-----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, CkD+KJEAfZxY+6xZJmAERIjUWzbf5f0g/g3KEnORgax2SZXmJ5A1khnR1jFcQy++ A/M8iKiDFoq+q4/exkIx2A== 0000950144-99-003453.txt : 19990331 0000950144-99-003453.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950144-99-003453 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED HOLDINGS INC CENTRAL INDEX KEY: 0000909950 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 580360550 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13867 FILM NUMBER: 99577177 BUSINESS ADDRESS: STREET 1: 160 CLAIRMONT AVE STREET 2: STE 510 CITY: DECATUR STATE: GA ZIP: 30030 BUSINESS PHONE: 4043701100 MAIL ADDRESS: STREET 1: 160 CLAIREMONT AVENUE SUITE 510 CITY: DECATUR STATE: GA ZIP: 30030 10-K 1 ALLIED HOLDINGS, INC. 1 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 YEAR ENDED DECEMBER 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-22276 ALLIED HOLDINGS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 58-0360550 - -------------------------------------------------------------- -------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer ID Number) 160 Clairemont Avenue, Suite 200, Decatur, Georgia 30030 (Address of principal executive office) - -------------------------------------------------------------------------------------------------------------------
Registrant's telephone number, including area code (404) 373-4285 --------------- Securities registered pursuant to Section 12(b) of the Act: No par value Common Stock New York Stock Exchange - -------------------------------------------------------------- -------------------------------------- (Title of Class) (Name of Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act: None ---------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, 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 referenced in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 3, 1999 Registrant had outstanding 7,964,097 shares of common stock. The aggregate market value of the common stock held by nonaffiliates of the Registrant, based upon the closing sales price of the common stock on March 3, 1999 as reported on the New York Stock Exchange, was approximately $52,426,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for Registrant's 1999 Annual Meeting of Shareholders to be held May 12, 1999 are incorporated by reference in Part III. 2 ALLIED HOLDINGS, INC. TABLE OF CONTENTS
Page Caption Number ------- ------ PART I. ITEM 1. BUSINESS...................................................................................2 ITEM 2. PROPERTIES.................................................................................7 ITEM 3. LEGAL PROCEEDINGS........................................ .................................7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................8 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................................................10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA......................................................11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............................................18 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................................18 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................19 ITEM 11. EXECUTIVE COMPENSATION....................................................................19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................................................19 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................19 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................................................................20
3 PART I ITEM 1. BUSINESS. 1. GENERAL Allied Holdings, Inc. (the "Company" or "Allied"), founded in 1934, is a holding company which operates through its wholly-owned subsidiaries. The Company's principal operating divisions are Allied Automotive Group, Inc. ("Allied Automotive Group" or "Automotive Group") and Axis Group, Inc. ("Axis" or the "Axis Group"). Allied Automotive Group is the largest motor carrier in North America specializing in the transportation of new and used automobiles and light trucks utilizing specialized tractor trailers ("Rigs" or "Rig") and serves all of the major domestic and foreign automotive manufacturers. The Axis Group provides logistics solutions and other services to the new and used vehicle distribution market and other segments of the automotive industry. Axis is the global logistics services arm of the Allied Holdings family of companies. On September 30, 1997, the Company acquired Ryder Automotive Carrier Services, Inc. and RC Management Corp. (collectively, "Ryder Automotive Group") from Ryder System, Inc. (the "Ryder Automotive Group Acquisition"). Allied Automotive Group offers a full range of automotive delivery services including transporting new, used and off-lease vehicles to dealers from plants, rail ramps, ports and auctions, and providing vehicle rail-car loading and unloading services. The Allied Automotive Group represented approximately 98% of the Company's consolidated 1998 revenues. The Allied Automotive Group operates primarily in the short-haul segment of the automotive transportation industry with an average length of haul of less than 200 miles. The Allied Automotive Group delivers new and used vehicles throughout the United States and Canada for all of the major domestic and foreign manufacturers of automobiles and light trucks. General Motors, Ford and DaimlerChrysler represent the Company's largest customers, accounting for in total approximately 73% of 1998 revenues. The Automotive Group also provides services to all of the major foreign manufacturers, including Honda, Mazda, Nissan, Toyota, Isuzu, Volkswagen and Mitsubishi. Allied Automotive Group participated in the transportation of approximately 65% of the new vehicles sold in the United States and Canada in 1998, and had 1998 revenues nearly five times greater than its closest competitor. The Company provides logistics solutions to the automotive market through the Axis Group that complement Allied's new vehicle distribution services operations. Axis provides carrier management services for various automotive clients, leases equipment for containerized international shipment of vehicles, and provides vehicles processing services at ports and inland distribution centers. In addition, Axis has established a joint venture in Brazil to provide automotive logistics services in the Mercosur region, and it recently created subsidiaries in Mexico to provide services to the auto industry in Mexico. 2. INTEGRATION OF RYDER AUTOMOTIVE GROUP Ryder Automotive Group, prior to its acquisition by the Company, was North America's largest motor carrier of new and used automobiles and light trucks offering a full range of automotive delivery services including transporting new, used and off-lease vehicles to dealers from plants, railramps, ports and auctions, and providing vehicle rail-car loading and unloading services. The Ryder Automotive Group also provided logistics solutions and other services to the new and used vehicle distribution market and other segments of the automotive industry, including the growing used car superstore market. During 1998, the Company completed the integration of Ryder Automotive Group by consolidating 19 duplicate terminal facilities and converting all former Ryder Automotive Group locations to Allied's computer system. 2 4 3. SERVICES As a result of the Ryder Automotive Group Acquisition, the Allied Automotive Group is the largest motor carrier in North America specializing in the transportation of new and used automobiles and light trucks for all the major domestic and foreign automotive manufacturers. Allied participated in the transportation of approximately 65% of the new vehicles sold in the United States and Canada in 1998, including more than 50% of the North American production of General Motors, Ford and DaimlerChrysler. Allied Automotive Group believes it can capture a larger percentage of its major customers' North American production by building upon its relationships with manufacturers and leveraging its reputation for high quality services, competitive pricing and value-added services. Allied Automotive Group also believes that it can expand the types of services provided to its existing customers by utilizing its sophisticated technology in order to deliver vehicles and provide other services more efficiently and cost effectively than its competitors. The Company has made a significant commitment to providing complementary services to its existing customers and to new customers through its Axis Group subsidiary. Axis Group is aggressively pursuing opportunities to provide logistics solutions to customers in the automotive industry and seeks to leverage its proprietary information systems in order to efficiently provide such services. These services include identifying new and innovative distribution methods for customers, providing solutions relating to improving the management of inventory of new and used vehicles, and providing reconditioning services relating to the used and remarketed vehicle market. The Axis Group further believes that significant opportunities exist for it to provide additional automotive distribution services to its existing customers' internationally through the formation of joint ventures with established local transportation carriers. For example, Axis owns a minority interest in Axis Sinimbu Logistica ("ASL"). ASL provides automotive distribution services to the automotive industry in Brazil. 4. CUSTOMER RELATIONSHIPS The Company has contracts with most of its customers. The Allied Automotive Group's contracts with its customers establish rates for the transportation of vehicles based upon a fixed rate per vehicle transported and a variable rate for each mile a vehicle is transported. While the contracts generally do not permit Allied Automotive Group to recover for increases in fuel prices, fuel taxes or labor cost, certain of the Allied Automotive Group contracts provide for renegotiation in the event material adverse changes occur. The Allied Automotive Group has two contracts with Ford. The first expires in May 1999 and provides that the Allied Automotive Group is the primary carrier for 24 locations in the United States and all Canadian locations. The second contract with Ford expires in June 2000 and provides that the Allied Automotive Group is the primary carrier for 6 locations in the United States. The Company has begun negotiations with Ford regarding an extension of the existing contract or a new contract. The Allied Automotive Group has two contracts with DaimlerChrysler. The first contract expires in June 2000 and provides that the Allied Automotive Group is the primary carrier for 26 locations throughout the United States and Canada. The second contract with DaimlerChrysler expires in May 2001 and provides that the Allied Automotive Group is the primary carrier for 13 locations in the United States and 1 in Canada. The Allied Automotive Group has a contract with General Motors which expires in October 2000 and provides that the Allied Automotive Group is the primary carrier for 32 locations in the United States. 5. PROPRIETARY MANAGEMENT INFORMATION SYSTEMS The Company has made a long-term commitment to utilizing technology to serve its customers. The Company's information systems subsidiary, Link Information Systems, Inc. ("Link") provides information systems services to the Allied Automotive Group, Axis Group and other subsidiaries of the Company. Link's advanced management information system is a centralized, fully integrated information system utilizing a mainframe computer together with client servers. The system is based on a company-wide information database, which allows Link to quickly respond to customer information requests without having to combine data files from several sources. Updates with respect to vehicle load, dispatch and delivery are immediately available for reporting to customers and for better control and tracking of customer vehicle inventories. Through electronic data interchange ("EDI"), Link communicates directly with manufacturers in the process of delivering vehicles and electronically bills and collects from manufacturers. Link also utilizes EDI to communicate with inspection companies, railroads, port processors and other carriers. 3 5 Subsidiaries of the Company utilize Link's information system to allow them to operate more efficiently. For example, the information systems automatically design an optimal load for each Rig, taking into account factors such as the capacity of the Rig, the size of the vehicles, the route, the drop points, applicable weight and height restrictions and the formula for paying drivers. The system also determines the most economical and efficient load sequence and drop sequence for the vehicles to be transported. 6. MANAGEMENT STRATEGY The Company has adopted a performance management strategy which it believes contributes to quality, enhanced efficiency, safety and profitability in its operations. The Company's management strategy and culture is designed to enhance employee performance through careful selection and continuous training of new employees, with individual performance goals established for each employee and performance measured regularly through the Company's management information system. The Company believes that its performance management strategy is unique with respect to the role that employees play in the form of participation in this process. The Company has developed and implemented various programs to incentivize and reward increased employee productivity. The various programs developed by the Company reward damage-free delivery by drivers, driver efficiency and driver safety. The Company believes that these programs have improved customer and employee satisfaction and driver related productivity in areas such as damage-free deliveries. During 1997, the Company adopted an economic value added ("EVA") based performance measurement and incentive compensation system. EVA is the measure used by the Company to determine incentive compensation for senior management. EVA also provides management with a measure to gauge financial performance, allocate capital to appropriate projects, assist in providing valuations in regard to proposed acquisitions, and evaluate daily operating decisions. The Company believes that the EVA based performance measurement and incentive compensation system promotes the creation of economic value and shareholder value by aligning the interests of senior management with that of the Company's shareholders. The Board of Directors of the Company has adopted an Employee Stock Purchase Plan to provide all employees the opportunity to purchase shares of the Company's common stock. The plan is subject to approval by the shareholders of the Company. 7. RISK MANAGEMENT AND INSURANCE The Company's risk management subsidiary, Haul Risk Management Services, Inc. ("HRMS"), is responsible for defining risks and securing appropriate insurance programs and coverages at cost effective rates for the Company. HRMS internally administers all claims for auto and general liability and for workers compensation claims in Alabama, Florida, Georgia, Missouri, North Carolina, Ohio, South Carolina, Tennessee and Virginia. Liability and workers compensation claims are subject to periodic audits by the Company's commercial insurance carriers. The Company currently retains up to $650,000 of liability for each claim for workers' compensation and up to $500,000 of liability for automobile and general liability, including personal injury and property damage claims. In addition to the $500,000 per occurrence deductible for automobile liability, there is a $1,500,000 aggregate deductible for those claims which exceed the $500,000 per occurrence deductible, subject to a $1,000,000 per claim limit. The Company also retains up to $250,000 of liability for each cargo damage claim in the United States. In Canada, the Company retains up to C$100,000 (approximately U.S. $70,000 at February 27, 1999) of liability for each claim for personal injury, property damage or cargo damage. If the Company were to experience a material increase in the frequency or severity of accidents or workers' compensation claims or unfavorable developments in existing claims, the Company's operating results could be adversely affected. The Company formed Haul Insurance Limited in December 1995 as a captive insurance subsidiary to provide insurance coverage to the Company. 4 6 8. EQUIPMENT, MAINTENANCE AND FUEL The Allied Automotive Group operates approximately 5,240 Rigs with an average age of 7.2 years. The Allied Automotive Group has historically invested heavily in both new equipment and equipment upgrades, which have served to increase efficiency and extend the useful life of Rigs. Currently, new 75-foot Rigs cost between $120,000 and $140,000 and have a useful life of between 10 to 15 years when properly maintained and upgraded. All of the Automotive Group's terminals have access to a central parts warehouse through the management information system. The system calculates maximum and minimum parts inventory quantities based upon usage and automatically reorders parts. Minor modifications of equipment are performed at terminal locations. Major modifications involving change in length, configuration or load capacity are performed by the trailer manufacturers. In order to reduce fuel costs, the Automotive Group purchases approximately 31% of its fuel in bulk. Also, fuel is purchased by drivers on the road from a few major suppliers that offer discounts and central billing. The Automotive Group has entered into futures contracts to manage a portion of its exposure to fuel price fluctuations. 