination of Employment. Any employee who resigns, retires or otherwise incurs a termination of employment, whether voluntary or involuntary, during the term of the Plan shall receive a pro rata distribution in accordance with paragraph 9 based upon his/her participation in the Plan through the date of his/her resignation, retirement or other termination of employment. 22. Limitation to Current Ownership. Should the Company, at any time subsequent to approval of this Plan, enter into negotiations for the sale of the Company the following is mutually understood: This Plan is limited to the current ownership, unless such current ownership and prospective purchaser obtain approval for continuance of the Plan from TNFINC after a meeting with TNFINC, such current owner and the prospective purchaser prior to the actual sale. During such meeting the feasibility of employee purchase of the Company will be discussed with the employee committee established in #14 above and with TNFINC. (COMPANY NAME) BY: --------------------------------------- EX-13 3 1999 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 Market for Registrant's Common Equity and Related Shareholder Matters Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data 2 MARKET AND DIVIDEND INFORMATION The Company's Common Stock trades on The Nasdaq Stock Market under the symbol "ABFS." The following table sets forth the high and low recorded last sale prices of the Common Stock during the periods indicated as reported by Nasdaq and the cash dividends declared:
CASH HIGH LOW DIVIDEND ---------- ----------- --------- 1999 First quarter ...................................................... $ 8.875 $ 5.250 $ -- Second quarter...................................................... 9.938 7.000 -- Third quarter....................................................... 13.750 9.688 -- Fourth quarter...................................................... 14.563 11.969 -- 1998 First quarter ...................................................... $ 11.750 $ 9.625 $ -- Second quarter...................................................... 11.625 8.750 -- Third quarter....................................................... 10.375 5.000 -- Fourth quarter...................................................... 6.125 4.813 --
At February 18, 2000, there were 19,762,133 shares of the Company's Common Stock outstanding, which were held by 682 shareholders of record. The Company's Board of Directors suspended payment of dividends on the Company's Common Stock during the second quarter of 1996. The declaration and payment of and the timing, amount and form of future dividends on the Common Stock will be determined based on the Company's results of operations, financial condition, cash requirements, certain corporate law requirements and other factors deemed relevant by the Board of Directors. The Company's credit agreement limits the total amount of "restricted payments" that the Company may make, including dividends on its capital stock, to $9.0 million in any one calendar year. The annual dividend requirements on the Company's Preferred Stock total approximately $4.3 million. 3 SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31 1999 1998 1997(4) 1996 1995(3) ------------ ------------ ------------ ------------ ------------ ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Operating revenues .............................. $ 1,721,586 $ 1,607,403 $ 1,593,218 $ 1,550,392 $ 1,384,357 Operating income (loss) ......................... 109,707 69,977 64,503 (15,673) (18,767) Minority interest in Treadco, Inc. income (expense) .............................. 245 (3,257) 1,359 1,768 (1,297) Other expenses, net ............................. 3,920 3,255 8,814 5,944 8,233 Gain on sale of Cardinal Freight Carriers, Inc... -- -- 8,985 -- -- Settlement of litigation (5) .................... -- 9,124 -- -- -- Interest expense ................................ 18,395 18,146 23,765 30,451 16,119 Income (loss) from continuing operations before income taxes ................ 87,637 54,443 42,268 (50,300) (44,416) Provision (credit) for income taxes ............. 36,455 23,192 20,086 (17,757) (13,197) Income (loss) from continuing operations ....... 51,182 31,251 22,182 (32,543) (31,219) Loss from discontinued operations, net of tax ......................... (786) (2,576) (6,835) (4,060) (1,573) Net income (loss) ............................... 50,396 28,675 15,347 (36,603) (32,792) Income (loss) per common share from continuing operations (diluted) .......... 2.14 1.32 0.91 (1.89) (1.82) Net income (loss) per common share (diluted) ............................... 2.11 1.21 0.56 (2.10) (1.90) Cash dividends paid per common share (1) .............................. -- -- -- 0.01 0.04 BALANCE SHEET DATA: Total assets .................................... 731,929 707,330 693,649 823,492 959,447 Current portion of long-term debt ............... 20,452 17,504 16,484 37,197 25,018 Long-term debt (including capital leases and excluding current portion) ................ 173,702 196,079 202,604 317,874 391,475 OTHER DATA: Gross capital expenditures (2) .................. 76,209 86,446 14,135 41,599 74,808 Net capital expenditures (6) .................... 61,253 70,243 (23,775) (23,713) 59,060 Depreciation and amortization ................... 45,242 40,674 44,316 56,389 46,627 Goodwill amortization ........................... 4,195 4,515 4,629 4,609 5,135 Other amortization .............................. 324 2,420 4,139 3,740 1,044
(1) Cash dividends on the Company's Common Stock were indefinitely suspended by the Company as of the second quarter of 1996. (2) Does not include revenue equipment placed in service under operating leases, which amounted to $21.9 million in 1997 and $24.6 million in 1995. There were no operating leases for revenue equipment entered into for 1999, 1998 and 1996. Does include purchases financed with capital leases. (3) 1995 selected financial data reflects an acquisition effective August 12, 1995. In conjunction with the acquisition, assets with a fair value of $313 million were acquired and liabilities of approximately $252 million were assumed. Approximately $134 million in revenues for the period from August 12, 1995 to December 31, 1995 are included in the 1995 consolidated statements of operations generated by subsidiaries acquired as part of the acquisition. (4) Selected financial data for 1997 reflects the sale of Cardinal on July 15, 1997 (see Note D to the Consolidated Financial Statements). (5) Income results from the settlement of Treadco, Inc. litigation (see Note L). (6) Capital expenditures, net of proceeds from the sale of property, plant and equipment. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- Arkansas Best Corporation (the "Company") is a diversified holding company engaged through its subsidiaries primarily in motor carrier transportation operations, intermodal transportation operations and truck tire retreading and new tire sales. Principal subsidiaries are ABF Freight System, Inc. ("ABF"); Treadco, Inc. ("Treadco"); Clipper Exxpress Company and related companies ("Clipper"); G.I. Trucking Company ("G.I. Trucking"); FleetNet America, LLC; and, until July 15, 1997, Cardinal Freight Carriers, Inc. ("Cardinal"). (See discussion below.) See Note R to the Consolidated Financial Statements regarding the acquisition of non-ABC owned Treadco shares and subsequent merger resulting in Treadco becoming a wholly owned subsidiary of the Company. See Note A regarding the consolidation of Treadco in the Company's consolidated financial statements for 1998 and 1997. See Note C regarding the Company's discontinuation of its logistics segment and Clipper International. See Note D regarding the sale of Cardinal. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. In June 1999, the FASB issued Statement No. 137, which deferred for one year the implementation date of FASB Statement No. 133. As a result, Statement No. 133 is effective for the Company in 2001. The Company is evaluating the impact the Statement will have on its financial statements and related disclosures. YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company's information services affiliate, Data-Tronics Corp., completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company has incurred costs of approximately $1.7 million since 1996 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues. The Company will continue to monitor its critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any Year 2000 matters that may arise are addressed promptly. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- OPERATING SEGMENT DATA The following table sets forth, for the periods indicated, a summary of the Company's operating expenses by segment as a percentage of revenue for the applicable segment. The Company has restated its 1997 segment presentation to conform to the current year's segment presentation, which is in accordance with the requirements of FAS No. 131. Note N to the Consolidated Financial Statements contains additional information regarding the Company's operating segments.
YEAR ENDED DECEMBER 31 1999 1998 1997 -------- -------- -------- OPERATING EXPENSES AND COSTS ABF FREIGHT SYSTEM, INC. Salaries and wages ................... 64.1% 66.5% 66.7% Supplies and expenses ................ 11.0 10.8 11.2 Operating taxes and licenses ......... 3.0 3.1 3.4 Insurance ............................ 1.6 1.7 1.8 Communications and utilities ......... 1.2 1.2 1.3 Depreciation and amortization ........ 2.4 2.2 2.1 Rents and purchased transportation ... 8.0 8.4 7.8 Other ................................ 0.4 0.5 0.5 Gain on sale of revenue equipment .... (0.1) (0.2) (0.2) -------- -------- -------- 91.6% 94.2% 94.6% ======== ======== ========
6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997 -------- -------- -------- OPERATING EXPENSES AND COSTS - CONTINUED: G.I. TRUCKING COMPANY Salaries and wages ..................... 46.8% 47.2% 48.2% Supplies and expenses .................. 8.0 8.5 9.5 Operating taxes and licenses ........... 2.4 2.1 2.0 Insurance .............................. 2.7 3.2 3.8 Communications and utilities ........... 1.3 1.3 1.3 Depreciation and amortization .......... 2.6 2.5 3.1 Rents and purchased transportation ..... 32.3 31.4 29.0 Other .................................. 2.5 2.6 2.5 Gain on sale of revenue equipment ...... (0.1) (0.1) -- -------- -------- -------- 98.5% 98.7% 99.4% ======== ======== ======== CARDINAL FREIGHT CARRIERS, INC ............. -- -- 94.7% ======== ======== ======== CLIPPER Cost of services ....................... 85.9% 87.6% 85.6% Selling, administrative and general .... 12.8 13.4 11.8 Gain on sale of revenue equipment ...... -- (0.1) -- -------- -------- -------- 98.7% 100.9% 97.4% ======== ======== ======== TREADCO, INC ............................... Cost of services ....................... 68.8% 70.6% 73.9% Selling, administrative and general .... 29.3 28.0 27.7 -------- -------- -------- 98.1% 98.6% 101.6% ======== ======== ======== OPERATING PROFIT (LOSS) ABF Freight System, Inc. ................... 8.4% 5.8% 5.4% G.I. Trucking Company ...................... 1.5 1.3 0.6 Cardinal Freight Carriers, Inc. ............ -- -- 5.3 Clipper .................................... 1.3 (0.9) 2.6 Treadco, Inc. .............................. 1.9 1.4 (1.6)
RESULTS OF OPERATIONS 1999 COMPARED TO 1998 Consolidated revenues from continuing operations of the Company for 1999 were $1,721.6 million compared to $1,607.4 million for 1998, representing an increase of 7.1% primarily due to increases in revenues for ABF, G.I. Trucking and Treadco, offset in part by declines in Clipper revenues. The Company's operating income from continuing operations increased 56.8% to $109.7 million for 1999 from $70.0 million for 1998. Increases in operating income from continuing operations are attributable to improved operations at ABF, G.I. Trucking, Clipper and Treadco, offset in part by increases in corporate incentive pay accruals reflected in the Company's "Other" segment. Income from continuing operations for 1999 was $51.2 million, or $2.14 per common share (diluted), compared to $31.3 million, or $1.32 per common share (diluted), for 1998. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- The improvement in income from continuing operations for 1999, as compared to 1998, reflects primarily the improvements in operating income. ABF FREIGHT SYSTEM, INC. Effective January 1, 1999 and September 13, 1999, ABF implemented overall rate increases of 5.5% and 5.1%, respectively. ABF had a previous overall rate increase effective January 1, 1998 of 5.3%. ABF did not implement a rate increase on January 1, 2000. Revenues for 1999 increased 8.7% to $1,277.1 million from $1,175.2 million in 1998. ABF generated operating income for 1999 of $107.0 million compared to $67.6 million in 1998. ABF's increase in revenue is due primarily to an increase in LTL revenue per hundredweight of 7.0% to $19.57 for 1999 compared to $18.29 in 1998, reflecting a continuing favorable pricing environment. ABF's revenue increase also results from an increase in LTL tonnage of 1.8% for 1999 compared to 1998. ABF implemented a fuel surcharge on July 7, 1999, based on the increase in diesel fuel prices compared to an index price. The fuel surcharge represented 0.5% of revenue for 1999. There was no fuel surcharge in effect during 1998. ABF's operating ratio improved to 91.6% for 1999 from 94.2% in 1998, as a result of the revenue yield improvements and increases in tonnage previously described and as a result of improvements in certain operating expense categories as follows: Salaries and wages expense decreased as a percent of revenue by 2.4% for 1999 compared to 1998. The decrease is due in part to lower linehaul and dock labor costs due to retirements and a lower effective wage rate associated with more new hires, offset in part by an increase in incentive pay amounts. Wage rates for new hires increase to full-scale levels over a two-year period. In addition, the decrease in linehaul wages for 1999 is due in part to an increase in rail utilization for freight transportation. Rail usage increased to 18.3% of total miles for 1999 compared to 17.3% for 1998. Supplies and expenses increased 0.2% as a percent of revenue for 1999 compared to 1998. This change is due primarily to higher diesel fuel prices, as described previously, which increased 14.0% on an average price-per-gallon basis when 1999 is compared to 1998. The previously mentioned fuel surcharge on revenue is intended to offset the fuel cost increase. In addition, trailer repair costs were higher due to ongoing trailer refurbishing and the installation of conspicuity tape to road and city trailers, in accordance with federal regulations. Such regulations require that the installation process be complete by June 1, 2001. As of December 31, 1999, the Company had completed the installation on approximately 90% of all road trailers and city trailers. Depreciation and amortization increased 0.2% as a percent of revenue for 1999 compared to 1998. Increases in depreciation resulted from an increase in the number of road tractors under capital leases. A larger portion of ABF's road tractor fleet was under operating leases in 1998. Rents and purchased transportation expense decreased 0.4% as a percent of revenue for 1999 compared to 1998, due primarily to declines in operating lease expense, reflecting ABF's replacement of road tractors under operating leases with road tractors under capital leases. This decrease was offset, in part, by the increase in rail utilization for 1999. As described above, ABF's rail usage increased during this period when compared to the same period in 1998. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- G.I. TRUCKING COMPANY G.I. Trucking revenues increased 10.3% to $137.4 million for 1999 from $124.5 million during 1998. The revenue increase resulted from an increase in G.I. Trucking's tonnage of 8.6% in 1999 when compared to 1998 and an increase in revenue per hundredweight of 1.6% to $10.81 in 1999 from $10.63 in 1998. G.I. Trucking implemented a fuel surcharge during the last week of August 1999, based upon a West Coast average fuel index. The fuel surcharge represented 0.4% of revenue for 1999. There was no fuel surcharge in effect during 1998. G.I. Trucking implemented a general rate increase of 5.5% effective October 1, 1999. G. I. Trucking's previous general rate increase was effective on November 1, 1998 and amounted to 5.5%. G.I. Trucking's operating ratio improved to 98.5% for 1999 from 98.7% in 1998. The improvement results from yield improvements and changes in certain operating expenses as follows: Salaries and wages expense declined 0.4% as a percent of revenue during 1999 as compared to 1998. The decrease is due to the improved productivity of the labor force and lower pension costs. In addition, a portion of salaries and wages expense is generally fixed in nature and declines as a percent of revenue with increases in revenue levels. Supplies and expenses decreased 0.5% as a percent of revenue for 1999 compared to 1998. This decrease is due primarily to lower repair and maintenance costs on revenue equipment during 1999 compared to 1998, reflecting new equipment purchased during 1999 and 1998 to replace older equipment which required more maintenance. Improvements in these areas were offset in part by higher fuel costs, which increased in total dollars by 12.1% when 1999 is compared to 1998. Operating taxes and licenses increased 0.3% as a percent of revenue for 1999 compared to 1998. This increase is due primarily to real estate taxes associated with the six new terminals opened during 1998. In addition, vehicle licenses and registration fees increased for 1999 as compared to 1998, due to G.I. Trucking's increase in fleet size of 75 tractors and 16 trailers during 1999. Insurance expense decreased 0.5% as a percent of revenue for 1999 compared to 1998. This decrease is due primarily to favorable claims experience for bodily injury and property damage during 1999 as compared to 1998. Rents and purchased transportation expenses increased 0.9% as a percent of revenue for 1999 as compared to 1998. This increase is due primarily to an increase in purchased transportation costs resulting from additional linehaul miles run in order to meet customer service needs. This increase is offset in part by a decline in terminal rent costs as a percent of revenue. This decline resulted from higher revenue levels and the fact that terminal rents are fixed in nature. CLIPPER Revenues for Clipper were $112.2 million for 1999, representing a decrease of 8.4% from 1998 revenues of $122.5 million. Beginning in the fourth quarter of 1997, Clipper was adversely affected by the service problems with the U.S. rail system. During the fourth quarter of 1998, Clipper experienced some improvements in the on-time service levels of its rail suppliers. In 1999, rail service continued to improve; however, in certain lanes, rail service was inconsistent. In addition, late in the third quarter of 1999, heavy rains and flooding from Hurricane Floyd added to the rail delays and equipment shortages on the East Coast. Revenue from intermodal shipments decreased 0.6% for 1999 compared to 1998. This decline resulted primarily from business lost as a result of inconsistent rail service in 1998. Clipper is aggressively trying to 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- regain this business but is faced with competition from truckload carriers and other rail service providers. Clipper experienced a decline of 5.7% in the number of LTL shipments from 1998 to 1999. The declines in LTL shipments resulted from management's decision to concentrate on metro-to-metro, long-haul lanes, resulting in the elimination of certain unprofitable lanes and from an emphasis on improving Clipper's account profile. In addition, LTL business levels were negatively impacted by heavy snowfall in the Chicago, Illinois area in January 1999. Although Clipper's revenues declined for the 1999 year from 1998, for the fourth quarter 1999, Clipper's revenues increased 8.8% from fourth quarter 1998. Clipper experienced some success in regaining intermodal customers lost, with intermodal revenues increasing 31.1% for the fourth quarter of 1999 compared to the fourth quarter of 1998. LTL revenues were down only slightly, 0.8%, for fourth quarter 1999 from the same period in 1998, which is an improvement over the LTL revenue declines experienced in previous 1999 quarters. Clipper's operating ratio improved to 98.7% for 1999 from 100.9% in 1998. Clipper's operating ratio improvements result from the elimination of certain unprofitable lanes, higher percentages of rail utilization of 59.3% for 1999 compared to 50.9% for 1998 and cost reductions implemented because of lower revenue levels. TREADCO, INC. Revenues for Treadco increased 2.9% to $186.6 million for 1999, compared to $181.3 million for 1998. For 1999, "same store" sales increased 2.7% compared to 1998. "New store" sales accounted for 0.2% of the increase from 1998. "Same store" sales include locations that have been in existence for the entire periods presented. "New store" sales resulted from the addition of two new sales-only locations. Revenues from retreading for 1999 were $70.7 million, representing a decrease of 0.2% from $70.8 million in 1998. Retread revenues for 1999 were lower due to a decrease in units sold of approximately 3.0% from the same period in 1998. This decrease was offset by an increase in the average sales price per unit of approximately 3.0% from the same period in 1998. Declines in retread units sold result from less customer demand and a more competitive marketplace. Revenues from new tires increased 2.9% to $94.2 million in 1999 from $91.6 million during 1998, due to a 4.0% increase in unit sales from 1998, offset in part by a 1.0% decrease in the sales price per unit. The decrease in the sales price per unit primarily is a result of lower commissions received from new tire manufacturers for new tires sold on national accounts. Service revenues for 1999 increased 14.5% to $21.6 million from $18.9 million in 1998. Treadco continues to emphasize service by adding service equipment and personnel. Treadco's operating ratio improved to 98.1% in 1999, from 98.6% during 1998. Improvements in Treadco's operating ratio result from improvements in retread and new tire margins which are reflected in cost of sales as a 1.8% of revenue improvement, offset by an increase in selling, administrative and general expenses of 1.3% of revenue. New tire margins improved approximately 0.6%, primarily as a result of a one-time volume discount from a new tire supplier for August and September purchases. Retread margins improved as a result of an increase in the average sales price per unit. Selling, administrative and general expenses increased primarily as a result of higher salaries and wages due to increased salesmen's commissions and increased service and inventory control personnel. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- OTHER OPERATING LOSS The operating loss for the "other" category increased $3.7 million for 1999 compared to 1998, due primarily to increases in corporate incentive pay accruals. INTEREST Interest expense was $18.4 million for 1999 compared to $18.1 million for 1998, due primarily to an increase in interest expense accruals related to pending Internal Revenue Service ("IRS") examinations (see Note G) offset by reductions in interest expense associated with lower debt levels. INCOME TAXES The difference between the effective tax rate for 1999 and the federal statutory rate resulted from state income taxes, amortization of nondeductible goodwill, minority interest, nondeductible tender offer response costs incurred by Treadco (see Note R) and other nondeductible expenses (see Note G). At December 31, 1999, the Company had deferred tax assets of $26.7 million, net of a valuation allowance of $1.1 million, and deferred tax liabilities of $44.7 million. The Company believes that the benefits of the deferred tax assets of $26.7 million will be realized through the reduction of future taxable income. Management has considered appropriate factors in assessing the probability of realizing these deferred tax assets. These factors include deferred tax liabilities of $44.7 million and the presence of significant taxable income in 1999 and 1998. The valuation allowance has been provided for the benefit of net operating loss carryovers in certain states with relatively short carryover periods and other limitations. Management intends to evaluate the realizability of deferred tax assets on a quarterly basis by assessing the need for any additional valuation allowance. ALLOWANCE FOR DOUBTFUL ACCOUNTS Allowance for doubtful accounts decreased $1.3 million from December 31, 1998 to December 31, 1999 due to improved collection procedures resulting in an improved accounts receivable aging, primarily at ABF. PREPAID EXPENSES Prepaid expenses decreased $5.3 million from December 31, 1998 to December 31, 1999, due primarily to a $2.4 million claims payment from a prepaid claims deposit account. In addition, a one-time payment for ABF contractual employees paid in August 1998 that was being amortized on a monthly basis, with a balance of $1.7 million at December 31, 1998, became fully amortized in March 1999. GOODWILL The Company's assets include goodwill, net of amortization, of $109.4 million, representing 14.9% of total assets and 49.5% of total shareholders' equity. Goodwill includes $68.6 million (with a remaining life of 29 years), resulting from a 1988 leveraged buyout transaction and $40.8 million (with a remaining life of 25 years), resulting from the 1994 acquisition of Clipper. The Company's accounting policy for reviewing the carrying amount of its goodwill for impairment is reflected in Note B to the Consolidated Financial Statements. No indications of impairment existed at December 31, 1999. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- OTHER ASSETS Other assets increased $5.5 million from December 31, 1998 to December 31, 1999, due primarily to increases in prepaid benefit costs related to the Company's defined benefit pension plans (see Note M). OTHER LIABILITIES Other liabilities increased $9.2 million from December 31, 1998 to December 31, 1999, as a result of increases in supplemental pension plan liabilities, deferred compensation plan liabilities, voluntary savings plan liabilities (see Note M), and increases in liabilities for interest associated with IRS examinations (see Note G). 1998 COMPARED TO 1997 Consolidated revenues from continuing operations of the Company for 1998 were $1,607.4 million compared to $1,593.2 million for 1997, representing a slight increase of 0.9%, primarily due to increases in revenues for ABF, G.I. Trucking and Treadco, offset in part by declines in Clipper revenues. The Company's operating income from continuing operations increased 8.5% to $70.0 million for 1998 from $64.5 million for 1997. Increases in operating income from continuing operations are attributable to improved operations at ABF, G.I. Trucking and Treadco. Operating income from continuing operations for 1998 was adversely impacted by the operating losses at Clipper. Income from continuing operations for 1998 was $31.3 million, or $1.32 per common share (diluted), compared to $22.2 million, or $0.91 per common share (diluted), for 1997. The improvement in income from continuing operations for 1998, as compared to 1997, reflects the improvement in operating income, along with lower interest cost due to reductions in outstanding debt and lower interest rates. In addition, non-operating income for 1998 includes $9.1 million of income from Treadco's settlement of litigation (see Note L). ABF FREIGHT SYSTEM, INC. Effective January 1, 1998 and 1997, ABF implemented overall rate increases of 5.3% and 5.5% respectively. Revenues for 1998 increased 1.8% to $1,175.2 million from $1,154.3 million in 1997. Operating income for 1998 improved 8.0% to $67.6 million from $62.6 million in 1997. ABF's revenue increased due to an increase in LTL revenue per hundredweight for 1998 of 3.7% to $18.29 from $17.65 in 1997. ABF experienced a generally favorable pricing environment during 1998, as it had in 1997. Total revenue increased despite a decline in tonnage during 1998 of 1.4% compared to 1997. Tonnage declines reflect some freight diversions caused by customer concerns regarding labor contract negotiations in the first quarter of 1998. Tonnage declines also reflect additional business handled during the UPS strike in the third quarter of 1997. Per-day tonnage declines by quarter for 1998 compared to 1997, beginning with the first quarter, were 1.8%, 1.5%, 2.1% and 0.3%, respectively. The International Brotherhood of Teamsters ("IBT") voted in favor of a new five-year labor contract on April 9, 1998. The contract was effective April 1, 1998. The contract provided for an average annual wage and benefit increase of approximately 2.3%, including a lump-sum payment of $750 for the first contract year for all active employees who are IBT members. The lump-sum payment was amortized over the first twelve months of the contract period. ABF's operating ratio improved to 94.2% in 1998 from 94.6% in 1997, as a result of the revenue yield improvements previously described and as a result of improvements in certain operating expense categories as follows: 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- Salaries and wages expense decreased 0.2% as a percent of revenue during 1998. Salaries and wages increased due to a $750 lump-sum payment made to contractual employees of ABF, which was amortized monthly over the contract period. This increase was offset by lower costs for labor and paid time off for vacations and holidays, due in part to an increase in utilization of rail for freight transportation. Rail usage increased to 17.3% of total miles in 1998 from 13.6% in 1997. Decreases during 1998 in supplies and expenses (0.4%) and operating taxes and licenses (0.3%) as a percent of revenue primarily reflect decreases in the cost of fuel, due to a 21.1% decline in the average price per gallon of fuel from 1997. In addition, consumption of fuel was reduced due to better average tractor miles per gallon. Fuel taxes declined due to favorable audit experience, as well as lower consumption. As described above, ABF's rail usage increased during 1998. Rents, which include purchased transportation, increased 0.6% as a percent of revenue, primarily due to increased rail usage. This increase was offset in part by declines in operating lease expense, reflecting ABF's reduction in leased road and city tractors. Certain of the leased tractors were replaced with tractors acquired under capital leases during 1998. G.I. TRUCKING COMPANY G.I. Trucking implemented a general rate increase of 5.5% on November 1, 1998. Total G.I. Trucking revenues increased 24.5% to $124.5 million from $100.0 million in 1997. Revenue increases resulted from an increase of 1.7% in G.I. Trucking's revenue per hundredweight to $10.63 and tonnage increases of 22.4% compared to the same period in 1997. G.I. Trucking expanded its operations during 1998, opening new terminal locations in Oklahoma City, OK; Tulsa, OK; Albuquerque, NM; El Paso, TX; and Kansas City, KS. G.I. Trucking also added a southern California facility to relieve congestion at its La Mirada, CA distribution center. G.I.'s operating ratio improved to 98.7% in 1998 from 99.4% in 1997. Details of the improvement in certain operating expenses follow: Salaries and wages expense decreased 1.0% as a percent of revenue during 1998. This decline reflects lower pension costs and, in part, the fact that a portion of salaries and wages expense is generally fixed in nature and declines as a percent of revenue with increases in revenue levels. Supplies and expenses decreased 1.0% as a percent of revenue during 1998, due primarily to declines in diesel fuel prices from 1997. In addition, repair and maintenance costs on revenue equipment were lower in 1998, reflecting new equipment purchased during the year to replace older equipment which requires more maintenance. Insurance expense declined 0.6% as a percent of revenue during 1998. This improvement was due primarily to a decrease in liability insurance rates. G.I. Trucking has handled its increased level of business in part by utilizing a higher level of purchased transportation relative to previous periods. As a result, rents, which include purchased transportation, increased 2.4% as a percent of revenue during 1998. While rents increased, total depreciation and amortization decreased 0.6% as a percent of revenue during 1998, reflecting the increase in purchased transportation. This overall decrease in depreciation as a percent of revenue is net of additional depreciation related to 1998 capital expenditures. During the year, G.I. Trucking purchased 114 new tractors and 253 new trailers. CLIPPER Revenues from Clipper decreased 11.7% to $122.5 million in 1998 from $138.8 million in 1997. Since the fourth quarter of 1997, Clipper had been adversely affected by service problems with the U.S. rail system. During the fourth quarter of 1998, Clipper experienced some improvements in the on-time service levels of its rail suppliers. However, rail service remained inconsistent and had not returned to acceptable levels across all lanes. Primarily as a result of the rail service problems, intermodal shipments declined 24.2% for the year 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- ended December 31, 1998 compared to the same period in 1997. Clipper also experienced a decline of 3.5% in the number of LTL shipments during 1998. The decline in LTL shipments resulted from management's decision to move away from heavier, less profitable shipments along with some impact of rail service problems. Clipper's operating ratio increased to 100.9% for 1998 from 97.4% for 1997. Declines in the number of intermodal shipments caused Clipper to fall below the volume levels necessary to receive volume rebates from the railroads during 1998. Also, rail service problems caused Clipper to utilize more expensive over-the-road transportation services. In addition, Clipper experienced an increase in basic rail transportation costs when 1998 is compared to 1997. These increases resulted in a 2.0% increase in cost of services as a percent of revenue during 1998. Clipper's operating ratio also reflects a 1.6% increase in selling, administrative and general costs as a percent of revenue during 1998. Selling, administrative and general costs