9. COMPETITION The transportation of vehicles in the long-haul segment of the automotive industry has been primarily controlled by rail carriers. In the 1970s and 1980s, following deregulation of the trucking industry by the Interstate Commerce Commission and as importers obtained a more significant share of United States automobile sales, new motor carriers, some without union contracts, began to compete for automobile traffic. Since the mid-1980s, nearly all transportation has been pursuant to contracts entered into by negotiation or competitive bid. The competition for these contracts has been from both rail carriers and union and non-union motor carriers. As a result, many negotiations and bids have resulted in contracts that do not allow for recovery of increased costs of labor or fuel over the contract term and that provide for rate reductions of varying magnitudes. Two other recent developments are now beginning to have an impact on competition. The first is the rise in the use of third-party logistics companies by automotive manufacturers. This is expected to convert further traffic to competitive bidding and ease entry for less well capitalized, less sophisticated haulers as the logistics companies provide the information systems and integrate, more comprehensively, the full distribution function. The second is the fundamental changes automotive manufacturers are making to their vehicle distribution systems in order to expedite the delivery of finished vehicles to dealers. Certain manufacturers are creating vehicle consolidation centers where rail traffic from numerous manufacturing plants is re-mixed for delivery to the dealer. In addition, manufacturers are creating new rail ramps in order to place vehicles in more central locations closer to the market but off the dealer lots. These new rail ramps may reduce the average length of haul for motor carriers of automobiles. In metropolitan areas, competition for traffic from the new rail ramps to the dealers may increase as local delivery carriers and equipment and driver leasing companies may become new competitors for the traffic. In addition, some parties may attempt to utilize drive-away operators or dealer pick-ups to deliver vehicles. Major motor carriers specializing in the delivery of new vehicles that are competitors of the Allied Automotive Group include Leaseway, Jack Cooper, Cassens, Hadley and E & L, all of which are privately held companies. 10. EMPLOYEES AND OWNER OPERATORS The Company has approximately 8,500 employees, including approximately 5,800 drivers. All drivers and shop and yard personnel are represented by various labor unions. The majority of the Automotive Group's employees are covered by the Master Agreement with the International Brotherhood of Teamsters ("IBT") which expires on May 31, 1999. Representatives of the IBT and the carriers covered by the master agreement, including the Allied Automotive Group, began negotiations regarding a new contract in February 1999. The compensation and benefits paid by the Automotive Group to union employees are established by union contracts. The Automotive Group also utilizes approximately 800 owner-operators, with approximately 200 driving exclusively for Allied Systems (Canada) Company, a subsidiary of the Automotive Group, in Canada and approximately 600 driving exclusively 5 7 from terminals in the United States. The owner-operators are either paid a percentage of the revenues they generate or receive normal driver pay plus a truck allowance. 11. REGULATION The Company is regulated in the United States by the United States Department of Transportation ("DOT") and various state agencies, and in Canada by the National Transportation Agency of Canada and various provincial transport boards. Truck and trailer length, height, width, maximum weight capacity and other specifications are regulated federally in the United States, as well as by individual states and provinces. In recent years, the automotive manufacturers have increased the percentage of vehicles produced that are light trucks as well as increased the size and weight of many vehicles. Due to the regulations on truck and trailer length, height, width and maximum weight capacity, the number of vehicles the Company delivers per load has decreased. Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. The DOT also regulates certain safety features incorporated in the design of Rigs. The motor carrier transportation industry is also subject to regulatory and legislative changes which can affect the economics of the industry by requiring changes in operating policies or influencing the demand for, and the costs of providing, services to shippers. In addition, the Company's terminal operations are subject to environmental laws and regulations enforced by federal, state, provincial and local agencies, including those related to the treatment, storage and disposal of wastes, and those related to the storage and handling of fuel and lubricants. The Company maintains regular ongoing testing programs for those underground storage tanks ("USTs") located at their terminals for compliance with environmental laws and regulations. Management believes that the Company's USTs are in compliance with current environmental standards. 12. INDUSTRY OVERVIEW The following table summarizes historic new vehicle production and sales in the United States and Canada, the primary sources of the Company's revenues:
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 1997 1998 ---- ---- ---- ---- NEW VEHICLE PRODUCTION (IN MILLIONS) United States........................... 11.6 11.5 11.8 11.6 Percent increase (decrease) over prior year (2.3)% (0.9)% 2.6% (1.7)% Canada.................................. 2.4 2.4 2.5 2.5 Percent increase (decrease) over prior year 3.6% 0.0% 4.2% 0.0% NEW VEHICLE SALES (IN MILLIONS) United States........................... 14.7 15.1 15.1 15.6 Percent increase (decrease) over prior year (2.2)% 2.5% 0.0% 3.3% Canada.................................. 1.1 1.2 1.4 1.4 Percent increase (decrease) over prior year (7.6)% 3.5% 16.7% 0.0%
Domestic automotive manufacturing plants are typically dedicated to manufacturing a particular model or models. Vehicles destined for dealers within a radius of approximately 250 miles from the plant are usually shipped by truck. The remaining vehicles are shipped by rail to rail ramps throughout the United States and Canada where trucking companies handle final delivery to dealers. The rail or truck carrier is responsible for loading the vehicles on railcars or trailers and for any damages incurred while the vehicles are in the carrier's custody. Automobiles manufactured in Europe and Asia are transported into the United States and Canada by ship and usually delivered directly to dealers from seaports by truck or shipped by rail to rail ramps and delivered by trucks to dealers. Vehicles transported by ship are normally prepared for delivery in port processing centers, which involves cleaning and may involve installing accessories. The port processor releases the vehicles to the carrier which loads the vehicles and delivers them to a rail ramp or directly to dealers. CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements, including statements regarding, among other items, (i) the Company's plans, intentions or expectations, (ii) general industry trends, competitive 6 8 conditions and customer preferences, (iii) the Company's management information systems, and its ability to resolve any year 2000 issues related thereto (iv) the Company's efforts to reduce costs, (v) the adequacy of the Company's sources of cash to finance its current and future operations and (vi) resolution of litigation without material adverse effect on the Company. This notice is intended to take advantage of the "safe harbor" provided by the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. These forward-looking statements involve a number of risks and uncertainties. Among others, factors that could cause actual results to differ materially are the following: economic recessions or downturns in new vehicle production or sales; the highly competitive nature of the automotive distribution industry; dependence on the automotive industry; loss or reduction of revenues generated by the Company's major customers; the variability of quarterly results and seasonality of the automotive distribution industry; labor disputes involving the Company or its significant customers; the dependence on key personnel who have been hired or retained by the Company; the availability of strategic acquisitions or joint venture partners; changes in regulatory requirements which are applicable to the Company's business; changes in vehicle sizes and weights which may adversely impact vehicle deliveries per load; risks associated with doing business in foreign countries; problems related to information technology systems and computations that must be made by the Company or its customers and vendors in 1999, 2000 or beyond; and the risk factors listed herein from time to time in the Company's Securities and Exchange Commission reports, including but not limited to, its Annual Reports on Form 10-K. ITEM 2. PROPERTIES. The Company's executive offices are located in Decatur, Georgia, a suburb of Atlanta. The Company leases approximately 96,000 square feet of space for its executive offices, which is sufficient to permit the Company to conduct its operations. The Company operates from 113 terminals which are located at or near manufacturing plants, ports, and railway terminals. The Company currently owns 29 of its terminals. The Company leases the remainder of its facilities. Most of the leased facilities are leased on a year to year basis from railroads at rents that are not material to the Company. Over the past 10 years, changes in governmental regulations have gradually permitted the lengthening of Rigs from 55 to 75 feet. The Company has worked closely with manufacturers to develop specialized equipment to meet the specific needs of manufacturers. The Automotive Group's Rigs are maintained at 57 shops by approximately 550 maintenance personnel, including supervisors. Rigs are scheduled for regular preventive maintenance inspections. Each shop is equipped to handle repairs resulting from inspection or driver write up, including repairs to electrical systems, air conditioners, suspension, hydraulic systems, cooling systems, and minor engine repairs. Major engine overhaul and engine replacement can be handled at larger terminal facilities, while smaller terminals rely on outside vendors. The trend has been to use engine suppliers' outlets for engine repairs due to the long-term warranties obtained by the Company. ITEM 3. LEGAL PROCEEDINGS. The Company is routinely a party to litigation incidental to its business, primarily involving claims for personal injury and property damage incurred in the transportation of vehicles. The Company does not believe that any of such pending litigation, if adversely determined, would have a material adverse effect on the Company. 7 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE Executive Officers of the Registrant The following table sets forth certain information regarding the Company's executive officers:
Name Age Title ---- --- ----- Robert J. Rutland 57 Chairman of the Board of Directors and Chief Executive Officer Guy W. Rutland, III 62 Chairman Emeritus and Director A. Mitchell Poole, Jr. 51 President, Chief Operating Officer, Assistant Secretary and Director Bernard O. De Wulf 50 Vice Chairman, Executive Vice President and Director Berner F. Wilson, Jr. 60 Vice Chairman and Director Guy W. Rutland, IV 35 Vice President and Director Joseph W. Collier 56 President of Allied Automotive Group and Director Randall E. West 50 President of Axis Group and Director Douglas A. Lauer 35 President of Link Information Systems Daniel H. Popky 34 Senior Vice President, Chief Financial Officer, and President of Allied Industries Herbert A. Terwilliger 49 President of Haul Risk Management Services and Haul Insurance Limited Thomas M. Duffy 38 Vice President, Corporate Affairs, General Counsel and Secretary
Mr. Rutland has been Chairman and Chief Executive Officer of the Company since December 1995. Mr. Rutland served as President and Chief Executive Officer of the Company from 1986 to December 1995. Prior to October 1993, Mr. Rutland was Chief Executive Officer of each of the Company's subsidiaries. Guy Rutland, III was elected Chairman Emeritus in December 1995. Mr. Rutland served as Chairman of the Board of the Company from 1986 to December 1995. Prior to October 1993, Mr. Rutland was Chairman or Vice Chairman of each of the Company's subsidiaries. Mr. Poole has been President, Chief Operating Officer, and Assistant Secretary of the Company since December 1995. Prior to December 1995, Mr. Poole served as Executive Vice President and Chief Financial Officer of the Company. Mr. Poole continued to serve as Chief Financial Officer until November 1998. Mr. Poole joined Allied Systems, Ltd. in 1988 as Senior Vice President and Chief Financial Officer. He was appointed President of Allied Industries, Inc. in December 1990 and served in that capacity until December 1997. Prior to joining the Company in 1988, Mr. Poole was an audit partner with Arthur Andersen LLP, independent public accountants. Mr. De Wulf has been Vice Chairman and an Executive Vice President of the Company since October 1993. Prior to such time, Mr. De Wulf was Vice Chairman of each of the Company's subsidiaries. Mr. De Wulf was Vice Chairman of Auto Convoy from 1983 until 1988 when the Company and Auto Convoy became affiliated. 8 10 Mr. Wilson has been Vice President of the Company since October 1993 and Vice Chairman of the Board of Directors since December 1995. Mr. Wilson was Secretary of the Company from December 1995 to June 1998. Prior to October 1993, Mr. Wilson was an officer or Vice Chairman of several of the Company's subsidiaries. Mr. Wilson joined the Company in 1974 and has held various finance, administration, and operations positions. Mr. Rutland, IV has been Vice President of the Company since October 1993 and Senior Vice President - Operations of Allied Automotive Group since November 1997. Mr. Rutland was Vice President - Reengineering Core Team of Allied Automotive Group from November 1996 to November 1997. From January 1996 to November 1996 Mr. Rutland was Assistant Vice President of the Central and Southeast Region of Operations for Allied Systems, Ltd. From March 1995 to January 1996 Mr. Rutland was Assistant Vice President of the Central Division of Operations for Allied Systems, Ltd. From June 1994 to March 1995, Mr. Rutland was Assistant Vice President of the Eastern Division of Operations for Allied Systems, Ltd. From 1993 to June 1994 Mr. Rutland was assigned to special projects with an assignment in Industrial Relations/Labor Department and from 1988 to 1993, Mr. Rutland was Director of Performance Management. Mr. Collier was appointed as a director of the Company in December 1995. Mr. Collier has been the President of Allied Automotive Group since December 1995. Mr. Collier had been Executive Vice President of Marketing and Sales and Senior Vice President of Allied Systems, Ltd. since 1991. Prior to joining the Company in 1979, Mr. Collier served in management positions with Bowman Transportation and also with the Federal Bureau of Investigation. Mr. West was appointed as a director of the Company in December 1997. Mr. West has been the President of Axis Group since October 1997. Mr. West was President of Ryder Automotive Carrier Services, Inc. from January 1996 to October 1997 and Senior Vice President and General Manager of Ryder International from 1993 to 1995. Mr. Lauer has been President of Link Information Systems since July 1996. From January 1996 to July 1996 Mr. Lauer was Vice President and Chief Information Officer of Allied Industries, Inc. Mr. Lauer has 11 years of information technology experience. Prior to joining the Company, he was Director, Information Systems at Exel Logistics. Mr. Popky has been Senior Vice President and Chief Financial Officer of the Company since November 1998. He was appointed President of Allied Industries, Inc. in December 1997 and continues to serve in such capacity. Mr. Popky was Senior Vice President, Finance of the Company from December 1997 to November 1998. From December 1995 to December 1997, Mr. Popky was Vice President, Finance of the Company. From January 1995 to December 1995 Mr. Popky was Vice President and Controller and from October 1994 to January 1995 he was Assistant Vice President and Controller for the Company. Prior to joining the Company, Mr. Popky held various positions with Arthur Andersen LLP for 9 years. Mr. Terwilliger has been President of Haul Insurance Limited since its inception in December 1995 and President of Haul Risk Management Services since its inception in April 1997. From August 1994 to April 1997, Mr. Terwilliger was Vice President Risk Management of Allied Industries. From July 1992 to August 1994, Mr. Terwilliger was Director Risk Management of Allied Industries. Prior to joining the Company in 1992, Mr. Terwilliger spent 18 years with various companies in the insurance and risk management industry. Mr. Duffy joined the Company in June 1998 as Vice President, Corporate Affairs, General Counsel and Secretary. From May 1997 to June 1998, Mr. Duffy was a partner with the law firm of Troutman Sanders LLP. Prior to May 1997, Mr. Duffy was a partner with the law firm of Peterson Dillard Young Asselin & Powell LLP. 9 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded on the New York Stock Exchange under the symbol AHI. The common stock began trading on September 29, 1993 on The Nasdaq Stock Market and has been trading on the New York Stock Exchange since March 3, 1998. Prior to September 29, 1993, there had been no established public trading market for the common stock. Market information regarding the common stock is set forth in Financial Statements and Supplementary Data included elsewhere herein. As of March 3, 1999 there were approximately 2,500 holders of the Company's common stock. The Company has paid no cash dividends in the last two years. 10 12 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for each of the five years in the period ended December 31, 1998 are derived from the Company's Consolidated Financial Statements which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and notes thereto.