are primarily fixed in nature and increase as a percentage of revenue with a decline in revenue levels. TREADCO, INC. Revenues increased 12.4% to $181.3 million in 1998 from $161.3 million in 1997. For 1998, "same store" sales increased 10.9% and "new store" sales accounted for 1.5% of the total increase in revenues from 1997. "Same store" sales include both production facilities and sales locations in existence for the entire years of 1998 and 1997. "New store" sales resulted from one new sales location in 1998 and one new sales location in 1997. Revenues from retreading for 1998 were $70.8 million, an 8.4% increase from $65.3 million during 1997. In 1998, retreaded truck tire units sold increased 8.1%. The average sales price for retreads increased due primarily to a 3.0% price increase implemented on October 1, 1998. Revenues from the sale of new tires for 1998 were $91.6 million, a 13.0% increase from $81.0 million during 1997. New tire units sold increased 15.8% from 1997. This increase was offset by a decrease in the average sales price per tire of approximately 1.2% from 1997 due to the mix of new tires sold. Service revenues for 1998 were $18.9 million, an increase of 26.5%, from $15.0 million in 1997. Treadco's operating ratio improved to 98.6% for 1998 from 101.6% for 1997. The decrease in cost of services of 3.3%, as a percent of revenue, resulted primarily from improved casing costs, inventory controls, and lower overhead costs, reflecting greater capacity utilization. The increase in selling, administrative and general costs of 0.3%, as a percent of revenue, resulted primarily from the implementation of a gross profit-based compensation plan for salesmen effective January 1, 1998. INTEREST Interest expense was $18.1 million for 1998 compared to $23.8 million for 1997, primarily due to lower interest rates and some reductions in average outstanding debt. The average interest rate on the Company's Revolving Credit Agreement was 7.2% on January 1, 1998 and 6.4% on December 31, 1998. INCOME TAXES The difference between the effective tax rate for 1998 and the federal statutory rate resulted from state income taxes, amortization of nondeductible goodwill, minority interest and other nondeductible expenses (see Note G). The difference between the effective tax rate for 1997 and the federal statutory rate resulted from state income taxes, amortization of goodwill, minority interest and other nondeductible expenses. In addition, income tax expense for 1997 exceeded the expected amount because of $3.5 million in taxes attributable to a lower tax 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- basis than accounting basis in Cardinal. The basis difference resulted from goodwill of approximately $9.5 million allocated to Cardinal as a result of purchase accounting for a 1995 acquisition, which included Cardinal (see Note G). LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for 1999 was $114.4 million compared to $72.3 million for 1998. The increase is due primarily to the improvement in operating results, net income, decreases in prepaid expenses and increases in accrued and other liabilities for 1999 compared to 1998. Cash provided by operations, proceeds from assets sales of $14.5 million and borrowings were used to purchase revenue equipment and other property and equipment in the amount of $50.1 million, to purchase the non-ABC owned shares of Treadco for $23.7 million and to pay down outstanding debt during 1999. During 1998, cash provided by operations and proceeds from the sale of assets of $16.4 million were used to purchase revenue equipment and other assets in the amount of $60.9 million. The Company is party to a $250 million credit agreement (the "Credit Agreement") with Societe Generale as Administrative Agent and with Bank of America National Trust and Savings Association and Wells Fargo Bank (Texas), N.A., as Co-Documentation Agents. The Credit Agreement provides for up to $250 million of revolving credit loans (including letters of credit) and extends through 2003. At December 31, 1999, there were $101.3 million of Revolver Advances and approximately $22.2 million of letters of credit outstanding. At December 31, 1999, the Company had approximately $126.5 million of borrowing availability under the Credit Agreement. The Credit Agreement contains various covenants, which limit, among other things, indebtedness, distributions, disposition of assets and capital expenditures, and require the Company to meet certain quarterly financial ratio tests. As of December 31, 1999, the Company was in compliance with the covenants. The Company is party to an interest rate swap on a notional amount of $110 million. The purpose of the swap is to limit the Company's exposure to increases in interest rates on $110 million of bank borrowings over the seven-year term of the swap. The interest rate under the swap is fixed at 5.845% plus the Credit Agreement margin, which at December 31, 1999 was 0.625% and is currently 0.50% (see Notes H and O). Since January 1, 1999, the Company has entered into $26.1 million in capital lease obligations for the purchase of revenue equipment. At December 31, 1998, Treadco was a party to a revolving credit facility with Societe Generale (the "Treadco Credit Agreement"), providing for borrowings up to the lesser of $20 million or the applicable borrowing base. The Treadco Credit Agreement was terminated on June 25, 1999. The following table sets forth the Company's historical capital expenditures (net of equipment trade-ins) for the periods indicated below. Proceeds from the sale of property and equipment have not been netted against the capital expenditures:
YEAR ENDED DECEMBER 31 1999 1998 1997 -------- -------- -------- ($ thousands) CAPITAL EXPENDITURES ABF Freight System, Inc. .................... $ 49,342 $ 58,364 $ 6,761 G.I. Trucking Company ....................... 7,946 11,730 309 Cardinal Freight Carriers, Inc. ............. -- -- 652 Clipper ..................................... 5,309 2,805 128 Treadco, Inc. ............................... 9,801 11,205 4,334 Other and eliminations ...................... 3,811 2,342 1,951 -------- -------- -------- Total consolidated capital expenditures .. $ 76,209 $ 86,446 $ 14,135 ======== ======== ========
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- The amounts presented in the table include equipment purchases financed with capital leases of $26.1 million, $25.6 million, and $2.6 million in 1999, 1998 and 1997, respectively. In 2000 the Company forecasts total spending of $85.0 to $95.0 million for capital expenditures net of proceeds from equipment sales. Of the $85.0 to $95.0 million, ABF is budgeted for $63.0 to $73.0 million to be used primarily for revenue equipment and facilities. Treadco is budgeted for approximately $4.0 million of expenditures to be used primarily for retreading and service equipment and facilities and G.I. Trucking is budgeted for approximately $10.0 million of expenditures to be used primarily for revenue equipment. Clipper is budgeted for approximately $4.0 million of expenditures to be used primarily for revenue equipment. Management believes, based upon the Company's current levels of operations, the Company's cash, capital resources, borrowings available under the Credit Agreement and cash flow from operations will be sufficient to finance current and future operations and meet all present and future debt service requirements, as well as fund its commitment to purchase $30.9 million in revenue equipment (see Note K). SEASONALITY ABF and G.I. Trucking are affected by seasonal fluctuations, which affect tonnage to be transported. Freight shipments, operating costs and earnings are also affected adversely by inclement weather conditions. The third calendar quarter of each year usually has the highest tonnage levels while the first quarter has the lowest. Clipper's operations are similar to operations at ABF and G.I. Trucking with revenues being weaker in the first quarter and stronger during the months of September and October. Treadco's operations are somewhat seasonal with the third quarter of the calendar year generally having the highest levels of sales. ENVIRONMENTAL MATTERS The Company's subsidiaries store some fuel for their tractors and trucks in approximately 78 underground tanks located in 27 states. Maintenance of such tanks is regulated at the federal and, in some cases, state levels. The Company believes that it is in substantial compliance with all such regulations. The Company is not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on the Company. Environmental regulations have been adopted by the United States Environmental Protection Agency ("EPA") that required the Company to upgrade its underground tank systems by December 1998. The Company successfully completed the upgrades prior to December 31, 1998. The Company has received notices from the EPA and others that it has been identified as a potentially responsible party ("PRP") under the Comprehensive Environmental Response Compensation and Liability Act or other federal or state environmental statutes at several hazardous waste sites. After investigating the Company's or its subsidiaries' involvement in waste disposal or waste generation at such sites, the Company has either agreed to de minimis settlements (aggregating approximately $300,000 over the last ten years), or believes its obligations with respect to such sites would involve immaterial monetary liability, although there can be no assurances in this regard. As of December 31, 1999, the Company has accrued approximately $2.7 million to provide for environmental-related liabilities. The Company's environmental accrual is based on management's best estimate of the actual liability. The Company's estimate is founded on management's experience in dealing with similar environmental matters and on actual testing performed at some sites. Management believes that the accrual is adequate to cover environmental liabilities based on the present environmental regulations. Accruals for environmental liability are included in the balance sheet as accrued expenses. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS Statements contained in the Management's Discussion and Analysis section of this report that are not based on historical facts are "forward-looking statements." Terms such as "estimate," "expect," "predict," "plan," "anticipate," "believe," "intend," "should," "would," "scheduled," and similar expressions and the negatives of such terms are intended to identify forward-looking statements. Such statements are by their nature subject to uncertainties and risk, including but not limited to union relations; availability and cost of capital; shifts in market demand; weather conditions; the performance and needs of industries served by Arkansas Best's subsidiaries; actual future costs of operating expenses such as fuel and related taxes; self-insurance claims and employee wages and benefits; actual costs of continuing investments in technology, the timing and amount of capital expenditures; the accuracy of assessments and estimates relating to Year 2000 computer issues; competitive initiatives and pricing pressures; general economic conditions; and other financial, operational and legal risks and uncertainties detailed from time to time in the Company's SEC public filings. 17 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- INTEREST RATE INSTRUMENTS The Company has historically been subject to market risk on all or a part of its borrowings under bank credit lines, which have variable interest rates. In February 1998, the Company entered into an interest rate swap effective April 1, 1998. The swap agreement is a contract to exchange floating interest rate payments for fixed rate payments over the life of the instrument. The notional amount is used to measure interest to be paid or received and does not represent the exposure to credit loss. The purpose of the swap is to limit the Company's exposure to increases in interest rates on the notional amount of bank borrowings over the term of the swap. The fixed interest rate under the swap is 5.845% plus the Credit Agreement margin (currently 0.50%). This instrument is not recorded on the balance sheet of the Company. Details regarding the swap, as of December 31, 1999, are as follows:
NOTIONAL RATE RATE FAIR AMOUNT MATURITY PAID RECEIVED VALUE (2) ------ -------- ---- -------- --------- $110.0 million April 1, 2005 5.845% Plus Credit Agreement LIBOR rate (1) $5.0 million Margin (currently 0.50%) Plus Credit Agreement Margin (currently 0.50%)
(1) LIBOR rate is determined two London Banking Days prior to the first day of every month and continues up to and including the maturity date. (2) The fair value is an amount estimated by Societe Generale ("process agent") that the Company would have received at December 31, 1999 to terminate the agreement. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for all financial instruments, except for the interest rate swap agreement disclosed above. CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. LONG- AND SHORT-TERM DEBT. The carrying amounts of the Company's borrowings under its Revolving Credit Agreements approximate their fair values, since the interest rate under these agreements is variable. Also, the carrying amount of long-term debt was estimated to approximate their fair values, with the exception of the Subordinated Debentures and Treadco equipment debt, which are estimated using current market rates. The carrying amounts and fair value of the Company's financial instruments at December 31 are as follows:
1999 1998 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- ($ thousands) Cash and cash equivalents .... $ 4,319 $ 4,319 $ 4,543 $ 4,543 Short-term debt .............. $ 1,166 $ 1,080 $ 1,233 $ 1,182 Long-term debt ............... $135,780 $132,648 $161,371 $157,337
Borrowings under the Company's Credit Agreement in excess of $110.0 million are subject to market risk. During 1999, outstanding debt obligations under the Credit Agreement periodically exceeded $110.0 million. The Company's highest borrowings during 1999 reached $140.2 million, and the average borrowings during the year were $122.0 million. A 100-basis-point change in interest rates on Credit Agreement borrowings above $110.0 million would change annual interest cost by $100,000 per $10.0 million of borrowings. 18 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued - -------------------------------------------------------------------------------- The Company is subject to market risk for increases in diesel fuel prices; however, this risk is mitigated by fuel surcharges which are included in the revenues of ABF and G. I. Trucking based on increases in diesel fuel prices compared to relevant indexes. The Company does not have a formal foreign currency risk management policy. The Company's foreign operations are not significant to the Company's total revenues or assets. Revenue from non-U.S. operations amounted to less than 1% of total revenues for 1999. Accordingly, foreign currency exchange rate fluctuations have never had a significant impact on the Company, and they are not expected to in the foreseeable future. The Company has not historically entered into financial instruments for trading purposes, nor has the Company historically engaged in hedging fuel prices. No such instruments were outstanding during 1999 or 1998. 19 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Shareholders and Board of Directors Arkansas Best Corporation We have audited the accompanying consolidated balance sheets of Arkansas Best Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arkansas Best Corporation and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Little Rock, Arkansas January 19, 2000 20 ARKANSAS BEST CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
DECEMBER 31 1999 1998 ---------- ---------- ($ thousands) ASSETS CURRENT ASSETS Cash and cash equivalents ............................ $ 4,319 $ 4,543 Trade receivables less allowances (1999--$5,775,000; 1998--$7,051,000) ............... 187,837 166,520 Inventories .......................................... 33,050 33,150 Prepaid expenses ..................................... 7,428 12,700 Deferred income taxes ................................ 7,231 874 Assets of discontinued operations .................... -- 3,546 Other ................................................ 3,234 5,467 ---------- ---------- TOTAL CURRENT ASSETS .............................. 243,099 226,800 PROPERTY, PLANT AND EQUIPMENT Land and structures .................................. 222,421 218,250 Revenue equipment .................................... 292,493 256,474 Manufacturing equipment .............................. 15,851 17,506 Service, office and other equipment ..................... 82,508 73,891 Leasehold improvements ............................... 10,520 9,484 ---------- ---------- 623,793 575,605 Less allowances for depreciation and amortization .... 286,699 255,732 ---------- ---------- 337,094 319,873 OTHER ASSETS ............................................ 39,154 33,598 ASSETS HELD FOR SALE .................................... 3,197 2,084 GOODWILL, less amortization (1999 -- $36,365,000; 1998 -- $36,740,000) ........... 109,385 124,975 ---------- ---------- $ 731,929 $ 707,330 ========== ==========