Year ended December 31, (in thousands except per share amounts) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- STATEMENT OF OPERATION DATA: Revenues $1,026,799 $581,530 $392,547 $381,464 $297,236 ---------- -------- -------- -------- -------- Operating expenses: Salaries, wages and fringe benefits 547,780 302,539 204,838 195,952 157,979 Operating supplies and expenses 169,498 96,206 62,880 62,179 51,532 Purchased transportation 109,884 59,925 34,533 32,084 9,486 Insurance and claims 40,339 22,737 16,849 16,022 12,043 Operating taxes and licenses 40,779 23,028 16,122 16,564 14,301 Depreciation and amortization 53,327 33,340 26,425 25,431 16,314 Rent expense 10,072 5,720 4,975 5,354 3,214 Communications and utilities 9,341 4,530 3,111 3,434 1,855 Other operating expenses 7,899 6,812 4,219 3,522 1,781 Acquisition related realignment(1) -- 8,914 -- -- -- ---------- -------- -------- -------- -------- Total operating expenses 988,919 563,751 373,952 360,543 268,505 ---------- -------- -------- -------- -------- Operating Income 37,880 17,779 18,595 20,291 28,731 Interest expense (26,146) (14,095) (10,720) (11,260) (5,462) Interest income 3,270 868 603 707 312 ---------- -------- -------- -------- -------- Income before income taxes and Extraordinary item 15,004 4,552 8,478 10,368 23,581 Income tax provision (6,527) (2,150) (3,557) (4,222) (9,393) ---------- -------- -------- -------- -------- Income before extraordinary item 8,477 2,402 4,921 6,146 14,188 Extraordinary loss on early Extinguishment of debt -- -- (935) -- (2,627) ---------- -------- -------- -------- -------- Net income $ 8,477 $ 2,402 $ 3,986 $ 6,146 $ 11,561 ========== ======== ======== ======== ======== Income before extraordinary item per share - basic $ 1.09 $ 0.31 $ 0.64 $ 0.80 $ 1.84 Income before extraordinary item per share - diluted 1.08 0.31 0.64 0.80 1.84 Net income per share - basic 1.09 0.31 0.52 0.80 1.50 Net income per share - diluted 1.08 0.31 0.52 0.80 1.50 Weighted average common shares outstanding - basic 7,747 7,728 7,725 7,725 7,725 Weighted average common shares outstanding - diluted 7,846 7,810 7,725 7,725 7,725 BALANCE SHEET DATA: Current assets $ 195,759 $149,673 $ 49,202 $ 50,421 50,861 Current liabilities 145,730 157,679 48,494 43,257 44,608 Total assets 621,627 558,939 211,083 214,696 218,806 Long-term debt & capital lease obligations, less current portion 291,096 228,003 93,708 106,634 120,136 Stockholders' equity 62,853 57,328 56,709 53,022 45,835
(1) Represents a non-cash charge the Company recorded during 1997 to write down Company Rigs and terminal facilities that were idled or closed as a result of the Ryder Automotive Group Acquisition. 11 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth the percentage relationship of expense items to revenues for the periods indicated:
Year ended December 31, ----------------------- 1998 1997 1996 ---- ---- ---- Revenues 100.0% 100.0% 100.0% ----- ----- ----- Operating Expenses: Salaries, wages and fringe benefits 53.3 52.0 52.2 Operating supplies and expenses 16.5 16.5 16.0 Purchased transportation 10.7 10.3 8.8 Rent expense 1.0 1.0 1.3 Insurance and claims 3.9 3.9 4.3 Operating taxes and licenses 4.0 4.0 4.1 Depreciation and amortization 5.2 5.7 6.7 Communications and utilities 0.9 0.8 0.8 Other operating expenses 0.8 1.2 1.1 Acquisition related realignment 0.0 1.5 0.0 --- --- --- Total operating expenses 96.3 96.9 95.3 ---- ---- ---- Operating income 3.7 3.1 4.7 --- --- --- Other income (expense): Interest expense (2.5) (2.4) (2.8) Interest income 0.3 0.1 0.2 ---- ---- --- Total other income (expense) (2.2) (2.3) (2.6) ---- ---- ---- Income before income taxes and extraordinary item 1.5 0.8 2.1 Income tax provision (0.7) (0.4) (0.9) --- --- --- Income before extraordinary item 0.8 0.4 1.2 Extraordinary loss on early extinguishment of debt 0.0 0.0 (0.2) --- --- --- Net Income 0.8% 0.4% 1.0% === === ===
1998 Compared to 1997 Revenues were $1.03 billion in 1998 compared to $581.5 million in 1997, an increase of $448.5 million, or 77%. The increase in revenues was primarily due to a 75% increase in the number of vehicles delivered by the Allied Automotive Group. The number of vehicles delivered by the Automotive Group increased 71% because of the Ryder Automotive Group Acquisition and the inclusion of the Ryder Automotive Group's results since September 30, 1997, the date of the acquisition. The remaining increase in vehicle deliveries was primarily due to increased new vehicle sales in the United States together with rail-car shortages which led to increased deliveries by the Automotive Group's U.S. operations. Net income in 1998 was $8.5 million compared with net income of $2.4 million in 1997. Basic earnings per share for 1998 were $1.09 while diluted earnings per share were $1.08, versus basic and diluted earnings per share of $0.31 in 1997. The 1998 results were impacted by an eight-week work stoppage at most General Motors manufacturing plants. The Company estimates that the work stoppages reduced earnings in 1998 by approximately $0.75 per share. In addition, the 1998 results include a $0.15 per share charge relating to a voluntary early retirement program instituted in the fourth quarter. The 1997 results include a charge of $0.67 per share to write down Rigs and terminal facilities idled or closed as a result of the Ryder Automotive Group Acquisition. Excluding these unusual items, the significant increase in earnings in 1998 was primarily due to contributions from the Ryder Automotive Group Acquisition. The operating ratio (operating expenses as a percentage of revenues) for 1998 was 96.3%, compared to 96.9% in 1997. However, excluding the effect of the General Motors work stoppages and voluntary early retirement program costs in 1998 and the acquisition related charge in 1997, the operating ratio improved from 95.4% in 1997 12 14 to 95.1% in 1998. The improvement in the operating ratio is due to the operating income contribution from the Ryder Automotive Group. The following is a discussion of the changes in the Company's major expense categories: Salaries, wages and fringe benefits increased from 52.0% of revenues in 1997 to 53.3% in 1998. The increase was primarily due to annual salary and benefit increases together with additional labor costs due to inefficiencies caused by the lower volumes from the loss of General Motors business as a result of the work stoppages offset by continued productivity and efficiency improvements. Also, the Company expensed approximately $2 million during 1998 for a voluntary early retirement program and such costs are included in salaries, wages and fringe benefits. Operating supplies and expenses as a percentage of revenues remained unchanged in 1998 from 1997. Lower fuel prices were offset by inefficiencies caused by the lower volumes from the loss of General Motors business as a result of the work stoppages. Purchased transportation increased from 10.3% of revenues in 1997 to 10.7% in 1998 primarily due to an increase in the number of vehicles hauled by other carriers for the Allied Automotive Group as part of an exchange program to improve loaded miles. Depreciation and amortization as a percentage of revenues decreased from 5.7% in 1997 to 5.2% in 1998. The decrease was primarily the result of depreciation expense on the Rigs acquired as part of the Ryder Automotive Group Acquisition representing a lower percentage of revenues than the Company's due to the age and useful lives of the Rigs. Interest expense increased from $14.1 million, or 2.4% of revenues, in 1997, to $26.2 million, or 2.5% of revenues in 1998. The increase is primarily due to interest on additional borrowings used to finance the Ryder Automotive Group Acquisition. Interest income increased from $0.9 million, or 0.1% of revenues in 1997, to $3.3 million, or 0.3% of revenues in 1998. The increase is due to an increase in earnings from the Company's captive insurance subsidiary, Haul Insurance Limited, due to increases in the amount of investments held by the captive insurance company. The income tax provision as a percentage of revenues increased form 0.4% in 1997 to 0.7% in 1998, however, the effective tax rate decreased from 47.2% of pre-tax income in 1997 to 43.5% of pre-tax income in 1998. The decrease in the effective tax rate was due to lower pre-tax income in 1997 because of the acquisition related charge which made non-deductible expenses a greater percentage of pre-tax income. 1997 Compared to 1996 Revenues were $581.5 million in 1997 compared to $392.6 million in 1996, an increase of $188.9 million, or 48%. The increase in revenues was due to a 41% increase in the number of vehicles delivered by the Allied Automotive Group together with an increase in the revenue generated per vehicle delivered due to an increase in the percentage of longer-haul dealer deliveries. The number of vehicles delivered by the Automotive Group increased 38% because of the acquisition of the Ryder Automotive Group and the inclusion of their results since September 30, 1997, the date of the acquisition. The remaining increase in vehicle deliveries was primarily due to increased new vehicle production and sales in Canada which led to increased deliveries by the Automotive Group's Canadian operations. Net income in 1997 was $2.4 million, or $0.31 per share, compared with net income of $4.0 million, or $0.52 per share in 1996. The 1997 results include a one time charge of $0.67 per share related to the acquisition of the Ryder Automotive Group. The 1996 results include an extraordinary loss on the early extinguishment of debt of $0.12 per share. Excluding the acquisition related charge in 1997 and the extraordinary loss in 1996, the significant increase in earnings was primarily due to contributions from the acquisition of the Ryder Automotive Group together with increased earnings from the Allied Automotive Group's Canadian operations due to increased vehicle deliveries. In addition, net income in 1996 was impacted by strikes at a number of General Motors manufacturing plants. 13 15 The operating ratio (operating expenses as a percentage of revenues) for 1997 was 96.9%, compared to 95.3% in 1996. The operating ratio increased 1.6 percentage points, but 1.5 of the percentage point increase was due to a non-cash charge the company recorded during the third quarter of 1997 to write-down Company Rigs and terminal facilities that will be idled or closed as a result of the acquisition of the Ryder Automotive Group. Excluding this one time charge, the operating ratio for 1997 was virtually unchanged from the prior year. The following is a discussion of the changes in the Company's major expense categories: Salaries, wages and fringe benefits decreased from 52.2% of revenues in 1996 to 52.0% in 1997. This change is primarily due to annual salary and benefit increases of approximately 3%, which were more than offset by productivity and efficiency improvements implemented during 1997 by the Allied Automotive Group together with increases in purchased transportation. Operating supplies and expenses as a percentage of revenues increased from 16.0% in 1996 to 16.5% in 1997. The increase is mainly the result of the acquisition of the Ryder Automotive Group as its operating costs as a percentage of revenues were higher than the Company's. Purchased transportation increased from 8.8% of revenues in 1996 to 10.3% of revenues in 1997 primarily due to an increase in the number of vehicles hauled by other carriers for the Allied Automotive Group as part of an exchange program to improve loaded miles. Insurance and claims expense as a percentage of revenues decreased from 4.3% in 1996 to 3.9% in 1997 mainly due to lower cargo claims costs resulting from quality programs instituted during 1997. Operating taxes and licenses decreased from 4.1% of revenues in 1996 to 4.0% in 1997. This decrease is due to efforts made by the Company to reduce its licensing costs per Rig together with an overall decrease in the number of Rigs operated by the Allied Automotive Group after the acquisition of the Ryder Automotive Group. Depreciation and amortization as a percentage of revenues decreased from 6.7% in 1996 to 5.7% in 1997. The decrease is mainly the result of depreciation expense on the Rigs acquired as part of the Ryder Automotive Group representing a lower percentage of revenues than the Company's due to the age and useful lives of the Rigs. In addition, depreciation and amortization expense has been reduced due to a reduction in the number of Rigs operated by the Allied Automotive Group after the acquisition of Ryder Automotive Group. Interest expense as a percentage of revenues decreased from 2.8% in 1996 to 2.4% in 1997, however interest expense increased from $10.7 million in 1996 to $14.1 million in 1997. The increase was primarily the result of interest on additional borrowings used to finance the acquisitions in 1997 of Kar-Tainer and the Ryder Automotive Group. The effective tax rate increased from 42.0% of pre-tax income in 1996 to 47.2% in 1997. The increase was due to higher non-deductible expenses resulting from the acquisition of the Ryder Automotive Group together with lower pre-tax income which made the non-deductible expenses a greater percentage of pre-tax income. Liquidity and Capital Resources The Company's sources of liquidity are funds provided by operations and borrowings under its revolving credit facility with a syndicate of banks. The Company's liquidity needs are for the acquisition and maintenance of Rigs and terminal facilities, the payment of operating expenses and the payment of interest on and repayment of long-term debt. Net cash provided by operating activities totaled $47.9 million in 1997 versus $25.6 million for 1998. The decrease in cash provided by operating activities was primarily due to the change in payment terms for one of the Company's customers which caused an increase in accounts receivable together with a reduction in accrued liabilities because of the payment of certain liabilities resulting from the Ryder Automotive Group Acquisition. 