21 ARKANSAS BEST CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
DECEMBER 31 1999 1998 ---------- ---------- ($ thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank overdraft and drafts payable ................................. $ 16,187 $ 19,830 Trade accounts payable ............................................ 76,597 69,983 Accrued expenses .................................................. 160,469 145,432 Federal and state income taxes .................................... 8,434 8,179 Current portion of long-term debt ................................. 20,452 17,504 ---------- ---------- TOTAL CURRENT LIABILITIES ...................................... 282,139 260,928 LONG-TERM DEBT, less current portion ................................. 173,702 196,079 OTHER LIABILITIES .................................................... 29,845 20,577 DEFERRED INCOME TAXES ................................................ 25,191 22,319 MINORITY INTEREST IN TREADCO, INC .................................... -- 33,512 SHAREHOLDERS' EQUITY Preferred stock, $.01 par value, authorized 10,000,000 shares; issued and outstanding 1,495,000 shares ........................ 15 15 Common stock, $.01 par value, authorized 70,000,000 shares; issued and outstanding 1999: 19,752,333 shares; 1998: 19,610,213 shares ........................................ 197 196 Additional paid-in capital ........................................ 194,155 193,117 Retained earnings (deficit) ....................................... 26,685 (19,413) Accumulated other comprehensive income ............................ -- -- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY ..................................... 221,052 173,915 COMMITMENTS AND CONTINGENCIES......................................... ---------- ---------- $ 731,929 $ 707,330 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 22 ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997 ------------ ------------ ------------ ($ thousands, except per share data) OPERATING REVENUES Transportation operations ........................................... $ 1,537,271 $ 1,428,421 $ 1,434,306 Tire operations ..................................................... 184,315 178,982 158,912 ------------ ------------ ------------ 1,721,586 1,607,403 1,593,218 ------------ ------------ ------------ OPERATING EXPENSES AND COSTS Transportation operations ........................................... 1,430,294 1,360,261 1,366,919 Tire operations ..................................................... 181,585 177,165 161,796 ------------ ------------ ------------ 1,611,879 1,537,426 1,528,715 ------------ ------------ ------------ OPERATING INCOME ....................................................... 109,707 69,977 64,503 OTHER INCOME (EXPENSE) Net gains (losses) on sales of property and non-revenue equipment ........................................ 871 1,694 (3,534) Gain on sale of Cardinal Freight Carriers, Inc. ..................... -- -- 8,985 Settlement of litigation ............................................ -- 9,124 -- Interest expense .................................................... (18,395) (18,146) (23,765) Minority interest in Treadco, Inc. .................................. 245 (3,257) 1,359 Other, net .......................................................... (4,791) (4,949) (5,280) ------------ ------------ ------------ (22,070) (15,534) (22,235) ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ................................................ 87,637 54,443 42,268 FEDERAL AND STATE INCOME TAXES Current ............................................................. 33,327 21,245 3,715 Deferred ............................................................ 3,128 1,947 16,371 ------------ ------------ ------------ 36,455 23,192 20,086 ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS ...................................... 51,182 31,251 22,182 ------------ ------------ ------------ DISCONTINUED OPERATIONS: Loss from discontinued operations (net of tax benefits of $472, $1,287 and $2,173 for the years ended December 31, 1999, 1998, and 1997, respectively) ..................................... (786) (2,576) (3,742) Loss on disposal of discontinued operations (net of tax benefits of $605) ..................................... -- -- (3,093) ------------ ------------ ------------ LOSS FROM DISCONTINUED OPERATIONS ...................................... (786) (2,576) (6,835) ------------ ------------ ------------ NET INCOME ............................................................. 50,396 28,675 15,347 Preferred stock dividends ........................................... 4,298 4,298 4,298 ------------ ------------ ------------ NET INCOME FOR COMMON SHAREHOLDERS ..................................... $ 46,098 $ 24,377 $ 11,049 ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE BASIC: Continuing operations ............................................... $ 2.38 $ 1.37 $ 0.91 Discontinued operations ............................................. (0.04) (0.13) (0.35) ------------ ------------ ------------ NET INCOME PER SHARE ................................................... $ 2.34 $ 1.24 $ 0.56 ============ ============ ============ DILUTED: Continuing operations ............................................... $ 2.14 $ 1.32 $ 0.91 Discontinued operations ............................................. (0.03) (0.11) (0.35) ------------ ------------ ------------ NET INCOME PER SHARE ................................................... $ 2.11 $ 1.21 $ 0.56 ============ ============ ============ CASH DIVIDENDS PAID PER COMMON SHARE ................................... $ -- $ -- $ -- ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 23 ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
ACCUMULATED ADDITIONAL RETAINED OTHER PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE TOTAL STOCK STOCK CAPITAL (DEFICIT) INCOME (LOSS)(1) EQUITY --------- --------- --------- --------- ---------------- --------- ($ thousands) BALANCES AT JANUARY 1, 1997 ...................... $ 15 $ 195 $ 192,328 $ (54,837) $ (271) $ 137,430 Net income .................................... -- -- -- 15,347 -- 15,347 --------- Comprehensive income ....................... 15,347 --------- Issuance of common stock ...................... -- 1 582 -- -- 583 Dividends paid ................................ -- -- -- (4,298) -- (4,298) --------- --------- --------- --------- ---------------- --------- BALANCES AT DECEMBER 31, 1997 .................... 15 196 192,910 (43,788) (271) 149,062 Net income .................................... -- -- -- 28,675 -- 28,675 Adjustment to minimum pension liability ....... -- -- -- (2) 271 269 --------- Comprehensive income ....................... 28,944 --------- Tax effect of stock options exercised ......... -- -- 118 -- -- 118 Issuance of common stock ...................... -- -- 89 -- -- 89 Dividends paid ................................ -- -- -- (4,298) -- (4,298) --------- --------- --------- --------- ---------------- --------- BALANCES AT DECEMBER 31, 1998 .................... 15 196 193,117 (19,413) -- 173,915 Net income .................................... -- -- -- 50,396 -- 50,396 --------- Comprehensive income ..................... 50,396 --------- Tax effect of stock options exercised ......... -- -- 7 -- -- 7 Issuance of common stock ...................... -- 1 1,031 -- -- 1,032 Dividends paid ................................ -- -- -- (4,298) -- (4,298) --------- --------- --------- --------- ---------------- --------- BALANCES AT DECEMBER 31, 1999 .................... $ 15 $ 197 $ 194,155 $ 26,685 $ -- $ 221,052 ========= ========= ========= ========= ================ =========
The accompanying notes are an integral part of the consolidated financial statements. (1) Net of tax benefits of $0.1 million. 24 ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997 ---------- ---------- ---------- ($ thousands) OPERATING ACTIVITIES Net income .................................................. $ 50,396 $ 28,675 $ 15,347 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................ 45,242 40,674 44,316 Amortization of intangibles .............................. 4,195 4,515 4,629 Other amortization ....................................... 324 2,420 4,139 Provision for losses on accounts receivable .............. 2,967 3,957 2,956 Provision for deferred income taxes ...................... 3,128 1,962 16,310 Net gain on sales of assets and subsidiaries ............. (1,786) (3,928) (4,560) Minority interest in Treadco, Inc. ....................... (245) 3,257 (1,359) Changes in operating assets and liabilities: Receivables ........................................... (24,284) (2,885) (7,646) Inventories and prepaid expenses ...................... 5,506 (1,793) 28 Other assets .......................................... (3,012) 5,896 (8,826) Accounts payable, bank drafts payable, taxes payable, accrued expenses and other liabilities .............. 31,969 (10,478) 10,865 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES ..................... 114,400 72,272 76,199 ---------- ---------- ---------- INVESTING ACTIVITIES Purchases of property, plant and equipment, less capital leases ....................................... (50,085) (60,866) (11,645) Capitalized software ........................................ (2,505) -- -- Purchase of Treadco stock ................................... (23,673) (1,132) -- Proceeds from sales of stock of subsidiaries ................ -- -- 39,031 Proceeds from asset sales and other ......................... 14,470 16,415 37,340 ---------- ---------- ---------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ............... (61,793) (45,583) 64,726 ---------- ---------- ---------- FINANCING ACTIVITIES Deferred financing costs and expenses ....................... (137) (731) (1,165) Borrowings under revolving credit facilities ................ 428,750 557,975 463,135 Payments under revolving credit facilities .................. (448,300) (551,925) (545,635) Payments on long-term debt .................................. (26,116) (22,175) (16,652) Payment under term loan facilities .......................... -- (13,000) (42,948) Dividends paid to minority shareholders of Treadco, Inc. .... -- -- (330) Dividends paid .............................................. (4,298) (4,298) (4,298) Net increase (decrease) in bank overdraft ................... (3,769) 4,715 13,801 Other ....................................................... 1,039 90 (2,057) ---------- ---------- ---------- NET CASH USED BY FINANCING ACTIVITIES .......................... (52,831) (29,349) (136,149) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................................ (224) (2,660) 4,776 Cash and cash equivalents at beginning of year .............. 4,543 7,203 2,427 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR ....................... $ 4,319 $ 4,543 $ 7,203 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 25 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS Arkansas Best Corporation (the "Company") is a diversified holding company engaged through its subsidiaries primarily in motor carrier transportation operations, intermodal transportation operations, and truck tire retreading and new tire sales (see Note N). Principal subsidiaries are ABF Freight System, Inc. ("ABF"); Treadco, Inc. ("Treadco"); Clipper Exxpress Company and related companies ("Clipper"); G.I. Trucking Company ("G.I. Trucking"); FleetNet America, LLC; and, until July 15, 1997, Cardinal Freight Carriers, Inc. ("Cardinal") (see Note D). Approximately 79% of ABF's employees are covered under a five-year collective bargaining agreement which began on April 1, 1998 with the International Brotherhood of Teamsters ("IBT"). During the first half of 1999, the Company acquired 2,457,000 shares of Treadco for $23.7 million via a cash tender offer pursuant to a definitive merger agreement. As a result of the transaction, Treadco became a wholly owned subsidiary of the Company (see Note R). For the years ended December 31, 1998 and 1997, the Company's consolidated financial statements reflected full consolidation of the accounts of Treadco, with the ownership interests of the other stockholders of Treadco reflected as minority interest because the Company controlled Treadco through stock ownership, board representation and management services, provided under a transition services agreement. The Company's ownership percentages of Treadco at December 31, 1998 and 1997 were 49% and 46%, respectively. NOTE B - ACCOUNTING POLICIES CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. CASH AND CASH EQUIVALENTS: Short-term investments which have a maturity of ninety days or less when purchased are considered cash equivalents. CONCENTRATION OF CREDIT RISK: The Company's services are provided primarily to customers throughout the United States and Canada. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Historically, credit losses have been within management's expectations. INVENTORIES: Inventories, which consist primarily of new tires and retread tires and supplies used in Treadco's business, are stated at the lower of cost (first-in, first-out basis) or market. PROPERTY, PLANT AND EQUIPMENT: Purchases of property, plant and equipment are recorded at cost. For financial reporting purposes, such property is depreciated principally by the straight-line method, using the following lives: structures - -- 15 to 30 years; revenue equipment -- 3 to 7 years; manufacturing equipment -- 5 to 12 years; other equipment -- 3 to 10 years; and leasehold improvements -- 4 to 10 years. For tax reporting purposes, accelerated depreciation or cost recovery methods are used. Gains and losses on asset sales are reflected in the year of disposal. Trade-in allowances in excess of the book value of revenue equipment traded are accounted for by adjusting the cost of assets acquired. Tires purchased with revenue equipment are capitalized as a part of the cost of such equipment, with replacement tires being expensed when placed in service. ASSETS HELD FOR SALE: Assets held for sale represent primarily non-operating freight terminals and other properties, which are carried at the lower of net book value or estimated net realizable value. Writedowns to net realizable value are included in gains or losses on sales of property. 26 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- The Company recorded writedowns to net realizable value of $1.6 million in 1997 for properties reclassified to assets held for sale. Total assets held for sale at December 31, 1997 were $3.3 million. In 1998, additional assets of $1.0 million were identified and reclassified to assets held for sale. During 1998, assets carried at $2.3 million were sold, resulting in a gain of $1.1 million. No writedowns were made in 1998. Total assets held for sale at December 31, 1998 were $2.1 million. In 1999, additional assets of $2.1 million were identified and reclassified to assets held for sale and the Company recorded writedowns to net realizable value of $.6 million. During 1999, assets carried at $.4 million were sold, resulting in a net gain of $.3 million. COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE: The Company adopted Statement of Position ("SOP") 98-1, Accounting for Costs of Computer Software Developed for or Obtained for Internal Use January 1, 1999. As a result, the Company capitalizes qualifying computer software costs incurred during the "application development stage." For financial reporting purposes, capitalized software costs are amortized by the straight-line method over 24 to 60 months. The amount of costs capitalized within any period is dependent on the nature of software development activities and projects in each period. For the year ended December 31, 1999, the Company capitalized software developed or obtained for internal use of $2.5 million, which included capitalized interest of $46,000. GOODWILL: Excess cost over fair value of net assets acquired (goodwill) is amortized on a straight-line basis over 30 to 40 years. The carrying value of goodwill will be reviewed for impairment whenever changes or circumstances indicate that the carrying amount may not be recoverable, such as a significant adverse change in legal factors or the business climate or an adverse assessment by a regulator or a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows over the remaining amortization period, the Company's carrying value of the goodwill will be reduced. INCOME TAXES: Deferred income taxes are accounted for under the liability method. Deferred income taxes relate principally to asset and liability basis differences arising from a 1988 purchase transaction and from a 1995 acquisition, as well as to the timing of the depreciation and cost recovery deductions previously described and to temporary differences in the recognition of certain revenues and expenses of carrier operations. REVENUE RECOGNITION: Motor carrier revenue is recognized based on relative transit time in each reporting period with expenses recognized as incurred. Revenue for other segments is recognized generally at the point when goods or services are provided to the customers. EARNINGS (LOSS) PER SHARE: The calculation of earnings (loss) per share is based on the weighted average number of common (basic earnings per share) or common equivalent shares outstanding (diluted earnings per share) during the applicable period. The dilutive effect of Common Stock equivalents is excluded from basic earnings per share and included in the calculation of diluted earnings per share. The calculation of basic earnings per share reduces income available to common shareholders by Preferred Stock dividends paid or accrued during the period. STOCK-BASED COMPENSATION: Stock-based compensation to employees is accounted for based on the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). 