14 16 These decreases in operating cash flows were offset by an increase in depreciation and amortization expense resulting from the inclusion of the Ryder Automotive Group's operating results since the consummation of the Ryder Automotive Group Acquisition. Net cash used in investing activities totaled $163.3 million for 1997 versus $79.3 million for 1998. The decrease was primarily due to the purchase of the Ryder Automotive Group in September 1997 for $114.5 million offset by an increase in capital expenditures, from $27.2 million in 1997 to $61.9 million in 1998. This increase was due to an increase in the number of new tractors and trailers purchased by the Company together with an increase in modifications to existing tractors and trailers because of the increase in the fleet size as a result of the Ryder Automotive Group Acquisition. In addition, the Company invested $11.9 million to form Axis do Brasil in February 1998. Net cash provided by financing activities totaled $123.9 million in 1997 versus $65.5 million in 1998. The decrease was primarily due to the financing of the Ryder Automotive Group Acquisition in 1997 which was offset with additional borrowings from the Company's revolving credit facility in 1998 due to the losses associated with the General Motors work stoppages, the change in payment terms for a customer and the investment in Brazil. In connection with the acquisition of the Ryder Automotive Group, the Company refinanced its revolving credit facility with a syndicate of banks. The new revolving credit facility allows the Company to borrow, under a revolving line of credit, and issue letters of credit, up to the lesser of $230 million or a borrowing base amount that is determined based on a defined percentage of the Company's accounts receivable and equipment. The credit facility matures in September 2002 and the interest rate is, at the Company's option, either (i) the bank's base rate, as defined, or (ii) the bank's Eurodollar rate, as defined, as determined at the date of each borrowing, plus an applicable margin. The Company has the right to repay the outstanding debt under the credit facility, in whole or in part, without penalty or premium, subject to a limitation that prepayment of Eurodollar rate loans will be subject to a breakage penalty if prepaid other than on the last day of the applicable interest period. The Company will be subject to mandatory prepayment with a defined percentage of net proceeds from certain asset sales, new debt offerings and new equity offerings. The credit facility gives the Company the ability to reduce the commitment amount and the Company periodically reviews its borrowing needs. The Company had $100.8 million outstanding under the revolving credit facility at December 31, 1998 bearing interest at a weighted average interest rate of 7.4%. In addition, the Company had approximately $4.5 million of letters of credit outstanding under its revolving credit facility at December 31, 1998. The credit facility, the $150 million of 8 5/8% Senior Notes due in 2007 and the $40 million of 12% Senior Subordinated Notes due in 2003, set forth a number of affirmative, negative, and financial covenants binding on the Company. The negative covenants limit the ability of the Company to, among other things, incur debt, incur liens, make investments, make dividend or other distributions, or enter into any merger or other consolidation transaction. The financial covenants include the maintenance of a minimum consolidated tangible net worth, compliance with a leverage ratio and a coverage ratio and limitations on capital expenditures. The Company's obligations under the Senior Notes due in 2007 are guaranteed by substantially all of the subsidiaries of the Company (the "Guarantors"). Separate financial statements of the Guarantors are not provided herein as (i ) the Guarantors are jointly and severally liable for the Company's obligations under the Notes, (ii) the subsidiaries which are not Guarantors are inconsequential to the consolidated operations of the Company and its subsidiaries, and (iii) the net assets and earnings of the Guarantors are substantially equivalent to the net assets and earnings of the consolidated entity as reflected in the Company's consolidated financial statements. There are no restrictions on the ability of the Guarantors to make distributions to the Company. Disclosures About Market Risks The market risk inherent in the Company's market risk sensitive instruments and positions is the potential loss arising from adverse changes in short-term investment prices, interest rates, fuel prices, and foreign currency exchange rates. 15 17 SHORT-TERM INVESTMENTS - The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments in instruments that meet high credit quality standards, as specified in the Company's investment policy guidelines. The policy also limits the amount of credit exposure to any one issue, issuer, and type of instrument. Short-term investments at December 31, 1998, which are recorded at fair value of $23.3 million, have exposure to price risk. This risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in quoted prices and amounts to $2.3 million. INTEREST RATES - The Company primarily issues long-term debt obligations to support general corporate purposes including capital expenditures and working capital needs. The majority of the Company's long-term debt obligations bear a fixed rate of interest. A one percentage point increase in interest rates affecting the Company's floating rate long-term debt would reduce pre-tax income by $1.0 million over the next fiscal year. A one percentage point change in interest rates would not have a material effect on the fair value of the Company's fixed rate long-term debt. FUEL PRICES - The Company is dependent on diesel fuel to operate its fleet of Rigs. Diesel fuel prices are subject to fluctuations due to unpredictable factors such as weather, government policies, changes in global demand, and global production. To reduce price risk caused by market fluctuations, the Company generally follows a policy of hedging a portion of its anticipated diesel fuel consumption. The instruments used are principally readily marketable exchange traded futures contracts which are designated as hedges. The changes in market value of such contracts have a high correlation to the price changes of diesel fuel. Gains and losses resulting from fuel hedging transactions are recognized when the underlying fuel being hedged is used. A 10% increase in diesel fuel prices would reduce pre-tax income by $3.9 million over the next fiscal year. FOREIGN CURRENCY EXCHANGE RATES - Although the majority of the Company's operations are in the United States, the Company does have foreign subsidiaries (primarily Canada). The net investments in foreign subsidiaries translated into dollars using year-end exchange rates at December 31, 1998, is $77.1 million. The potential loss in fair value impacting other comprehensive income resulting from a hypothetical 10% change in quoted foreign currency exchange rates amounts to $7.7 million. The Company does not use derivative financial instruments to hedge its exposure to changes in foreign currency exchange rates. Year 2000 Year 2000 ("Y2K") issues are being addressed by the Company. The Company, like most other major companies, is currently addressing a universal problem commonly referred to as "Year 2000 Compliance," which relates to the ability of computer programs and systems to properly recognize and process date sensitive information before and after January 1, 2000. The following discussion is based on information currently available to the Company. The Company has analyzed and continues to analyze its internal information technology ("IT") systems ("IT systems") to identify any computer programs that are not Year 2000 compliant and implement any changes required to make such systems Year 2000 compliant. The Company believes that its critical IT systems currently are capable of functioning without substantial Year 2000 Compliance problems. Of the non-critical, but important, IT systems that are not currently Year 2000 compliant, the Company believes such IT systems will be Year 2000 capable in a time frame that will avoid any material adverse effect on the Company. Also, the Company does not believe that the expenditures related to replacing or upgrading any of its IT systems to make them Year 2000 compliant will have a material adverse effect on the financial condition or results of operations of the Company. The Company has evaluated its critical equipment and critical systems that contain embedded software, ("Non-IT systems"), and the Company believes that all of its critical Non-IT systems are capable of functioning without substantial Year 2000 Compliance problems. The Company has engaged a leading computer consulting services firm to lead the Year 2000 remediation and testing process. The Company is also investigating each of its significant vendors, suppliers, financial service organizations, service providers and customers to confirm that the Company's operations will not be materially adversely affected by the failure of any such third party to have Year 2000 compliant computer programs. 16 18 Regardless of the responses that the Company receives from such third parties, the Company is establishing contingency plans to reduce the Company's exposure resulting from the non-compliance of third parties. The Company has approached the Year 2000 project in phases. Phase I of the project involved identification of all software used by the Company, identification of all significant vendors, and establishment of a senior management committee to oversee the project. Phase I was completed in the third calendar quarter of 1998. Phase II of the project involves (a) evaluation of each significant vendor and evaluation of major customers through letters and questionnaires (b) communication with customers concerning any products currently or recently sold by the Company that have Year 2000 issues, and (c) evaluating the Company's most reasonably likely worst case Year 2000 scenarios and contingency planning related thereto. Phase II is in process and many of the tasks described in subparagraphs (b) and (c) above have been completed; Phase II is expected to be completed in the first calendar quarter of 1999. Phase III involves testing of the Company's IT systems and Non-IT systems to confirm Year 2000 compliance and/or discover any overlooked Year 2000 problems. Phase III has commenced and should be completed in the third calendar quarter of 1999. Last, Phase IV involves implementation of the Company's contingency plans. Such plans are expected to be implemented in the third calendar quarter of 1999. The Company has material relationships with third parties whose failure to be Year 2000 compliant could have materially adverse impacts on the Company's business, operations or financial condition in the future. Third parties that are considered to be in this category for Y2K purposes include critically important customers, suppliers, vendors and public entities such as government regulatory agencies, utilities, financial entities and others. The Company derives most of its net operating revenues from the transportation of new and used automobiles and light trucks for all major domestic and foreign automotive manufacturers. The Company has made Y2K awareness information available to all customers and has asked each customer to advise the Company of their plans for reaching Y2K readiness. The Company has also contacted the customers to inquire about actions being taken with respect to third parties. Further action may be taken by the Company as it deems appropriate in particular cases. The Company classifies as critical those suppliers of products or services that, if interrupted, would materially disrupt the Company's ability to conduct operations. The Company expect reviews of these products and service providers to be completed by the second quarter of 1999. In the first calendar quarter of 1999, the Company began the planning and implementation of a Y2K program involving interaction with and assessment of public entities such as government regulatory agencies, utilities, financial entities and others. The Company is preparing contingency plans relating specifically to identified Y2K risks, and cost estimates relating to these plans are being developed. The Company began training designated employees in Y2K contingency planning matters during the first calendar quarter of 1999, and anticipates completion of the Y2K contingency plans during the third calendar quarter of 1999. Contingency plans may include establishing alternative means of communicating with employees at terminal locations and with customers, and other appropriate measures. Once developed, Y2K contingency plans and related cost estimates will be continually refined as additional information becomes available. While the Company currently believes that it will be able to modify or replace its affected systems in time to minimize any significant detrimental effects on its operations, failure to do so, or the failure of customers or other third parties to modify or replace their affected systems, could have materially adverse impacts on the Company's business, operations or financial condition in the future. There can be no guarantee that such impacts will not occur. In particular, because of the interdependent nature of business systems, the Company could be materially adversely affected if private businesses, utilities and governmental entities with which it does business or that provide essential products or services are not Year 2000 compliant. Reasonably likely consequences of failure by the Company or third parties to resolve the Y2K problem include, among other things, temporary slowdowns or cessation's of delivery operations at one or more Company terminals, or delays in the delivery of vehicles. However, the Company believes that its Y2K readiness program, including related contingency planning, should significantly reduce the possibility of significant interruptions of normal operations. 17 19 As of February 20, 1999, the Company's total incremental costs (historical plus estimated future costs) of addressing Y2K issues are estimated to be in the range of $3.5 million, of which approximately $1.5 million has been incurred. The Company believes that approximately 30% of the costs expected to be incurred in 1999 will be internal costs, including compensation and benefits of employees assigned primarily to Y2K procedures. Internal costs addressing Y2K issues during 1998 were not material. These costs are being funded through operating cash flow. These amounts do not include: (i) any costs associated with the implementation of contingency plans, which are in the process of being developed, or (ii) costs associated with replacements of computerized systems or equipment in cases where replacement was not accelerated due to Y2K issues. Implementation of the Company's Y2K plan is an ongoing process. Consequently, the above described estimates of costs and completion dates for the various components of the plan are subject to change. The preceding discussion on Y2K contains various forward-looking statements which represent the Company's beliefs or expectations regarding future events. When used in the Y2K discussion, the words "believes," "expects," "estimates" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, the Company's expectations as to when it will complete the remediation and testing phases of its Y2K procedures as well as its Y2K contingency plans; its estimated cost of achieving Y2K readiness; and the Company's belief that its internal systems and equipment will be Year 2000 ready in a timely manner. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other information technology resources; the ability to identify and remediate all date sensitive lines of computer code or to replace embedded computer chips in affected systems or equipment; and the actions of governmental agencies or other third parties with respect to Y2K problems. The Company does not currently believe that any of the foregoing will have a material adverse effect on its financial condition or its results of operations. However, the process of evaluating the Company's third party vendors and their systems is ongoing. Although not expected, failures of critical suppliers, critical customers, critical IT systems or critical Non-IT systems could have a material adverse effect on the Company's financial condition or results of operations. As widely publicized, Year 2000 Compliance has many issues and aspects, not all of which the Company is able to accurately forecast or predict. There is no way to assure that Year 2000 Compliance will not have adverse effects on the Company, some of which could be material. Seasonality and Inflation The Company generally experiences its highest revenues and earnings during the second and fourth quarters of each calendar year due to the shipment of new vehicle models and because the first and third quarters are impacted by manufacturing plant downtime. During the past three years, inflation has not significantly affected the Company's results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial statements and supplementary data are set forth beginning on page F-1 of this Report. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. NONE. 18 20 PART III Certain information required by Part III is omitted from this report in that the Registrant will file a definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. Such information does not include the Compensation Committee Report or the Performance Graph included in the Proxy Statement. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning the Company's directors required by this Item is incorporated by reference to the Company's Proxy Statement. The information concerning the Company's executive officers required by this Item is incorporated by reference to the section in Part I, Item 4, entitled "Executive Officers of the Registrant." The information regarding compliance with Section 16 of the Securities Exchange Act of 1934, as amended, is to be set forth in the Proxy Statement and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference to the Company's Proxy Statement. 19 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements: INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants......................................................F-1 Consolidated Balance Sheets at December 31, 1998 and 1997.....................................F-2 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996....F-3 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996...........................................................F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996....F-5 Notes to Consolidated Financial Statements....................................................F-6
(2) Financial Statement Schedules: INDEX TO FINANCIAL STATEMENT SCHEDULES
Page Report of Independent Public Accountants......................................................S-1 Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996 ..........................................................S-2
All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. (b) Reports on Form 8-K; (c) Exhibits; Exhibit Index filed as part of this report 20 22 EXHIBIT DESCRIPTION (1) 3.1 Amended and Restated Articles of Incorporation of the Company. (1) 3.2 Amended and Restated Bylaws of the Company. (1) 4.1 Specimen Common Stock Certificate. (5) 4.2 Indenture dated September 30, 1997 by and among the Company, the Guarantors and The First National Bank of Chicago, as Trustee. (5) 4.3 $230 million Revolving Credit Agreement among Allied Holdings, Inc. and BankBoston, N.A., individually and as Administrative Agent, et al., dated September 30, 1997. (3) 10.1 Form of the Company's Employment Agreement with executive officers. (1) 10.2 The Company's Long Term Incentive Plan dated July 1993. (2) 10.3 The Company's 401(k) Retirement Plan and Defined Benefit Pension Plan and Trust. (3) 10.4 Form of 12% Senior Subordinated Notes due February 1, 2003. (4) 10.5 Agreement between the Company and Ford Motor Company, as amended. (4) 10.6 Agreement between the Company and Chrysler Corporation, as amended. (7) 10.7 Agreement between the Company and General Motors Corporation. (6) 10.8 Acquisition Agreement among Allied Holdings, Inc., AH Acquisition Corp., Canadian Acquisition Corp., and Axis International Incorporated and Ryder System, Inc. dated August 20, 1997. (8) 10.9 The Company's 1999 Employee Stock Purchase Plan. 21.1 List of subsidiary corporations. 23.1 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney (included within the signature pages of this Report). 27.1 Financial Data Schedule (for SEC use only).
- ------------- (1) Incorporated by reference from Registration Statement (File Number 33-66620) as filed with the Securities and Exchange Commission on July 28, 1993 and amended on September 2, 1993 and September 17, 1993 and deemed effective on September 29, 1993. (2) Incorporated by reference from Registration Statement (File Number 33-76108) as filed with the SEC on March 4, 1994 and deemed effective on such date, and Annual Report on Form 10-K for the year ended December 31, 1993. (3) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31,1996. (4) Incorporated by reference from Amendment No. 1 to the Company's Annual Report on Form 10-K for the year ended December 31,1996. Portions of the agreements are omitted pursuant to a request for confidential treatment granted by the Commission. (5) Incorporated by reference from Registration Statement (File Number 33-37113) as filed with the SEC on October 3, 1997. (6) Incorporated by reference from Form 8-K filed with the Commission on August 29, 1997. Portions of the agreement are omitted pursuant to a request for confidential treatment granted by the Commission. (7) Portions of the agreement are omitted pursuant to a confidential treatment request made to the commission on March 29, 1999. (8) Incorporated by reference from Registration Statement (File Number 333-72053) as filed with the SEC on February 9, 1999. 21 23 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. ALLIED HOLDINGS, INC. Date: March 26, 1999 By: /s/ Robert J. Rutland ------------------ ------------------------------------- Robert J. Rutland, Chairman and Chief Executive Officer Date: March 26, 1999 By: /s/ A. Mitchell Poole, Jr. ------------------ ------------------------------------- A. Mitchell Poole, Jr., President, Chief Operating Officer and Assistant Secretary Date: March 26, 1999 By: /s/ Daniel H. Popky ------------------ ------------------------------------- Daniel H. Popky, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 22 24 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert J. Rutland and A. Mitchell Poole, Jr., jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. 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/ Robert J. Rutland Chairman of the Board of Directors and March 26, 1999 - --------------------------------------------- Chief Executive Officer -------------- Robert J. Rutland /s/ Guy W. Rutland, III Chairman Emeritus and Director March 26, 1999 - --------------------------------------------- -------------- Guy W. Rutland, III /s/ A. Mitchell Poole, Jr. President, Chief Operating Officer and March 26, 1999 - --------------------------------------------- Director -------------- A. Mitchell Poole, Jr. /s/ Bernard O. De Wulf Vice Chairman, Executive Vice March 26, 1999 - --------------------------------------------- President, and Director -------------- Bernard O. De Wulf /s/ Berner F. Wilson, Jr. Vice Chairman and Director March 26, 1999 - --------------------------------------------- -------------- Berner F. Wilson, Jr. /s/ Guy W. Rutland, IV Vice President and Director March 26, 1999 - --------------------------------------------- -------------- Guy W. Rutland, IV /s/ Joseph W. Collier Director, President - Allied Automotive March 26, 1999 - --------------------------------------------- Group -------------- Joseph W. Collier /s/ Randall E. West Director, President - Axis Group March 26, 1999 - --------------------------------------------- -------------- Randall E. West /s/ David G. Bannister Director March 26, 1999 - --------------------------------------------- -------------- David G. Bannister /s/ Robert R. Woodson Director March 26, 1999 - --------------------------------------------- -------------- Robert R. Woodson /s/ William P. Benton Director March 26, 1999 - --------------------------------------------- -------------- William P. Benton