27 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- ACCOUNTING FOR SALES OF STOCK BY SUBSIDIARIES: The Company recognizes gains and losses on sales of subsidiary stock when incurred. CLAIMS LIABILITIES: The Company is self-insured up to certain limits for workers' compensation, cargo loss and damage, certain property damage and liability claims. Provision has been made for the estimated liabilities for such claims based on historical trends, claims frequency, severity and other factors. INSURANCE-RELATED ASSESSMENTS: The Company adopted Statement of Position 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments, January 1, 1999. As a result, the Company has recorded estimated liabilities of $.6 million incurred for state guarantee fund assessments and other insurance-related assessments. Management has estimated the amounts incurred, using the best available information about premiums and guarantee assessments by state. These amounts are expected to be paid within a period not to exceed one year. The liabilities recorded have not been discounted or reduced for possible recoveries from insurance carriers or other third parties. ENVIRONMENTAL MATTERS: The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site-by-site basis with actual testing at some sites, and records a liability at the time when it is probable and can be reasonably estimated. The estimated liability is not discounted or reduced for possible recoveries from insurance carriers or other third parties (see Note L). DERIVATIVE FINANCIAL INSTRUMENTS: The Company has, from time to time, entered into interest-rate swap agreements and interest-rate cap agreements (see Notes H and O) designed to modify the interest characteristic of outstanding debt or limit exposure to increasing interest rates. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the debt (the accrual accounting method). The related amount payable to or receivable from counterparties is included in other liabilities or assets. The fair value of the swap agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the financial statements. Gains and losses on terminations of interest-rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized as an adjustment to the interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income coincident with the extinguishment gain or loss. Any swap agreements or portions thereof that are not designated with outstanding debt or notional amounts or durations of interest-rate swap agreements in excess of the principal amounts or expected maturities of the underlying debt obligations will be recorded as an asset or liability at fair value, with changes in fair value recorded in other income or expense (the fair value method). COSTS OF START-UP ACTIVITIES: The Company expenses certain costs associated with start-up activities as they are incurred. COMPREHENSIVE INCOME: The Company reports the classification components of other comprehensive income by their nature in the financial statements and displays the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the consolidated financial statements. Comprehensive income refers to revenues, expenses, gains and losses that are included in comprehensive income but excluded from net income. 28 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- SEGMENT INFORMATION: The Company uses the "management approach" for determining appropriate segment information to disclose. The management approach is based on the way management organizes the segments within the Company for making operating decisions and assessing performance. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS: Certain reclassifications have been made to the prior year financial statements to conform to the current year's presentation. NOTE C - DISCONTINUED OPERATIONS As of June 30, 1997 and prior periods since 1995, the Company was engaged in providing logistics services, including warehousing and distribution, through two wholly owned subsidiaries, The Complete Logistics Company ("CLC") and Integrated Distribution, Inc. ("IDI"). On August 8, 1997, the Company sold CLC for approximately $2.5 million in cash. The sale resulted in a pre-tax loss of $1.3 million. In September 1997, the Company completed a formal plan to exit the logistics segment by disposing of IDI. As of September 30, 1997, the Company recorded a loss for the disposal of IDI of $2.2 million, net of tax benefits of $0.1 million. On October 31, 1997, the Company closed the sale of IDI for proceeds of approximately $0.6 million. At December 31, 1998, the Company was engaged in international ocean freight services through its subsidiary, CaroTrans International, Inc. ("Clipper International"), a non-vessel operating common carrier (N.V.O.C.C.). On February 28, 1999, the Company completed a formal plan to exit its international ocean freight N.V.O.C.C. services by disposing of the business and assets of Clipper International. On April 17, 1999, the Company closed the sale of the business and certain assets of Clipper International, including the trade name "CaroTrans International, Inc." Remaining assets are being liquidated. The aggregate of the selling price of the assets sold and the estimated liquidation value of the retained Clipper International assets aggregated approximately $5.0 million which was approximately equal to the Company's net investment in the related assets. Results of operations of the logistics segment and Clipper International have been reported as discontinued operations and the statements of operations for all prior periods have been restated to remove the revenue and expenses of these segments. Results of the logistics operations segment and Clipper International included in discontinued operations are summarized as follows:
YEAR ENDED DECEMBER 31 1999 1998 1997 ---------- ---------- ---------- ($ thousands) Revenues: Clipper International ......................... $ 6,777 $ 44,049 $ 50,460 Logistics ..................................... -- -- 29,812 ---------- ---------- ---------- Total discontinued operations revenues ........ $ 6,777 $ 44,049 $ 80,272 ========== ========== ========== Operating Loss: Clipper International ......................... $ (1,314) $ (3,567) $ (1,595) Logistics ..................................... -- -- (3,516) ---------- ---------- ---------- Total discontinued operations operating loss .. $ (1,314) $ (3,567) $ (5,111) ========== ========== ========== Pre-tax Loss: Clipper International ......................... $ (1,258) $ (3,863) $ (1,910) Logistics ..................................... -- -- (4,005) ---------- ---------- ---------- Total discontinued operations pre-tax loss .... $ (1,258) $ (3,863) $ (5,915) ========== ========== ==========
29 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- NOTE D - SALE OF CARDINAL FREIGHT CARRIERS, INC. On July 15, 1997, the Company sold Cardinal for approximately $38.0 million in cash. The sale resulted in a pre-tax gain of approximately $9.0 million. The net proceeds from the sale were used to pay down bank debt. Results of operations for Cardinal included in the statements of operations are summarized as follows:
YEAR ENDED DECEMBER 31 1999 1998 1997 ---------- ---------- ---------- ($ thousands) Revenues ................ $ -- $ -- $ 39,366 Operating income ........ -- -- 2,087 Pre-tax income .......... -- -- 1,710
NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. In June 1999, the FASB issued Statement No. 137, which deferred for one year the implementation date of FASB Statement No. 133. As a result, Statement No. 133 is effective for the Company in 2001. The Company is evaluating the impact the Statement will have on its financial statements and related disclosures. NOTE F - INVENTORIES
DECEMBER 31 1999 1998 ---------- ---------- ($ thousands) Finished goods ......................... $ 26,253 $ 25,523 Materials .............................. 4,042 5,147 Repair parts, supplies and other ....... 2,755 2,480 ---------- ---------- $ 33,050 $ 33,150 ========== ==========
30 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- NOTE G - FEDERAL AND STATE INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31 1999 1998 ------------ ------------ ($ thousands) Deferred tax liabilities: Depreciation and basis differences for property, plant and equipment ............ $ 33,424 $ 30,797 Revenue recognition ............................. 5,066 4,540 Basis difference on asset and stock sale ........ -- 3,239 Prepaid expenses ................................ 4,572 2,885 Other ........................................... 1,592 1,578 ------------ ------------ Total deferred tax liabilities ................ 44,654 43,039 Deferred tax assets: Accrued expenses ................................ 19,632 14,710 Postretirement benefits other than pensions ..... 1,184 1,086 Net operating loss carryovers ................... 2,843 2,903 Other ........................................... 4,183 4,043 ------------ ------------ Total deferred tax assets ..................... 27,842 22,742 Valuation allowance for deferred tax assets ... (1,148) (1,148) ------------ ------------ Net deferred tax assets ...................... 26,694 21,594 ------------ ------------ Net deferred tax liabilities ....................... $ 17,960 $ 21,445 ============ ============
31 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- Significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31 1999 1998 1997 ---------- ---------- ---------- ($ thousands) Current: Federal ................... $ 28,797 $ 18,605 $ 2,498 State ..................... 4,530 2,640 1,217 ---------- ---------- ---------- Total current .......... 33,327 21,245 3,715 ---------- ---------- ---------- Deferred: Federal ................... 2,023 1,577 14,794 State ..................... 1,105 370 1,577 ---------- ---------- ---------- Total deferred ......... 3,128 1,947 16,371 ---------- ---------- ---------- Total income tax expense ..... $ 36,455 $ 23,192 $ 20,086 ========== ========== ==========
A reconciliation between the effective income tax rate, as computed on income from continuing operations, and the statutory federal income tax rate is presented in the following table:
YEAR ENDED DECEMBER 31 1999 1998 1997 ---------- ---------- ---------- ($ thousands) Income tax at the statutory federal rate of 35% ....................... $ 30,673 $ 19,055 $ 14,794 Federal income tax effects of: State income taxes ................................ (1,972) (1,047) (980) Nondeductible goodwill ............................ 963 1,045 1,262 Other nondeductible expenses ...................... 1,364 672 538 Minority interest ................................. (85) 1,140 (476) Undistributed earnings or losses of Treadco, Inc. . -- 204 (80) Nondeductible goodwill included in assets of Cardinal ........................... -- -- 3,078 Other ............................................. (123) (886) (844) ---------- ---------- ---------- Federal income taxes ................................. 30,820 20,183 17,292 State income taxes ................................... 5,635 3,009 2,794 ---------- ---------- ---------- Total income tax expense ............................. $ 36,455 $ 23,192 $ 20,086 ========== ========== ========== Effective tax rate ................................... 41.6% 42.6% 47.5% ========== ========== ==========
Income taxes of $29.9 million were paid in 1999, $13.1 million were paid in 1998, and $2.4 million were paid in 1997. Income tax refunds amounted to $1.4 million in 1999, $4.4 million in 1998, and $8.5 million in 1997. As of December 31, 1999, the Company had state net operating loss carryovers of approximately $55.2 million. State net operating loss carryovers expire generally in five to fifteen years. For financial reporting purposes, a valuation allowance of approximately $1.1 million has been established for certain state net operating loss carryovers for which realization is uncertain. In March 1999, the Tenth Circuit Court of Appeals ruled against an appealing taxpayer regarding the timing of deductibility of contributions to multiemployer pension plans. The Internal Revenue Service (IRS) has raised 32 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- the same issue with respect to the Company. There are certain factual differences between those present in the Tenth Circuit case and those relating specifically to the Company. The Company is involved in the administrative appeals process with the IRS regarding those factual differences. A favorable determination regarding these factual differences would result in a substantial reduction in the Company's liability. In the event of an unfavorable result from the administrative appeals process of the IRS, the Company presently intends to pursue its judicial remedies as necessary. If all the issues involved in the pension matter were decided adversely to the Company, the amount of tax and interest due would be approximately $34.0 million. Because of the complex issues involved and the fact that multiple tax years of the Company and an acquired company are involved, with multiple IRS examinations in different stages of completion, management believes the resolution of this matter will occur over an extended future period. All related income taxes have been provided for, and, in the opinion of management, adequate provision has been made for all related interest liabilities that may arise as a result of the proposed IRS adjustments. In the opinion of management, any liability that may arise will not have a material adverse effect on the Company's results of operations or financial position. NOTE H - LONG-TERM DEBT AND CREDIT AGREEMENTS
DECEMBER 31 1999 1998 ------------ ------------ ($ thousands) Revolving Credit and Term Loan Facility (1) ... $ 101,300 $ 119,600 Subordinated Debentures (2) ................... 33,342 37,994 Treadco Credit Agreement (3) .................. -- 1,250 Capitalized Lease Obligations (4) ............. 57,207 50,979 Other ......................................... 2,305 3,760 ------------ ------------ 194,154 213,583 Less current portion .......................... 20,452 17,504 ------------ ------------ $ 173,702 $ 196,079 ============ ============