23 25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Allied Holdings, Inc.: We have audited the accompanying consolidated balance sheets of ALLIED HOLDINGS, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1998 and 1997 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allied Holdings, Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia February 8, 1999 F-1 26 ALLIED HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (IN THOUSANDS) ASSETS
1998 1997 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 21,977 $ 10,530 Short-term investments 23,323 19,540 Receivables, net of allowance for doubtful accounts of $1,545 and $2,078 in 1998 and 1997, respectively 103,968 74,881 Inventories 6,788 5,391 Deferred tax assets 20,773 17,812 Prepayments and other current assets 18,930 21,519 --------- --------- Total current assets 195,759 149,673 --------- --------- PROPERTY AND EQUIPMENT, NET 297,530 286,214 --------- --------- OTHER ASSETS: Goodwill, net 94,577 99,310 Notes receivable due from related parties 0 573 Other 33,761 23,169 --------- --------- Total other assets 128,338 123,052 --------- --------- Total assets $ 621,627 $ 558,939 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 2,746 $ 2,980 Trade accounts payable 42,196 36,263 Accrued liabilities 100,788 118,436 --------- --------- Total current liabilities 145,730 157,679 --------- --------- LONG-TERM DEBT, LESS CURRENT MATURITIES 291,096 228,003 --------- --------- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 11,165 11,355 --------- --------- DEFERRED INCOME TAXES 39,953 35,062 --------- --------- OTHER LONG-TERM LIABILITIES 70,830 69,512 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTES 5, 7, AND 8) STOCKHOLDERS' EQUITY: Common stock, no par value; 20,000 shares authorized, 7,878 and 7,819 shares outstanding at December 31, 1998 and 1997, respectively 0 0 Additional paid-in capital 44,854 43,758 Retained earnings 25,354 16,877 Accumulated other comprehensive income, net of tax (6,115) (2,826) Unearned compensation (1,240) (481) --------- --------- Total stockholders' equity 62,853 57,328 --------- --------- Total liabilities and stockholders' equity $ 621,627 $ 558,939 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. F-2 27 ALLIED HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996 ---------- -------- -------- REVENUES $1,026,799 $581,530 $392,547 ---------- -------- -------- OPERATING EXPENSES: Salaries, wages, and fringe benefits 547,780 302,539 204,838 Operating supplies and expenses 169,498 96,206 62,880 Purchased transportation 109,884 59,925 34,533 Insurance and claims 40,339 22,737 16,849 Operating taxes and licenses 40,779 23,028 16,122 Depreciation and amortization 53,327 33,340 26,425 Rent expense 10,072 5,720 4,975 Communications and utilities 9,341 4,530 3,111 Other operating expenses 7,899 6,812 4,219 Acquisition related realignment 0 8,914 0 ---------- -------- -------- Total operating expenses 988,919 563,751 373,952 ---------- -------- -------- Operating income 37,880 17,779 18,595 ---------- -------- -------- OTHER INCOME (EXPENSE): Interest expense (26,146) (14,095) (10,720) Interest income 3,270 868 603 ---------- -------- -------- (22,876) (13,227) (10,117) ---------- -------- -------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 15,004 4,552 8,478 INCOME TAX PROVISION (6,527) (2,150) (3,557) ---------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 8,477 2,402 4,921 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAX BENEFIT OF $573 0 0 (935) ---------- -------- -------- NET INCOME $ 8,477 $ 2,402 $ 3,986 ========== ======== ======== PER COMMON SHARE: Basic: Income before extraordinary item $ 1.09 $ 0.31 $ 0.64 Extraordinary loss on early extinguishment of debt 0.00 0.00 (0.12) ---------- -------- -------- Net income per common share--basic $ 1.09 $ 0.31 $ 0.52 ========== ======== ======== Diluted: Income before extraordinary item $ 1.08 $ 0.31 $ 0.64 Extraordinary loss on early extinguishment of debt 0.00 0.00 (0.12) ---------- -------- -------- Net income per common share--diluted $ 1.08 $ 0.31 $ 0.52 ========== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 7,747 7,728 7,725 ========== ======== ======== Diluted 7,846 7,810 7,725 ========== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-3 28 ALLIED HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER COMPREHENSIVE ------------- PAID-IN RETAINED COMPREHENSIVE UNEARNED INCOME SHARES AMOUNT CAPITAL EARNINGS INCOME COMPENSATION TOTAL ----------- ------ ------ ------- -------- ------------- ------------ ----- BALANCE, DECEMBER 31, 1995 7,725 $0 $ 42,977 $10,489 $ (444) $ 0 $53,022 Net income $ 3,986 0 0 0 3,986 0 0 3,986 Other comprehensive income--foreign currency translation adjustment, net of income taxes of $181 (299) 0 0 0 0 (299) 0 (299) ---------- Comprehensive income $ 3,687 ========== Restricted stock 85 0 680 0 0 (680) 0 ----- ---- -------- ------- -------- ------- ------- BALANCE, DECEMBER 31, 1996 7,810 0 43,657 14,475 (743) (680) 56,709 Net income $ 2,402 0 0 0 2,402 0 0 2,402 Other comprehensive income--foreign currency translation adjustment, net of income taxes of $1,331 (2,083) 0 0 0 0 (2,083) 0 (2,083) ---------- Comprehensive income $ 319 ========== Nonqualified options exercised 17 0 163 0 0 0 163 Restricted stock, net (8) 0 (62) 0 0 199 137 ----- ---- -------- ------- -------- ------- ------- BALANCE, DECEMBER 31, 1997 7,819 0 43,758 16,877 (2,826) (481) 57,328 Net income $ 8,477 0 0 0 8,477 0 0 8,477 Other comprehensive income--foreign currency translation adjustment, net of income taxes of $2,089 (3,289) 0 0 0 0 (3,289) 0 (3,289) ---------- Comprehensive income $ 5,188 ========== Issuance of stock 1 0 22 0 0 0 22 Nonqualified options exercised 3 0 24 0 0 0 24 Restricted stock, net 55 0 1,050 0 0 (759) 291 BALANCE, DECEMBER 31, 1998 7,878 $0 $ 44,854 $25,354 $(6,115) $(1,240) $62,853 ===== ==== ======== ======= ======== ======= =======
The accompanying notes are an integral part of these consolidated statements. F-4 29 ALLIED HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,477 $ 2,402 $ 3,986 -------- -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 53,327 33,340 26,425 (Gain) loss on sale of property and equipment (32) 141 (13) Acquisition related realignment 0 8,914 0 Extraordinary loss on early extinguishment of debt, net 0 0 935 Equity in loss of joint venture 470 0 0 Compensation expense related to restricted stock grants 291 75 0 Deferred income taxes 1,852 2,990 1,921 Change in operating assets and liabilities, excluding effect of businesses acquired: Receivables, net (30,321) (4,314) (9) Inventories (1,505) 382 82 Prepayments and other current assets 2,384 1,216 452 Trade accounts payable 6,366 2,296 4,565 Accrued liabilities (15,751) 474 1,277 -------- -------- -------- Total adjustments 17,081 45,514 35,635 -------- -------- -------- Net cash provided by operating activities 25,558 47,916 39,621 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (61,868) (27,243) (25,972) Proceeds from sale of property and equipment 606 953 3,447 Purchase of businesses, net of cash acquired (942) (123,492) 0 Investment in joint venture (11,920) 0 0 Increase in short-term investments (3,783) (11,020) (8,520) Increase in the cash surrender value of life insurance (1,373) (2,451) (1,981) -------- -------- -------- Net cash used in investing activities (79,280) (163,253) (33,026) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (repayments) of long-term debt, net 62,859 133,052 (15,034) Proceeds from exercise of stock options 24 163 0 Other, net 2,613 (9,277) (655) -------- -------- -------- Net cash provided by (used in) financing activities 65,496 123,938 (15,689) -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (327) (44) (80) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,447 8,557 (9,174) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,530 1,973 11,147 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,977 $ 10,530 $ 1,973 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-5 30 ALLIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997, AND 1996 1. ORGANIZATION AND OPERATIONS Allied Holdings, Inc. (the "Company"), a Georgia corporation, is a holding company which operates through its wholly owned subsidiaries. The principal operating divisions of the Company are Allied Automotive Group, Inc. ("Allied Automotive Group") and Axis Group, Inc. ("Axis Group"). Allied Automotive Group, through its subsidiaries, is engaged in the business of transporting automobiles and light trucks from manufacturing plants, ports, auctions, and railway distribution points to automobile dealerships. Axis Group, through its subsidiaries, provides distribution and logistics services for the automotive industry. The Company acquired Ryder Automotive Carrier Services, Inc. and RC Management Corp. (collectively "Ryder Automotive Carrier Group") on September 30, 1997 (Note 2), resulting in the Company becoming the largest motor carrier of automobiles and light trucks in North America. The Company has four additional operating divisions: Allied Industries, Inc. ("Allied Industries"), Haul Insurance Limited ("Haul"), Link Information Systems, Inc. ("Link"), and Haul Risk Management, Inc. ("Risk Management"), which provide services to Allied Automotive Group, Axis Group, and the other subsidiaries of the Company. Allied Industries provides administrative, financial, and other related services. During December 1995, the Company incorporated Haul as a captive insurance company. Haul was formed for the purpose of insuring general liability, automobile liability, and workers' compensation for the Company. Link, which was incorporated in 1996, provides information systems hardware, software, and support. Risk Management was incorporated in 1997 and offers a range of risk management and claims administration services. 2. ACQUISITION OF RYDER AUTOMOTIVE CARRIER GROUP On September 30, 1997, the Company completed the acquisition of Ryder Automotive Carrier Group from Ryder System, Inc. for approximately $114.5 million in cash, subject to post-closing adjustments. The acquisition has been accounted for under the purchase method, and accordingly, the operating results of Ryder Automotive Carrier Group have been included in the accompanying financial statements since the date of the acquisition. In conjunction with the acquisition, the Company issued $150,000,000 of 8 5/8% senior notes (the "Senior Notes") in order to finance the acquisition, pay related fees and expenses, and reduce borrowings (Note 6). Upon completion of the acquisition, the Company recorded a pretax charge of approximately $8.9 million (the "Acquisition Charge") to write down Company rigs and terminal facilities that will be idled or closed as a result of the acquisition. During 1998 and 1997, the Company paid approximately $562,000 and $282,000 against the Acquisition Charge, respectively, related to employee severance and in 1997 charged F-6 31 approximately $7,412,000 to the Acquisition Charge to write-down rigs and terminal facilities that were idled or closed as a result of the acquisition. The following unaudited pro forma results of operations for the years ended December 31, 1997 and 1996 assume that the acquisition of Ryder Automotive Carrier Group and the Senior Notes offering had occurred on January 1, 1996. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been consummated on January 1, 1996, nor are they intended to be a projection of future results from combined operations (in thousands, except per share data).
1997 1996 ---------- -------- Revenues $1,044,875 $960,661 Operating income 43,904 31,748 Income before extraordinary item 15,515 5,674 Net income 15,515 4,739 Income per share before extraordinary item: Basic $ 2.01 $ 0.73 Diluted $ 1.99 $ 0.73 Net income per share: Basic $ 2.01 $ 0.61 Diluted $ 1.99 $ 0.61 Weighted average common shares outstanding 7,728 7,725
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated. FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars using current exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded as accumulated other comprehensive income in the accompanying consolidated statements of changes in stockholders' equity, net of related income taxes. REVENUE RECOGNITION Substantially all revenue is derived from transporting automobiles and light trucks from manufacturing plants, ports, auctions, and railway distribution points to automobile dealerships. Revenue is recorded by the Company when the vehicles are delivered to the dealerships. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. F-7 32 INVENTORIES Inventories consist primarily of tires, parts, materials, and supplies for servicing the Company's tractors and trailers. Inventories are recorded at the lower of cost (on a first-in, first-out basis) or market. PREPAYMENTS AND OTHER CURRENT ASSETS Prepayments and other current assets consist of the following at December 31, 1998 and 1997 (in thousands):
1998 1997 ------- ------- Tires on tractors and trailers $13,378 $13,582 Prepaid insurance 1,355 3,228 Other 4,197 4,709 $18,930 $21,519
TIRES ON TRACTORS AND TRAILERS Tires on tractors and trailers are capitalized and amortized to operating supplies and expenses on a cents per mile basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Major property additions, replacements, and betterments are capitalized, while maintenance and repairs which do not extend the useful lives of these assets are expensed currently. Depreciation is provided using the straight-line method for financial reporting and accelerated methods for income tax purposes. The detail of property and equipment at December 31, 1998 and 1997 is as follows (in thousands):
1998 1997 USEFUL LIVES -------- -------- ------------- Tractors and trailers $367,380 $320,282 4 to 10 years Buildings and facilities (including leasehold improvements) 46,322 41,250 4 to 25 years Land 17,772 17,888 Furniture, fixtures, and equipment 23,677 15,418 3 to 10 years Service cars and equipment 2,309 1,670 3 to 10 years -------- -------- 457,460 396,508 Less accumulated depreciation and amortization 159,930 110,294 -------- -------- $297,530 $286,214 ======== ========
F-8 33 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1998 1997 1996 ------- --------- ------ Cash paid during the year for interest $24,540 $ 9,189 $8,514 Cash paid during the year for income taxes, net of refunds 378 278 (280) Liabilities assumed in connection with businesses acquired* 0 (170,745) 0
*Includes trade accounts payable, accrued liabilities, postretirement benefits other than pensions, deferred income taxes, and other long-term liabilities. GOODWILL The acquisition of Ryder Automotive Carrier Group resulted in goodwill of approximately $68,079,000. Goodwill related to the acquisition is being amortized on a straight-line basis over 40 years. Other goodwill is being amortized on a straight-line basis over 20 to 30 years. Amortization (included in depreciation and amortization expense) for the years ended December 31, 1998, 1997, and 1996 amounted to approximately $3,235,000, $2,086,000, and $1,541,000, respectively. Accumulated amortization was approximately $7,164,000 and $7,709,000 at December 31, 1998 and 1997, respectively. The Company periodically evaluates the realizability of goodwill based on expectations of nondiscounted cash flows and operating income for each subsidiary having a material goodwill balance. In the opinion of management, no impairment of goodwill exists at December 31, 1998. CASH SURRENDER VALUE OF LIFE INSURANCE The Company maintains life insurance policies for certain employees of the Company. Under the terms of the policies, the Company will receive, upon the death of the insured, the lesser of aggregate premiums paid or the face amount of the policy. Any excess proceeds over premiums paid are remitted to the employee's beneficiary. The Company records the increase in cash surrender value each year as a reduction of premium expense. The Company has recorded approximately $7,950,000 and $6,577,000 of cash surrender value as of December 31, 1998 and 1997, respectively, included in other assets on the accompanying balance sheets. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the following information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a F-9 34 current transaction between willing parties, other than in a forced sale or liquidation. The amounts disclosed represent management's best estimates of fair value. In accordance with SFAS No. 107, the Company has excluded certain financial instruments and all other assets and liabilities from its disclosure. Accordingly, the aggregate fair value amounts presented are not intended to, and do not, represent the underlying fair value of the Company. The methods and assumptions used to estimate fair value are as follows: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value due to the relatively short period to maturity of these instruments. SHORT-TERM INVESTMENTS The Company's short-term investments are comprised of debt securities, all classified as trading securities, which are carried at their fair value based on the quoted market prices of those investments. Accordingly, net realized and unrealized gains and losses on trading securities are included in net earnings. LONG-TERM DEBT The carrying amount approximates fair value based on the borrowing rates currently available to the Company for borrowings with similar terms and average maturities. FUEL HEDGING CONTRACTS The Company has entered into futures contracts to manage a portion of the Company's exposure to fuel price fluctuations. Gains and losses resulting from fuel hedging transactions are recognized when the underlying fuel being hedged is used. The fair value of fuel hedging contracts is estimated based on quoted market prices. The financial instruments are generally executed with major financial institutions which expose the Company to acceptable levels of market and credit risks and may at times be concentrated with certain counterparties or groups of counterparties. The creditworthiness of counterparties is subject to continuing review and full performance is anticipated. The asset and (liability) amounts recorded in the balance sheet and the estimated fair values of financial instruments at December 31, 1998 consisted of the following (in thousands):
CARRYING FAIR AMOUNT VALUE --------- --------- Cash and cash equivalents $ 21,977 $ 21,977 Short-term investments 23,323 23,323 Long-term debt (291,096) (291,096) Fuel hedging contracts 0 (1,572)
F-10 35 ACCRUED LIABILITIES Accrued liabilities consist of the following at December 31, 1998 and 1997 (in thousands):
1998 1997 -------- -------- Wages and benefits $ 46,615 $ 44,676 Claims and insurance reserves 23,158 28,476 Other 31,015 45,284 -------- -------- $100,788 $118,436 ======== ========
The long-term portion of claims and insurance reserves is included in the balance sheet as other long-term liabilities and amounts to approximately $69,475,000 and $66,795,000 at December 31, 1998 and 1997, respectively. CLAIMS AND INSURANCE RESERVES In the United States, the Company retains liability up to $650,000 for each workers' compensation claim and $500,000 for each claim for automobile and general liability, including personal injury and property damage claims. In addition to the $500,000 per occurrence deductible for automobile liability, there is a $1,500,000 aggregate deductible for those claims which exceed the $500,000 per occurrence deductible, subject to a $1,000,000 per claim limit. In addition, the Company retains liability up to $250,000 for each cargo damage claim. In Canada, the Company retains liability up to CDN $100,000 for each claim for personal injury, property damage, and cargo damage. The reserves for self-insured workers' compensation, automobile, and general liability losses are based on actuarial estimates that are discounted at 6% to their present value based on the Company's historical claims experience adjusted for current industry trends. The undiscounted amount of the reserves for claims and insurance at December 31, 1998 and 1997 was approximately $97,114,000 and $97,697,000, respectively. The claims and insurance reserves are adjusted periodically as such claims mature, to reflect changes in actuarial estimates based on actual experience. The estimated costs of all known and potential losses are accrued by the Company. In the opinion of management, adequate provision has been made for all incurred claims. COMPREHENSIVE INCOME In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. The Company has chosen to disclose comprehensive income, which encompasses net income and foreign currency translation adjustment, net of income taxes, in the accompanying consolidated statements of changes in stockholders' equity. Prior years have been restated to conform to the statement requirements. INCOME TAXES The Company follows the practice of providing for income taxes based on SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires F-11 36 recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns (Note 4). EQUITY INVESTMENT In February 1998, Axis Group completed the formation of a joint venture in Brazil. Axis Group initially invested $10,089,000 in the venture. The Company is accounting for the investment under the equity method of accounting with its share of the venture's earnings or loss included in other operating expenses in the consolidated statements of operations. The related equity investment is included in other assets in the accompanying consolidated balance sheet. The Company's equity in the joint venture's earnings/loss was not material in 1998. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." This statement requires presentation of basic and diluted earnings per share. Basic earnings per share are calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the years presented. Diluted earnings per share reflect the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic and diluted earnings per share are not materially different for the years presented. A reconciliation of the number of weighted average shares used in calculating basic and diluted earnings per share is as follows (in thousands):
1998 1997 1996 ----- ----- ----- Weighted average number of common shares outstanding-basic earnings per share 7,747 7,728 7,725 Effect of potentially dilutive shares outstanding 99 82 0 ----- ----- ----- Weighted average number of common shares outstanding-diluted earnings per share 7,846 7,810 7,725 ===== ===== =====
NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal quarters beginning after June 15, 1999. The Company has not yet quantified the impact of adopting SFAS No. 133 on the consolidated financial statements and has not determined the timing of or method of adoption of SFAS No. 133. However, this F-12 37 Statement could increase volatility in earnings and other comprehensive income. RECLASSIFICATION Certain amounts in the December 31, 1997 and 1996 financial statements have been reclassified to conform to the current year presentation. 4. INCOME TAXES For all periods presented, the accompanying financial statements reflect provisions for income taxes computed in accordance with the requirements of SFAS No. 109. The following summarizes the components of the income tax provision (in thousands):
1998 1997 1996 ------- ------- ------- Current: Federal $ (38) $ (874) $ 369 State 795 110 269 Foreign 1,316 340 932 Deferred: Federal 3,319 3,148 4,365 State 215 415 646 Foreign 920 (989) (3,024) ------- ------- ------- Total income tax provision $ 6,527 $ 2,150 $ 3,557 ======= ======= =======
The provision for income taxes differs from the amounts computed by applying federal statutory rates due to the following (in thousands):
1998 1997 1996 ------- ------- ------- Provision computed at the federal statutory rate $ 5,101 $ 1,548 $ 2,883 State income taxes, net of federal income tax benefit 667 346 604 Insurance premiums, net of recovery 0 258 (115) Amortization of goodwill 405 274 146 Earnings in jurisdictions taxed at rates different from the statutory U.S. federal rate (121) (166) (494) Other, net 475 (110) 533 ------- ------- ------- Total income tax provision $ 6,527 $ 2,150 $ 3,557 ======= ======= =======
The tax effect of significant temporary differences representing deferred tax assets and liabilities at December 31, 1998 and 1997 is as follows (in thousands): F-13 38
1998 1997 -------- -------- Deferred tax assets: Claims and insurance expense $ 23,316 $ 28,510 Accrued compensation expense 6,290 6,016 Postretirement benefits 4,567 4,581 Other liabilities not currently deductible 3,934 11,687 Tax carryforwards 9,625 10,736 Other, net 7,136 5,379 -------- -------- Total deferred tax assets 54,868 66,909 -------- -------- Deferred tax liabilities: Prepaids currently deductible (2,469) (5,707) Depreciation and amortization (67,143) (68,328) Postemployment benefits (299) (5,665) Other, net (4,137) (4,459) -------- -------- Total deferred tax liabilities (74,048) (84,159) -------- -------- Net deferred tax liabilities $(19,180) $(17,250) ======== ========
The Company has certain tax carryforwards available to offset future income taxes consisting of net operating losses that expire from 2004 to 2019, foreign tax credits that expire from 2001 to 2004, charitable contributions that expire from 2002 to 2003, and alternative minimum tax credits that have no expiration dates. Management believes that a valuation allowance is not considered necessary based on the Company's earnings history, the projections for future taxable income, and other relevant considerations over the periods during which the deferred tax assets are deductible. The 1996 consolidated federal income tax return of the Company is presently under examination by the Internal Revenue Service. The ultimate result of the examination cannot be predicted at this time. In the opinion of management, any additional tax liability resulting from the examination would not have a material adverse impact on the consolidated financial position or operating results of the Company. 5. LEASE COMMITMENTS RELATED PARTIES The Company leased office space through December 1997 from a related party under a lease which was to expire in 2003. On December 31, 1997, this space was sold to an unrelated party, and a new and revised agreement was signed effective January 1, 1998 which extends the lease term through 2007. Rental expenses under these noncancelable leases amounted to approximately $1,456,000 in 1997 and $1,030,000 in 1996. In the opinion of management, the terms of these leases were as favorable as those which could be obtained from unrelated lessors. UNRELATED PARTIES The Company leases equipment, office space, and certain terminal facilities from unrelated parties under noncancelable operating lease agreements which expire in various years through 2007. Rental expenses F-14 39 under these leases amounted to approximately $6,540,000, $4,277,000, and $3,245,000 in 1998, 1997, and 1996, respectively. The Company also leases certain terminal facilities from unrelated parties under cancelable leases (i.e., month-to-month terms). The total rental expenses under these leases were approximately $5,187,000, $2,198,000, and $2,142,000 for the years ended December 31, 1998, 1997, and 1996, respectively. Subsequent to December 31, 1998, the Company entered into a sublease agreement with a third party for a leased building obtained in connection with the Ryder Automotive Carrier acquisition. The Company's commitment under the lease expires in 2006. The lease agreement with the third party expires in 2004. Future minimum rental commitments and related sublease income under all noncancelable operating lease agreements, excluding lease agreements that expire within one year, are as follows as of December 31, 1998 (in thousands):