(1) On June 12, 1998, the Company entered into a senior five-year Revolving Credit Agreement ("Credit Agreement") in the amount of $250 million, which includes a $75 million sublimit for the issuance of letters of credit. The parties to the Credit Agreement are the Company, Societe Generale as Administrative Agent, and Bank of America National Trust and Savings Association and Wells Fargo Bank (Texas), N.A. as Co-Documentation Agents, as well as five other participating banks. The Company's previous credit agreement was terminated upon entering into the new Credit Agreement. The Credit Agreement contains covenants limiting, among other things, indebtedness, distributions, dispositions of assets, and capital expenditures, and requires the Company to meet certain quarterly financial ratio tests. As of December 31, 1999, the Company was in compliance with all covenants. Interest rates under the agreement are at variable rates as defined by the Credit Agreement. At December 31, 1999, the effective average interest rate on the Credit Agreement was 6.6%. At December 31, 1999, there were $101.3 million of Revolver Advances and approximately $22.2 million of outstanding letters of credit. At December 31, 1998, there were $119.6 million of Revolver Advances and approximately $37.8 million in outstanding letters of credit. Outstanding revolving credit advances may not exceed a borrowing base calculated using the Company's equipment, real estate and eligible receivables. The borrowing base was $344.9 million at December 31, 1999, which exceeded the $250.0 million limit specified by the Credit Agreement. The amount available under the Credit Agreement at December 31, 1999 was $126.5 million. The Company has pledged, as security for 33 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- the Credit Agreement, substantially all accounts receivable and revenue equipment not already pledged under other debt obligations. (2) The Subordinated Debentures were issued in April 1986 by an acquired company. The debentures bear interest at 6.25% per annum, payable semi-annually, on a par value of $34.9 million at December 31, 1999. The debentures are payable April 15, 2011. The Company may redeem all outstanding debentures at 100% of par at any time and is required to redeem, through a mandatory sinking fund in each year through 2010, $2.5 million of the aggregate principal amount of the debentures issued. The Company has met its sinking fund obligations through 2002 by making market purchases and deposits of debentures with the Bond Trustee. Bonds with a par value of $5.0 million were purchased in 1999 for approximately $4.3 million. Bonds with a par value of $5.0 million were purchased for approximately $4.5 million in 1998. The bond repurchases resulted in gains of $0.5 million in 1999 and $0.3 million in 1998 (included in other income). (3) At December 31, 1998, Treadco was a party to a revolving credit facility with Societe Generale (the "Treadco Credit Agreement"), providing for borrowings up to the lesser of $20 million or the applicable borrowing base. The Treadco Credit Agreement was terminated on June 25, 1999. (4) Capitalized lease obligations include approximately $53.6 million relative to leases of carrier revenue equipment with an aggregate net book value of approximately $53.3 million at December 31, 1999. These leases have a weighted average interest rate of approximately 7.0%. Also included is approximately $3.6 million relative to leases of computer and office equipment, various terminals financed by Industrial Revenue Bond Issues, and Treadco delivery and service trucks, with a weighted average interest rate of approximately 7.3%. The net book value of the related assets was approximately $8.4 million at December 31, 1999. Annual maturities on long-term debt, excluding capitalized lease obligations (see Note K), in 2000 through 2004 aggregate approximately $1.2 million; $1.0 million; $0.1 million; $103.8 million; and $2.5 million, respectively. Interest paid, including interest capitalized, was $18.9 million in 1999, $18.3 million in 1998, and $24.4 million in 1997. Interest capitalized totaled $0.2 million in 1999 and $48,000 in 1998. No interest was capitalized during 1997. The Company was a party to an interest rate cap arrangement to reduce the impact of increases in interest rates on its variable-rate long-term debt. The agreement had a termination date of November 23, 1999. Under the agreement the Company was to be reimbursed for the difference in interest rates if the LIBOR rate exceeded a fixed rate of 9% applied to notional amounts, as defined in the contract, ranging from $10.0 million as of December 31, 1998 to $2.5 million as of October 1999. As of November 23, 1999, December 31, 1998 and December 31, 1997, the LIBOR rates were 5.6%, 5.1% and 5.8%, respectively; therefore, no amounts were due to the Company under this arrangement. Fees totaling $0.4 million were paid in 1994 to enter into this arrangement. These fees were fully amortized upon the termination of the agreement. In February 1998, the Company entered into an interest rate swap effective April 1, 1998, on a notional amount of $110.0 million. The purpose of the swap was to limit the Company's exposure to increases in interest rates on $110.0 million of bank borrowings over the seven-year term of the swap. The fixed interest rate under the swap is 5.845% plus the Credit Agreement margin (0.625% at December 31, 1999 and currently 0.50%) (see Note O). 34 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- NOTE I - ACCRUED EXPENSES
DECEMBER 31 1999 1998 ------------ ------------ ($ thousands) Accrued salaries, wages and incentive plans ........................ $ 32,309 $ 19,416 Accrued vacation pay ............................................... 33,083 31,386 Accrued interest ................................................... 2,029 2,413 Taxes other than income ............................................ 9,049 8,992 Loss, injury, damage and workers' compensation claims reserves ..... 74,309 72,110 Other .............................................................. 9,690 11,115 ------------ ------------ $ 160,469 $ 145,432 ============ ============
35 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- NOTE J - SHAREHOLDERS' EQUITY PREFERRED STOCK. In February 1993, the Company completed a public offering of 1,495,000 shares of Preferred Stock at $50 per share. The Preferred Stock is convertible at the option of the holder into Common Stock at the rate of 2.5397 shares of Common Stock for each share of Preferred Stock. Annual dividends are $2.875 and are cumulative. The Preferred Stock is exchangeable, in whole or in part, at the option of the Company on any dividend payment date beginning February 15, 1995, for the Company's 5 3/4% Convertible Subordinated Debentures due February 15, 2018, at a rate of $50 principal amount of debentures for each share of Preferred Stock. The Preferred Stock is redeemable at any time, in whole or in part, at the Company's option, initially at a redemption price of $52.0125 per share and thereafter at redemption prices declining to $50 per share on or after February 15, 2003, plus unpaid dividends to the redemption date. Holders of Preferred Stock have no voting rights unless dividends are in arrears six quarters or more, at which time they have the right to elect two directors of the Company until all dividends have been paid. Dividends of $4.3 million were paid during 1999, 1998 and 1997. STOCK OPTIONS. The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee and director stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has a stock option plan, which provides 2,900,000 shares of Common Stock for the granting of options to directors and key employees of the Company. All options granted are exercisable starting 12 months after the grant date, with 20% of the shares covered thereby becoming exercisable at that time and with an additional 20% of the option shares becoming exercisable on each successive anniversary date, with full vesting occurring on the fifth anniversary date. The options were granted for a term of 10 years. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant, using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 6.7%, 4.8% and 6.7%; dividend yields of .01%, .01% and .01%; volatility factors of the expected market price of the Company's Common Stock of .45, .47 and .45; and a weighted-average expected life of the option of 9.5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. 36 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
DECEMBER 31 1999 1998 1997 ------------ ------------ ------------ Net income - as reported ....................... $ 50,396 $ 28,675 $ 15,347 ============ ============ ============ Net income - pro forma ......................... $ 49,696 $ 27,809 $ 14,693 ============ ============ ============ Net income per share - as reported (basic) ..... $ 2.34 $ 1.24 $ .56 ============ ============ ============ Net income per share - as reported (diluted) ... $ 2.11 $ 1.21 $ .56 ============ ============ ============ Net income per share - pro forma (basic) ....... $ 2.31 $ 1.20 $ .53 ============ ============ ============ Net income per share - pro forma (diluted) ..... $ 2.08 $ 1.17 $ .52 ============ ============ ============
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1999 1998 1997 --------------------------- --------------------------- --------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------- -------------- ---------- -------------- ---------- -------------- Outstanding - beginning of year ... 1,839,500 $ 8.11 1,839,480 $ 8.01 1,790,200 $ 8.21 Granted ........................... 429,000 8.85 37,500 10.57 312,000 5.44 Exercised ......................... (142,120) 7.26 (14,000) 6.38 (91,740) 6.38 Forfeited ......................... (71,680) 7.77 (23,480) 6.38 (170,980) 6.38 ---------- -------------- ---------- -------------- ---------- -------------- Outstanding - end of year ......... 2,054,700 $ 8.28 1,839,500 $ 8.11 1,839,480 $ 8.01 ========== ============== ========== ============== ========== ============== Exercisable - end of year ......... 1,154,680 $ 8.87 1,025,320 $ 9.28 781,776 $ 9.99 ========== ============== ========== ============== ========== ============== Estimated weighted-average fair value per share of options granted to employees during the year ............................ $ 5.82 $ 6.68 $ 3.65 ========== ============== ========== ============== ========== ==============
The following table summarizes information concerning currently outstanding and exercisable options:
WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE --------------- ----------- ----------- ---------- ----------- --------- $ 4 - $ 6 270,500 7.2 $ 5.04 108,200 $ 5.04 $ 6 - $ 8 957,300 7.0 6.77 394,080 6.38 $ 8 - $10 97,000 6.3 8.92 51,000 9.14 $10 - $12 532,700 2.9 10.85 502,700 10.87 $12 - $14 197,200 6.9 12.83 98,700 12.65 --------------- ----------- ---- --------- --------- -------- 2,054,700 1,154,680 =========== =========
37 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- SHAREHOLDERS' RIGHTS PLAN. Each issued and outstanding share of Common Stock has associated with it one Common Stock right to purchase a share of Common Stock from the Company at a price of $60.00. The rights are not exercisable, but could become exercisable if certain events occur relating to the acquisition of 15% or more of the outstanding Common Stock of the Company. Upon distribution, the rights will entitle holders, other than an acquirer in a non-permitted transaction, to receive Common Stock with a market value of two times the exercise price of the right. The rights will expire in 2002 unless extended. NOTE K - LEASES AND COMMITMENTS Rental expense amounted to approximately $20.5 million in 1999, $24.4 million in 1998 and $29.8 million in 1997. The future minimum rental commitments, net of future minimum rentals to be received under noncancellable subleases, as of December 31, 1999 for all noncancellable operating leases are as follows:
TERMINALS EQUIPMENT AND RETREAD AND PERIOD TOTAL PLANTS OTHER - ------ ---------- ----------- ---------- ($ thousands) 2000 .............. $ 15,451 $ 11,528 $ 3,923 2001 .............. 11,123 9,564 1,559 2002 .............. 9,339 8,156 1,183 2003 ............... 6,242 6,004 238 2004................ 3,602 3,590 12 Thereafter ......... 7,210 7,193 17 ---------- ----------- ---------- $ 52,967 $ 46,035 $ 6,932 ========== =========== ==========
Certain of the leases are renewable for substantially the same rentals for varying periods. Future minimum rentals to be received under noncancellable subleases totaled approximately $3.5 million at December 31, 1999. The future minimum payments under capitalized leases at December 31, 1999 consisted of the following ($ thousands): 2000 ................................................. $ 22,453 2001 ................................................. 24,028 2002 ................................................. 15,047 2003 ................................................. 235 2004................................................... 235 Thereafter ............................................ 1,433 ---------- Total minimum lease payments .......................... 63,431 Amounts representing interest ......................... 6,224 ---------- Present value of net minimum leases included in long-term debt - Note H ................. $ 57,207 ==========
38 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- Assets held under capitalized leases are included in property, plant and equipment as follows:
DECEMBER 31 1999 1998 ---------- ---------- ($ thousands) Revenue equipment ................. $ 84,655 $ 75,689 Structures and other equipment .... 11,435 13,952 ---------- ---------- 96,090 89,641 Less accumulated amortization ..... 34,360 33,030 ---------- ---------- $ 61,730 $ 56,611 ========== ==========
The revenue equipment leases have remaining terms from one to four years and contain renewal or fixed price purchase options. The lease agreements require the lessee to pay property taxes, maintenance and operating expenses. Lease amortization is included in depreciation expense. Capital lease obligations of $26.1 million, $25.6 million and $2.6 million were incurred for the years ended December 31, 1999, 1998 and 1997, respectively. Commitments to purchase revenue equipment, which are cancellable by the Company if certain conditions are met, aggregated approximately $30.9 million at December 31, 1999. NOTE L - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS AND OTHER EVENTS Various legal actions, the majority of which arise in the normal course of business, are pending. None of these legal actions are expected to have a material adverse effect on the Company's financial condition, cash flows or results of operations. The Company maintains liability insurance against certain risks arising out of the normal course of its business, subject to certain self-insured retention limits. The Company's subsidiaries store some fuel for their tractors and trucks in approximately 78 underground tanks located in 27 states. Maintenance of such tanks is regulated at the federal and, in some cases, state levels. The Company believes that it is in substantial compliance with all such regulations. The Company is not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on the Company. Environmental regulations have been adopted by the United States Environmental Protection Agency ("EPA") that required the Company to upgrade its underground tank systems by December 1998. The Company successfully completed the upgrades prior to December 31, 1998. The Company has received notices from the EPA and others that it has been identified as a potentially responsible party ("PRP") under the Comprehensive Environmental Response Compensation and Liability Act or other federal or state environmental statutes at several hazardous waste sites. After investigating the Company's or its subsidiaries' involvement in waste disposal or waste generation at such sites, the Company has either agreed to de minimis settlements (aggregating approximately $300,000 over the last ten years), or believes its obligations with respect to such sites would involve immaterial monetary liability, although there can be no assurances in this regard. As of December 31, 1999, the Company has accrued approximately $2.7 million to provide for environmental-related liabilities. The Company's environmental accrual is based on management's best estimate of the actual liability. The Company's estimate is founded on management's experience in dealing with similar environmental matters and on actual testing performed at some sites. Management believes that the accrual is adequate to cover environmental liabilities based on the present environmental regulations. Accruals for environmental liability are included in the balance sheet as accrued expenses. 39 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- On October 30, 1995, Treadco filed a lawsuit in Arkansas State Court, alleging that Bandag Incorporated ("Bandag") and certain of its officers and employees had violated Arkansas statutory and common law in attempting to solicit Treadco's employees to work for Bandag or its competing franchisees and attempting to divert customers from Treadco. The Federal District Court ruled that under terms of Treadco's franchise agreements with Bandag, all of the issues involved in Treadco's lawsuit against Bandag were to be decided by arbitration. The arbitration hearing began September 21, 1998 and in December 1998 prior to the completion of the arbitration, Treadco entered into a settlement with Bandag and certain of Bandag's current and former employees. Under the settlement terms, Treadco received a one-time payment of $9,995,000 in settlement of all the Company's claims. The settlement resulted in other income for Treadco of $9,124,000. The settlement payment was used to reduce Treadco's outstanding borrowings under its Revolving Credit Agreement, which was ultimately terminated on June 25, 1999. NOTE M - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company and its subsidiaries have noncontributory defined benefit pension plans covering substantially all noncontractual employees. Benefits are based on years of service and employee compensation. Contributions are made based upon at least the minimum amounts required to be funded under provisions of the Employee Retirement Income Security Act of 1974, with the maximum amounts not to exceed the maximum amount deductible under the Internal Revenue Code. The plans' assets are held in trust funds and are primarily invested in equity and fixed income securities. Additionally, the Company participates in several multiemployer plans which provide defined benefits to the Company's union employees. In the event of insolvency or reorganization, plan terminations or withdrawal by the Company from the multiemployer plans, the Company may be liable for a portion of the multiemployer plan's unfunded vested benefits, the amount of which, if any, has not been determined, but which would be material. During 1999, the Company's and certain subsidiaries' defined benefit pension plans were amended to reduce early retirement incentives and to change the benefit formula from an annuity formula to a lump-sum formula. The Company also sponsors other postretirement benefit plans that provide supplemental medical benefits, life insurance, accident and vision care to certain full-time officers of the Company and certain subsidiaries. The plans are noncontributory, with the Company generally paying 80% of covered charges incurred by participants of the plan. 40 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- The following is a summary of the changes in benefit obligations and plan assets for the defined benefit plans and other postretirement benefit plans:
YEAR ENDED DECEMBER 31 PENSION BENEFITS OTHER BENEFITS 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ($ thousands) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year .................... $ 180,881 $ 155,638 $ 5,630 $ 6,534 Service cost ............................................... 6,025 7,953 64 65 Interest cost .............................................. 11,508 11,409 389 377 Amendments ................................................. (10,789) (642) (48) -- Actuarial (gain) loss and other ............................ (11,094) 16,037 (363) (787) Benefits and expenses paid ................................. (18,130) (9,514) (484) (559) ---------- ---------- ---------- ---------- Benefit obligation at end of year .......................... 158,401 180,881 5,188 5,630 ---------- ---------- ---------- ---------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year ............. 198,982 175,003 -- -- Actual return on plan assets and other ..................... 30,247 32,354 -- -- Employer contribution ...................................... 2,887 1,139 484 559 Benefits and expenses paid ................................. (18,130) (9,514) (484) (559) ---------- ---------- ---------- ---------- Fair value of plan assets at end of year ................... 213,986 198,982 -- -- ---------- ---------- ---------- ---------- Funded status .............................................. 55,585 18,101 (5,188) (5,630) Unrecognized net actuarial (gain) loss ..................... (25,087) (1,056) (179) 165 Unrecognized prior service cost (credit) ................... (8,779) 1,067 695 819 Unrecognized net transition obligation (asset) and other ... (58) (53) 1,743 1,884 ---------- ---------- ---------- ---------- Prepaid (accrued) benefit cost ............................. $ 21,661 $ 18,059 $ (2,929) $ (2,762) ========== ========== ========== ==========
At December 31, 1999 and 1998, the net pension asset is reflected in the accompanying financial statements as a noncurrent asset of $21.7 million and $18.1 million, respectively, included in other assets. At December 31, 1999, Treadco's defined benefit pension plan had pension benefit obligations of $4.8 million and plan assets with a fair value of $4.6 million. At December 31, 1998, G.I. Trucking's Freight Handler's Retirement Plan had pension benefit obligations of $29.0 million and plan assets with a fair value of $27.5 million. At December 31, 1999, the pension plan's assets included 681,500 shares of the Company's Common Stock, which had a fair market value of $8.2 million. There were no dividends paid on the Company's Common Stock during 1999. 41 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- Assumptions used in determining net periodic benefit cost for the defined benefit plans and other postretirement benefit plans were:
YEAR ENDED DECEMBER 31 PENSION BENEFITS OTHER BENEFITS 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS Discount rate............................ 7.9% 6.9% 7.0% 7.9% 6.9% 7.0% Expected return on plan assets........... 9.0% - 10.0% 10.0% 9.4% - 10.0% - - - Rate of compensation increase............ 3.0% - 4.0% 3.0% - 4.0% 3.0% - 4.0% - - -
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (in health care cost trend) ranges from 6.5% to 8% for 1999 and is assumed to decrease gradually to 4.5% in 2007 and later. A summary of the components of net periodic benefit cost for the defined benefit plans and other postretirement plans follows:
YEAR ENDED DECEMBER 31 PENSION BENEFITS OTHER BENEFITS 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- ($ thousands) COMPONENTS OF NET PERIODIC BENEFIT COST Service cost ..................................... $ 6,025 $ 7,953 $ 7,761 $ 64 $ 65 $ 93 Interest cost .................................... 11,508 11,409 10,483 389 377 411 Expected return on plan assets ................... (17,591) (16,842) (14,645) -- -- -- Transition (asset) obligation recognition ........ (4) (4) (4) 135 135 135 Amortization of prior service cost (credit) ...... (895) 74 100 131 131 131 Recognized net actuarial loss (gain) and other ... 361 1,369 918 (2) (19) (70) -------- -------- -------- -------- -------- -------- Net periodic benefit cost ........................ (596) 3,959 4,613 717 689 700 Multiemployer plans .............................. 68,211 66,355 65,237 -- -- -- -------- -------- -------- -------- -------- -------- $ 67,615 $ 70,314 $ 69,850 $ 717 $ 689 $ 700 ======== ======== ======== ======== ======== ========
The health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 1999:
1% 1% INCREASE DECREASE -------- -------- ($ thousands) Effect on total of service and interest cost components........... 66 (54) Effect on postretirement benefit obligation....................... 652 (545)
The Company has deferred compensation agreements with certain executives for which liabilities aggregating $3.1 million and $2.2 million as of December 31, 1999 and 1998, respectively, have been recorded. The deferred compensation agreements include a provision which immediately vests all benefits and, at the executive's election, provides for a lump-sum payment upon a change-in-control of the Company. The Company also has a supplemental benefit plan for the purpose of supplementing benefits under the Company's defined benefit plans. The plan will pay sums in addition to amounts payable under the retirement plans to eligible participants. Participation in the plan is limited to employees of the Company who are participants in the Company's retirement plans and who are designated as participants in the plan by the Company's Board of Directors. As of December 31, 1999 and 1998, the Company has liabilities of $5.4 million and $2.5 million, respectively, for future costs under this plan reflected in the accompanying consolidated 42 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- financial statements in other liabilities. The supplemental benefit plan includes a provision that benefits accrued under the plan will be paid in the form of a lump-sum following a change-in-control of the Company. An additional benefit plan provides certain death and retirement benefits for certain officers and directors of an acquired company and its former subsidiaries. The Company has liabilities of $5.4 million and $6.0 million at December 31, 1999 and 1998, respectively, for future costs under this plan reflected as other liabilities in the accompanying consolidated financial statements. The Company has insurance policies on the participants in amounts which are sufficient to fund a substantial portion of the benefits under the plan. The Company has various defined contribution plans which cover substantially all of its employees. The plans permit participants to defer a portion of their salary up to a maximum, ranging by plan from 12% to 15% as provided in Section 401(k) of the Internal Revenue Code. The Company matches a portion of participant contributions up to a specified compensation limit ranging from 0% to 4% in 1999. The plans also allow for discretionary Company contributions determined annually. The Company's expense for the defined contribution plans totaled $2.7 million for 1999, $1.8 million for 1998 and $1.3 million for 1997. In addition, the Company's union employees and union retirees are provided health care and other benefits through defined benefit multiemployer plans administered and funded based on the applicable labor agreement. The Company's obligation is determined based on the applicable labor agreement and does not extend directly to employees or retirees. The cost of such benefits cannot be readily separated between retirees and active employees. The aggregate contribution to the multiemployer health and welfare benefit plans totaled approximately $69.8 million, $66.0 million and $67.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. The Company has a performance award program available to the officers of ABC. Units awarded will be initially valued at the closing price per share of the Company's Common Stock on the date awarded. The vesting provisions and the return on equity target will be set upon award. No awards have been granted under this program. Treadco had a similar performance award plan under which, during 1995, 30,000 and 15,000 units were granted to Treadco's President and Executive Vice President, respectively. During 1998, Treadco awarded 855 and 428 units to its President and Executive Vice President, respectively. During 1999, Treadco paid $0.4 million to its President and Executive Vice President under the plan prior to the plan's termination on April 27, 1999. During 1998, the Company adopted a Voluntary Savings Plan ("VSP"). The VSP is a nonqualified deferred compensation plan for certain executives of the Company. Eligible employees are allowed to defer receipt of a portion of their regular compensation and other bonuses by making an election before the compensation is earned. In addition, the Company will credit participants' accounts with matching contributions and rates of return based on investments selected by the participants. Salary deferrals, Company match and investment earnings are considered part of the general assets of the Company until paid. As of December 31, 1999, the Company has recorded liabilities of $1.7 million in other liabilities and assets of $1.7 million in other assets associated with the plan. 43 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- NOTE N - OPERATING SEGMENT DATA The Company used the "management approach" to determine its reportable operating segments as well as to determine the basis of reporting the operating segment information. The management approach focuses on financial information that the Company's management uses to make decisions about operating matters. Management uses operating revenues, operating expense categories, operating ratios, operating income and key operating statistics to evaluate performance and allocate resources to the Company's operating segments. During the periods being reported on, the Company operated in five defined reportable operating segments: 1) ABF; 2) G.I. Trucking; 3) Cardinal (which was sold in July 1997); 4) Clipper; and 5) Treadco. A discussion of the services from which each reportable segment derives its revenues is as follows: ABF is headquartered in Fort Smith, Arkansas and is the fourth largest less-than-truckload ("LTL") motor carrier in the United States based on 1999 revenues as reported to the U.S. Department of Transportation ("D.O.T."). ABF provides direct service to over 98.6% of the cities in the United States having a population of 25,000 or more. ABF offers long-haul, intrastate and regional transportation of general commodities through LTL, assured services and expedited shipments. G.I. Trucking is headquartered in La Mirada, California and is one of the five largest western states-based non-union regional LTL motor carriers. G.I. Trucking offers one- to three-day regional service through service centers and agents in the Western and Southwestern regions. G.I. provides transcontinental service through a partnership with three other regional carriers through three major hub terminals located throughout the Midwest and East Coast. Cardinal, a truckload carrier serving primarily the Southeast and East, was sold by the Company in July 1997. Clipper is headquartered in Lemont, Illinois. Clipper offers domestic intermodal freight services, utilizing a variety of transportation modes including rail, over-the-road and air. Treadco is headquartered in Fort Smith, Arkansas. Treadco is the nation's largest independent tire retreader for the trucking industry and the largest independent commercial truck tire dealer. Treadco operates in locations across the Southern, Southwestern, Midwestern and Western regions of the United States. The Company's other business activities and operating segments that are not reportable include FleetNet America, LLC, a third-party, vehicle maintenance company; Arkansas Best Corporation, the parent holding company; and Transport Realty, Inc., a real estate subsidiary of the Company, as well as other subsidiaries. The Company eliminates intercompany transactions in consolidation. However, the information used by the Company's management with respect to its reportable segments is before intersegment eliminations of revenues and expenses. Intersegment revenues and expenses are not significant. Further classifications of operations or revenues by geographic location beyond the descriptions provided above is impractical and is, therefore, not provided. The Company's foreign operations are not significant. 44 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- The following tables reflect reportable operating segment information for the Company as well as a reconciliation of reportable segment information to the Company's consolidated operating revenues, operating expenses and operating income. The Company has restated its 1997 reportable segment presentation to conform to the current year's segment presentation.
YEAR ENDED DECEMBER 31 1999 1998 1997 ------------ ------------ ------------ ($ thousands) OPERATING REVENUES ABF Freight System, Inc. ................... $ 1,277,093 $ 1,175,213 $ 1,154,252 G.I. Trucking Company ...................... 137,409 124,547 100,015 Cardinal Freight Carriers, Inc. ............ -- -- 39,366 Clipper .................................... 112,237 122,528 138,811 Treadco, Inc. .............................. 186,602 181,293 161,276 Other revenues and eliminations ............ 8,245 3,822 (502) ------------ ------------ ------------ Total consolidated operating revenues ... $ 1,721,586 $ 1,607,403 $ 1,593,218 ============ ============ ============ OPERATING EXPENSES AND COSTS ABF FREIGHT SYSTEM, INC. Salaries and wages ......................... $ 818,928 $ 781,730 $ 770,248 Supplies and expenses ...................... 140,257 126,340 129,685 Operating taxes and licenses ............... 37,962 37,010 39,320 Insurance .................................. 20,811 19,889 20,370 Communications and utilities ............... 15,808 14,258 14,457 Depreciation and amortization .............. 30,409 25,967 24,766 Rents and purchased transportation ......... 101,849 98,206 89,987 Other ...................................... 4,887 6,318 5,095 Gain on sale of revenue equipment .......... (787) (2,114) (2,253) ------------ ------------ ------------ 1,170,124 1,107,604 1,091,675 ------------ ------------ ------------ G.I. TRUCKING COMPANY Salaries and wages ......................... 64,288 58,847 48,180 Supplies and expenses ...................... 11,061 10,643 9,480 Operating taxes and licenses ............... 3,251 2,574 2,007 Insurance .................................. 3,736 3,970 3,842 Communications and utilities ............... 1,773 1,672 1,330 Depreciation and amortization .............. 3,601 3,157 3,131 Rents and purchased transportation ......... 44,362 39,094 28,955 Other ...................................... 3,419 3,025 2,509 Gain on sale of revenue equipment .......... (117) (66) (25) ------------ ------------ ------------ 135,374 122,916 99,409 ------------ ------------ ------------ CARDINAL FREIGHT CARRIERS, INC. ............... -- -- 37,279 ------------ ------------ ------------ CLIPPER Cost of services ........................... 96,433 107,386 118,859 Selling, administrative and general ........ 14,381 16,280 16,318 Gain on sale of revenue equipment .......... (33) (64) -- ------------ ------------ ------------ 110,781 123,602 135,177 ------------ ------------ ------------
45 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997 ------------ ------------ ------------ ($ thousands) OPERATING EXPENSES AND COSTS (CONTINUED) TREADCO, INC. Cost of services .................................... 128,390 127,933 119,232 Selling, administrative and general ................. 54,622 50,868 44,553 ------------ ------------ ------------ 183,012 178,801 163,785 ------------ ------------ ------------ Other expenses and eliminations ........................ 12,588 4,503 1,390 ------------ ------------ ------------ Total consolidated operating expenses and costs .. $ 1,611,879 $ 1,537,426 $ 1,528,715 ============ ============ ============ OPERATING INCOME (LOSS) ABF Freight System, Inc. ............................ $ 106,969 $ 67,609 $ 62,577 G.I. Trucking Company ............................... 2,035 1,631 606 Cardinal Freight Carriers, Inc. ..................... -- -- 2,087 Clipper ............................................. 1,456 (1,074) 3,634 Treadco, Inc. ....................................... 3,590 2,492 (2,509) Other income (loss) and eliminations ................ (4,343) (681) (1,892) ------------ ------------ ------------ Total consolidated operating income .............. $ 109,707 $ 69,977 $ 64,503 ============ ============ ============
46 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- The following tables provide asset, capital expenditure and depreciation and amortization information by reportable operating segment:
YEAR ENDED DECEMBER 31 1999 1998 1997 ---------- ---------- ---------- ($ thousands) IDENTIFIABLE ASSETS ABF Freight System, Inc. ................................ $ 469,282 $ 406,430 $ 381,049 G.I. Trucking Company ................................... 51,049 39,859 28,240 Cardinal Freight Carriers, Inc. ......................... -- -- -- Clipper ................................................. 41,371 47,407 61,350 Treadco, Inc. ........................................... 90,472 107,370 100,458 Other and eliminations .................................. 79,755 106,264 122,552 ---------- ---------- ---------- Total consolidated assets ............................ $ 731,929 $ 707,330 $ 693,649 ========== ========== ========== CAPITAL EXPENDITURES ABF Freight System, Inc. ................................ $ 49,342 $ 58,364 $ 6,761 G.I. Trucking Company ................................... 7,946 11,730 309 Cardinal Freight Carriers, Inc. ......................... -- -- 652 Clipper ................................................. 5,309 2,805 128 Treadco, Inc. ........................................... 9,801 11,205 4,334 Other and eliminations .................................. 3,811 2,342 1,951 ---------- ---------- ---------- Total consolidated capital expenditures .............. $ 76,209 $ 86,446 $ 14,135 ========== ========== ========== DEPRECIATION AND AMORTIZATION EXPENSE ABF Freight System, Inc. ................................ $ 31,655 $ 27,214 $ 26,185 G.I. Trucking Company ................................... 3,552 3,260 3,187 Cardinal Freight Carriers, Inc. ......................... -- -- 1,899 Clipper ................................................. 1,473 1,408 1,872 Treadco, Inc. ........................................... 6,522 6,902 6,334 Other and eliminations .................................. 6,559 8,825 13,607 ---------- ---------- ---------- Total consolidated depreciation and amortization ..... $ 49,761 $ 47,609 $ 53,084 ========== ========== ==========
47 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- NOTE O - FINANCIAL INSTRUMENTS INTEREST RATE INSTRUMENTS In February 1998, the Company entered into an interest rate swap effective April 1, 1998. The swap agreement is a contract to exchange floating interest rate payments for fixed rate payments over the life of the instrument. The notional amount is used to measure interest to be paid or received and does not represent the exposure to credit loss. The purpose of the swap is to limit the Company's exposure to increases in interest rates on the notional amount of bank borrowings over the term of the swap. The fixed interest rate under the swap is 5.845% plus the Credit Agreement margin (currently 0.50%). This instrument is not recorded on the balance sheet of the Company. Details regarding the swap, as of December 31, 1999, are as follows:
NOTIONAL RATE RATE FAIR AMOUNT MATURITY PAID RECEIVED VALUE (2) ------ -------- ---- -------- --------- $110.0 million April 1, 2005 5.845% Plus Credit Agreement LIBOR rate (1) $5.0 million Margin (currently 0.50%) Plus Credit Agreement Margin (currently 0.50%)
(1) LIBOR rate is determined two London Banking Days prior to the first day of every month and continues up to and including the maturity date. (2) The fair value is an amount estimated by Societe Generale ("process agent") that the Company would have received at December 31, 1999 to terminate the agreement. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for all financial instruments, except for the interest rate swap agreement disclosed above: CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. LONG- AND SHORT-TERM DEBT. The carrying amounts of the Company's borrowings under its Revolving Credit Agreements approximate their fair values, since the interest rate under these agreements is variable. Also, the carrying amount of long-term debt was estimated to approximate their fair values, with the exception of the Subordinated Debentures and Treadco equipment debt, which are estimated using current market rates. The carrying amounts and fair value of the Company's financial instruments at December 31 are as follows:
1999 1998 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- ($ thousands) Cash and cash equivalents .... $ 4,319 $ 4,319 $ 4,543 $ 4,543 Short-term debt .............. $ 1,166 $ 1,080 $ 1,233 $ 1,182 Long-term debt ............... $ 135,780 $ 132,648 $ 161,371 $ 157,337
48 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- NOTE P - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1999 1998 1997 ------------ ------------ ------------ ($ thousands, except per share data) NUMERATOR: Numerator for basic earnings per share -- Net income ................................. $ 50,396 $ 28,675 $ 15,347 Preferred stock dividends .................. (4,298) (4,298) (4,298) ------------ ------------ ------------ Numerator for basic earnings per share -- Net income available to common shareholders ........................ 46,098 24,377 11,049 Effect of dilutive securities ................. 4,298 4,298 -- ------------ ------------ ------------ Numerator for diluted earnings per share -- Net income available to common shareholders ........................ $ 50,396 $ 28,675 $ 11,049 ============ ============ ============ DENOMINATOR: Denominator for basic earnings per share -- weighted-average shares ............ 19,671,130 19,608,963 19,540,118 Effect of dilutive securities: Preferred stock ............................. 3,796,852 3,796,852 -- Employee stock options ...................... 464,839 287,107 260,849 ------------ ------------ ------------ Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions .............. 23,932,821 23,692,922 19,800,967 ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE BASIC: Continuing operations ......................... $ 2.38 $ 1.37 $ 0.91 Discontinued operations ....................... (0.04) (0.13) (0.35) ------------ ------------ ------------ NET INCOME PER SHARE ............................. $ 2.34 $ 1.24 $ 0.56 ============ ============ ============ AVERAGE COMMON SHARES OUTSTANDING (BASIC) .......................... 19,671,130 19,608,963 19,540,118 ============ ============ ============ DILUTED: Continuing operations ......................... $ 2.14 $ 1.32 $ 0.91 Discontinued operations ....................... (0.03) (0.11) (0.35) ------------ ------------ ------------ NET INCOME PER SHARE ............................. $ 2.11 $ 1.21 $ 0.56 ============ ============ ============ AVERAGE COMMON SHARES OUTSTANDING (DILUTED): ........................ 23,932,821 23,692,922 19,800,967 ============ ============ ============ CASH DIVIDENDS PAID PER COMMON SHARE ............. $ -- $ -- $ -- ============ ============ ============
49 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- NOTE Q - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The tables below present unaudited quarterly financial information for 1999 and 1998:
1999 THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------ ($ thousands, except per share data) Operating revenues ................................. $ 394,374 $ 418,905 $ 452,850 $ 455,457 Operating expenses and costs ....................... 376,667 393,600 419,996 421,616 ------------ ------------ ------------ ------------ Operating income ................................... 17,707 25,305 32,854 33,841 Other expense - net ................................ (4,821) (6,172) (5,445) (5,632) Income taxes ....................................... 5,408 8,036 11,333 11,678 ------------ ------------ ------------ ------------ Income from continuing operations .................. 7,478 11,097 16,076 16,531 Loss from discontinued operations .................. (664) -- -- (122) ------------ ------------ ------------ ------------ Net income ......................................... $ 6,814 $ 11,097 $ 16,076 $ 16,409 ============ ============ ============ ============ Net income (loss) per common share, basic: (1) Continuing operations ........................... $ 0.32 $ 0.51 $ 0.76 $ 0.78 Discontinued operations ......................... (0.03) -- -- -- ------------ ------------ ------------ ------------ Net income per share ............................... 0.29 0.51 0.76 0.78 ------------ ------------ ------------ ------------ Average shares outstanding ......................... 19,613,653 19,632,533 19,691,666 19,746,666 ============ ============ ============ ============ Net income (loss) per common share, diluted: (2) Continuing operations ........................... $ 0.32 $ 0.47 $ 0.67 $ 0.68 Discontinued operations ......................... (0.03) -- -- -- ------------ ------------ ------------ ------------ Net income per share ............................... 0.29 0.47 0.67 0.68 ------------ ------------ ------------ ------------ Average shares outstanding ......................... 23,582,137 23,780,913 24,102,750 24,265,481 ============ ============ ============ ============
1998 THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------ ($ thousands, except per share data) Operating revenues ................................. $ 376,945 $ 405,589 $ 420,417 $ 404,452 Operating expenses and costs ....................... 365,627 386,575 399,679 385,545 ------------ ------------ ------------ ------------ Operating income ................................... 11,318 19,014 20,738 18,907 Other income (expense) - net ....................... (4,913) (6,145) (5,673) 1,197 Income taxes ....................................... 2,647 5,150 6,091 9,304 ------------ ------------ ------------ ------------ Income from continuing operations .................. 3,758 7,719 8,974 10,800 Loss from discontinued operations .................. (140) (318) (881) (1,237) ------------ ------------ ------------ ------------ Net income ......................................... $ 3,618 $ 7,401 $ 8,093 $ 9,563 ============ ============ ============ ============ Net income (loss) per common share, basic (1) Continuing operations ........................... $ 0.14 $ 0.34 $ 0.40 $ 0.49 Discontinued operations ......................... (0.01) (0.02) (0.04) (0.06) ------------ ------------ ------------ ------------ Net income per share ............................... 0.13 0.32 0.36 0.43 ------------ ------------ ------------ ------------ Average shares outstanding ......................... 19,605,213 19,610,213 19,610,213 19,610,213 ============ ============ ============ ============ Net income (loss) per common share, diluted: (2) Continuing operations ........................... $ 0.14 $ 0.32 $ 0.38 $ 0.46 Discontinued operations ......................... (0.01) (0.01) (0.04) (0.05) ------------ ------------ ------------ ------------ Net income per share ............................... 0.13 0.31 0.34 0.41 ------------ ------------ ------------ ------------ Average shares outstanding ......................... 20,075,081 23,850,481 23,606,484 23,440,637 ============ ============ ============ ============
(1) Gives consideration to preferred stock dividends of $1.1 million per quarter. (2) In the first quarter of 1998, consideration is given to preferred stock dividends of $1.1 million per quarter. Conversion of preferred stock into common would be antidilutive for the first quarter of 1998. For the first, second, third and fourth quarters of 1999, and for the second, third and fourth quarters of 1998, conversion of preferred stock into common is assumed. 50 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- NOTE R - ACQUISITION OF MINORITY INTEREST IN TREADCO, INC. On January 22, 1999, the Company announced that it had submitted a formal proposal to Treadco's Board of Directors under which the outstanding shares of Treadco's common stock not owned by the Company would be acquired for $9.00 per share in cash. The announcement stated that the proposal had the support of Shapiro Capital Management Company, Inc., Treadco's largest independent stockholder, which beneficially owned 1,132,775 shares (or approximately 22%) of the common stock of Treadco. On March 15, 1999, the Company and Treadco signed a definitive merger agreement for the acquisition of all shares of Treadco's stock not owned by the Company for $9.00 per share in cash via a tender offer. The tender offer commenced on March 23, 1999, and closed on April 20, 1999. A total of approximately 2,457,000 shares were tendered to the Company. Including the tendered shares, the Company owned approximately 98% of Treadco at the closing of the tender. At a June 10, 1999 special meeting, the shareholders of Treadco, Inc. approved the merger of Treadco Acquisition Corporation, a wholly owned subsidiary of the Company, into Treadco, Inc. This transaction resulted in Treadco, Inc. becoming a wholly owned subsidiary of the Company. Subject to the terms of the merger agreement, shares of common stock not tendered were converted into the right to receive $9.00 per share. As a result of the merger, the Company voluntarily delisted Treadco Inc.'s common stock from trading on The Nasdaq Stock Market on June 10, 1999. The cost of the Treadco shares and related expenses of $23.7 million was funded with the Company's Revolving Credit Facility. The acquisition of the Treadco stock was accounted for as a purchase. The application of purchase accounting to the acquired assets and liabilities of Treadco resulted in the elimination of Treadco's goodwill of approximately $12.0 million and a reduction of Treadco's fixed assets of approximately $4.0 million. Pro forma information (as if the acquisition and related transactions were completed at the beginning of their respective periods) for the years ended December 31, 1999, 1998 and 1997 is as follows:
YEAR ENDED DECEMBER 31 1999 1998 1997 ------------ ------------ ------------ ($ thousands, except per shar data) Operating revenues ....................... $ 1,721,586 $ 1,607,403 $ 1,593,218 Net income ............................... 50,217 32,161 14,129 Net income per share (diluted) ........... 2.10 1.36 0.50
EX-21 4 LIST OF SUBSIDIARY CORPORATIONS 1 EXHIBIT 21.01 EXHIBIT 21 2 EXHIBIT 21 LIST OF SUBSIDIARY CORPORATIONS ARKANSAS BEST CORPORATION The Registrant owns and controls the following subsidiary corporations:
JURISDICTION OF % OF VOTING NAME INCORPORATION SECURITIES OWNED - ------------------------------------------------------------------------------------------------------------------------ SUBSIDIARIES OF ARKANSAS BEST CORPORATION: ABF Freight System, Inc. Delaware 100 Treadco, Inc. Delaware 100 Transport Realty, Inc. Arkansas 100 Data-Tronics Corp. Arkansas 100 ABF Cartage, Inc. Delaware 100 Land-Marine Cargo, Inc. Puerto Rico 100 ABF Freight System Canada, Ltd. Canada 100 ABF Freight System de Mexico, Inc. Delaware 100 Agile Freight System, Inc. Delaware 100 Agricultural Express of America, Inc. Delaware 100 Clipper Exxpress Company Delaware 100 G.I. Trucking Company California 100 WorldWay Logistics Corporation North Carolina 100 Motor Carrier Insurance, Ltd. Bermuda 100 FleetNet America, LLC Delaware 100 Best Service Corp. Arkansas 100 Subsidiary of ABF Freight System, Inc.: ABF Freight System (B.C.), Ltd. British Columbia 100
EX-23 5 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.01 EXHIBIT 23 2 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Arkansas Best Corporation of our report dated January 19, 2000, included in the 1999 Annual Report to Shareholders of Arkansas Best Corporation. Our audits also included the financial statement schedule of Arkansas Best Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-93381) pertaining to the Arkansas Best Corporation Supplemental Benefit Plan, the Registration Statement (Form S-8 No. 333-69953) pertaining to the Arkansas Best Corporation Voluntary Savings Plan, the Registration Statement (Form S-8 No. 333-61793) pertaining to the Arkansas Best Corporation Stock Option Plan, the Registration Statement (Form S-8 No. 333-31475) pertaining to the Arkansas Best Corporation Stock Option Plan, the Registration Statement (Form S-8 No. 33-66694) pertaining to the Arkansas Best Corporation Disinterested Director Stockholder Plan and the Registration Statement (Form S-8, No. 33-52877) pertaining to the Arkansas Best Corporation Employees' Investment Plan, of our report dated January 19, 2000, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Arkansas Best Corporation. Ernst & Young LLP Little Rock, Arkansas March 7, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE - FYE - 12/31/99
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ARKANSAS BEST CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 DEC-31-1999 4,319 0 187,837 5,775 33,050 243,099 623,793 286,699 731,929 282,139 173,702 0 15 197 220,840 731,929 184,315 1,721,586 128,390 1,611,879 0 2,967 18,395 87,637 36,455 51,182 (786) 0 0 50,396 2.34 2.11
EX-27.2 7 FINANCIAL DATA SCHEDULE - FYE - 12/31/98
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ARKANSAS BEST CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AS RESTATED FOR DISCONTINUED OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 DEC-31-1998 4,543 0 166,520 7,051 33,150 226,800 575,605 255,732 707,330 260,928 196,079 0 15 196 173,704 707,330 178,982 1,607,403 127,933 1,537,426 0 3,957 18,146 54,443 23,192 31,251 (2,576) 0 0 28,675 1.24 1.21
EX-27.3 8 FINANCIAL DATA SCHEDULE - FYE - 12/31/97
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE ARKANSAS BEST CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AS RESTATED FOR DISCONTINUED OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 7,203 0 167,301 6,815 30,685 232,187 510,119 225,070 693,649 262,994 202,604 0 15 196 148,851 693,649 158,912 1,593,218 119,232 1,528,715 0 2,956 23,765 42,268 20,086 22,182 (6,835) 0 0 15,347 0.56 0.56
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