SUBLEASE COMMITMENTS INCOME ----------- ------ 1999 $ 6,496 $ 575 2000 5,489 858 2001 4,791 881 2002 4,987 904 2003 4,601 927 Thereafter 11,625 341 ------- ------ Total $37,989 $4,486 ======= ======
6. LONG-TERM DEBT Long-term debt consisted of the following at December 31, 1998 and 1997 (in thousands):
1998 1997 --------- --------- Revolving credit facility $ 100,837 $ 35,000 Senior notes 150,000 150,000 Senior subordinated notes 40,000 40,000 Other 3,005 5,983 --------- --------- 293,842 230,983 Less current maturities of long-term debt (2,746) (2,980) --------- --------- $ 291,096 $ 228,003 ========= =========
In September 1997, the Company issued $150,000,000 of Senior Notes through a private placement. Subsequently, the Senior Notes were registered with the Securities and Exchange Commission. The Senior Notes mature October 1, 2007 and bear interest at 8 5/8% annually. Interest on the Senior Notes is payable semi-annually in arrears on April 1 and October 1 of each year. Borrowings under the Senior Notes are general unsecured obligations of the Company. The Company's obligations under the Senior Notes are guaranteed by substantially all of the subsidiaries of the Company (the "Guarantors"). Separate financial statements of the Guarantors are not F-15 40 provided herein as (i) the Guarantors are jointly and severally liable for the Company's obligations under the Senior Notes, (ii) the subsidiaries which are not Guarantors are inconsequential to the consolidated operations of the Company and its subsidiaries, and (iii) the net assets and earnings of the Guarantors are substantially equivalent to the net assets and earnings of the consolidated entity, as reflected in these consolidated financial statements. There are no restrictions on the ability of Guarantors to make distributions to the Company. The Senior Notes set forth a number of negative covenants binding on the Company. The covenants limit the Company's ability to, among other things, purchase or redeem stock, make dividend or other distributions, make investments, and incur or repay debt (with the exception of payment of interest or principal at stated maturity). Concurrent with the issuance of the Senior Notes, the Company closed on a revolving credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility allows the Company to borrow under a revolving line of credit and to issue letters of credit up to the lesser of $230,000,000 or a borrowing base amount, as defined in the Revolving Credit Facility. Annual commitment fees are due on the undrawn portion of the commitment. Amounts outstanding under the Revolving Credit Facility mature in 2002. The interest rate for the Revolving Credit Facility is, at the Company's option, either (i) the bank's base rate, as defined, or (ii) the bank's Eurodollar rate, as defined, as determined at the date of each borrowing, plus an applicable margin. Borrowings under the Revolving Credit Facility are secured by a first priority security interest on assets (other than real estate) of the Company and certain of its subsidiaries, including a pledge of stock of certain subsidiaries. In addition, certain subsidiaries of the Company jointly and severally guarantee the obligations of the Company under the Revolving Credit Facility. The Revolving Credit Facility sets forth a number of affirmative, negative, and financial covenants binding on the Company. The negative covenants limit the ability of the Company to, among other things, incur debt, incur liens, make investments, make dividend or other distributions, or enter into any merger or other consolidation transaction. The financial covenants include the maintenance of a minimum consolidated net worth, compliance with a leverage ratio and a coverage ratio, and limitations on capital expenditures. In February 1996, the Company issued $40,000,000 of senior subordinated notes ("Senior Subordinated Notes") through a private placement. The Senior Subordinated Notes mature February 1, 2003 and bear interest at 12% annually. Proceeds from the Senior Subordinated Notes were used to reduce outstanding company borrowings. Future maturities of long-term debt are as follows at December 31, 1998 (in thousands): 1999 $ 2,746 2000 159 2001 100 2002 100,837 2003 40,000 Thereafter 150,000 -------- $293,842 ========
F-16 41 At December 31, 1998, the weighted average interest rate on borrowings under the Revolving Credit Facility was 7.4%, and approximately $4,500,000 was committed under letters of credit. At December 31, 1998, the Company had available borrowings under the Revolving Credit Facility of approximately $119,000,000. 7. EMPLOYEE BENEFITS PENSION AND POSTRETIREMENT BENEFIT PLANS The Company maintains the Allied Defined Benefit Pension Plan, a trusteed noncontributory defined benefit pension plan for management and office personnel in the United States, and the Pension Plan for Employees of Allied Systems (Canada) Company and Associated Companies for management and office personnel in Canada (the "Canada Plan," collectively, the "Plans"). Under the Plans, benefits are paid to eligible employees upon retirement based primarily on years of service and compensation levels at retirement. Contributions to the Plans reflect benefits attributed to employees' services to date and services expected to be rendered in the future. The Company's funding policy is to contribute annually at a rate that is intended to fund future service benefits as a level percentage of pay and past service benefits over a 30-year period. At December 31, 1998, participation in the Canada Plan was frozen. The Company also provides certain health care and life insurance benefits for eligible employees who retired prior to July 1, 1993 and their dependents, except for certain employees participating in the 1998 Voluntary Early Retirement Plan ("VERP"). Generally, the health care plan pays a stated percentage of most medical expenses reduced for any deductibles and payments by government programs or other group coverage. The life insurance plan pays a lump-sum death benefit based on the employee's salary at retirement. These plans are unfunded. Employees retiring after July 1, 1993 are not entitled to any postretirement medical or life insurance benefits. In conjunction with the Ryder Automotive Carrier Group acquisition, the Company took over a postretirement benefit plan to provide retired employees with certain health care and life insurance benefits. Substantially all employees not covered by union-administered medical plans and who had retired as of September 30, 1997 are eligible for these benefits. Benefits are generally provided to qualified retirees under age 65 and eligible dependents. Furthermore, the Company took over two defined pension plans for a certain terminal. One of the plans benefit provides a monthly benefit based on years of service upon retirement. The other plan provides benefits to eligible employees upon retirement based primarily on years of service and compensation levels at retirement. During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits." This statement requires additional disclosure information on changes in plan assets and benefit obligations. All disclosures related to the Company's pension and postretirement benefit plans have been prepared in accordance with SFAS No. 132. The change in the projected benefit obligation of the defined benefit pension plans and the postretirement benefit plans consisted of the following during fiscal 1998 and 1997 (in thousands): F-17 42
DEFINED BENEFIT POSTRETIREMENT PENSION PLANS BENEFIT PLANS ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Change in benefit obligation: Benefit obligation at beginning of fiscal year $ 31,886 $ 21,439 $ 10,642 $ 3,586 Impact of acquisition 0 5,189 0 7,894 Service cost 2,981 1,219 0 0 Interest cost 2,119 1,522 925 330 Foreign currency translation (426) (224) 0 0 Plan amendments and other 2,219 668 98 50 Curtailment loss 1,092 0 790 0 Actuarial (gain) loss (2,787) 2,761 (433) (669) Benefits paid (1,197) (688) (1,063) (549) -------- -------- -------- -------- Benefit obligation at end of fiscal year $ 35,887 $ 31,886 $ 10,959 $ 10,642 ======== ======== ======== ========
The change in plan assets and funded status of the defined benefit pension plans and the postretirement benefit plans consisted of the following during fiscal 1998 and 1997 (in thousands):
DEFINED BENEFIT POSTRETIREMENT PENSION PLANS BENEFIT PLANS ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Change in plan assets: Fair value of plan assets at beginning of year $ 26,673 $ 19,052 $ 0 $ 0 Acquisition 0 4,130 0 0 Actual return on plan assets 1,539 3,250 0 0 Participants' contributions 162 165 0 0 Foreign currency translation (382) (188) 0 0 Employer contribution 1,608 952 1,063 549 Benefits paid (1,197) (688) (1,063) (549) -------- -------- -------- -------- Fair value of plan assets at end of year $ 28,403 $ 26,673 $ 0 $ 0 ======== ======== ======== ======== Funded status $ (7,484) $ (5,213) $(10,959) $(10,642) Unrecognized actuarial loss (gain) 4,469 3,385 (390) (897) Unrecognized prior service cost 1,105 2,190 0 0 Unrecognized transition asset (218) (529) 0 0 -------- -------- -------- -------- Accrued benefit cost $ (2,128) $ (167) $(11,349) $(11,539) ======== ======== ======== ========
F-18 43
DEFINED BENEFIT POSTRETIREMENT PENSION PLANS BENEFIT PLANS -------------------- -------------------- 1998 1997 1998 1997 ------ ------ ------ ------ Amounts recognized in the consolidated balance sheets consist of: Accrued liabilities $(2,128) $(167) $ (184) $ (184) Postretirement benefit other than pension 0 0 (11,165) (11,355) ------- ----- ------- -------- $(2,128) $(167) $(11,349) $(11,539) ======= ===== ======== ========
The following assumptions were used in determining the actuarial present value of the projected pension benefit obligation and postretirement benefit obligation at December 31, 1998 and 1997:
DEFINED BENEFIT POSTRETIREMENT PENSION PLANS BENEFIT PLANS ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Weighted average discount rate 6.84% 7.30% 7.00% 7.50% Weighted average expected long-term rate of return on assets 9.29 9.29 N/A N/A Weighted average rate of compensation increase 4.06 4.98 N/A N/A
The net periodic benefit cost recognized for the defined benefit pension plans and the postretirement benefit plans includes the following components at December 31, 1998 and 1997 (in thousands):
DEFINED BENEFIT POSTRETIREMENT PENSION PLANS BENEFIT PLANS -------------------- ------------------- 1998 1997 1998 1997 ------ ------ ------- ------ Components of net periodic benefit cost: Service cost: $ 2,981 $ 1,219 $ 0 $ 0 Interest cost 2,119 1,522 925 330 Expected return on plan assets (2,490) (1,457) 0 0 Amortization of prior service cost 247 25 0 0 Amortization of transition asset (52) (47) 0 0 Curtailment loss 1,092 0 790 0 Recognized actuarial loss (gain) 25 33 (53) (60) ------- ------- ------- ----- Net periodic benefit cost $ 3,922 $ 1,295 $ 1,662 $ 270 ======= ======= ======= =====
As reflected in the net periodic benefit cost table above, for fiscal 1998, the Company recognized an aggregate net curtailment loss of $1,882,000 related to the VERP offered to qualified nonunion employees in December 1998. The effect of the VERP was to increase the benefit obligation based on the acceleration of years of credited service. This F-19 44 transaction is recognized as a curtailment loss in accordance with SFAS No. 88, "Employer Accounting for Settlements and Curtailments of Defined Benefit Pension Plans." The weighted average annual assumed rate of increase in the per capital cost of covered benefits (i.e., health care trend rate) for the health plans is 7.67% for 1997 and 7.35% for 1998, grading to 5.5% over five years. The effect of a 1% increase in the assumed trend rate would have increased the accumulated postretirement benefit obligation as of December 31, 1998 by approximately $796,000. The effect of this change on the periodic postretirement benefit cost for 1998 would be approximately $56,000. At December 31, 1998, plan assets consisted primarily of U.S. and international corporate bonds and stocks, convertible equity securities, and U.S. and Canadian government securities. A substantial number of the Company's employees are covered by union-sponsored, collectively bargained multiemployer pension plans. The Company contributed and charged to expense approximately $38,068,000, $17,926,000, and $11,444,000 for the years ended December 31, 1998, 1997, and 1996, respectively, for such plans. These contributions are determined in accordance with the provisions of negotiated labor contracts and are generally based on the number of man-hours worked. Also, a substantial number of the Company's employees are covered by union-sponsored, collectively bargained multiemployer health and welfare benefit plans. The Company contributed and charged to expense approximately $44,796,000, $22,402,000, and $14,811,000 in 1998, 1997, and 1996, respectively, in connection with these plans. These required contributions are determined in accordance with the provisions of negotiated labor contracts and are for both active and retired employees. 401(K) PLAN The Company has a 401(k) plan covering all of its employees in the United States. Prior to July 1, 1993, the Company did not contribute to this plan; however, the Company did incur the cost of administering this plan. The Company's administrative expense for the 401(k) plan was approximately $69,000, $102,000, and $165,000 in fiscal years 1998, 1997, and 1996, respectively. Beginning July 1, 1993, the Company contributes the lesser of 3% of participant wages or $1,000 per year for each nonbargaining unit participant of the plan. The Company contributed approximately $625,000, $319,000, and $225,000 to the plan during the years ended December 31, 1998, 1997, and 1996, respectively. EMPLOYEE STOCK PURCHASE PLAN During December 1998, the Company approved an Employee Stock Purchase Plan (the "ESPP"). The ESPP allows eligible employees, as defined, the right to purchase common stock of the Company on a quarterly basis at 85% of the fair market value on the first business day of the calendar quarter or on the last business day of the calendar quarter. There are 350,000 shares of the Company's common stock reserved under the ESPP, of which no shares were issued to employees during 1998. F-20 45 8. COMMITMENTS AND CONTINGENCIES The Company is involved in various litigation and environmental matters relating to employment practices, damages, and other matters arising from operations in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations. The Company has entered into employment agreements with certain executive officers of the Company. The agreements, which are substantially similar, provide for compensation to the officers in the form of annual base salaries and bonuses based on earnings. The employment agreements also provide for severance benefits upon the occurrence of certain events, including a change in control, as defined. Approximately 86% of the Company's total labor force is covered by collective bargaining agreements. Collective bargaining agreements representing 84% of the total force will expire within one year. 9. REVENUES FROM MAJOR CUSTOMERS Substantially all of the Company's revenues are realized through the automotive industry. In 1998, 1997, and 1996, approximately 73%, 77%, and 81%, respectively, of the Company's revenues were derived from the three largest automobile manufacturers. In 1998, 1997, and 1996, Ford Motor Company accounted for approximately 26%, 41%, and 53%, respectively, of revenues, General Motors Corporation accounted for approximately 32%, 22%, and 10%, respectively, of revenues, and Chrysler Corporation accounted for 15%, 14%, and 18% of revenues, respectively. 10. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires reporting selected information about operating segments in interim financial reports issued to stockholders. The Company operates in one reportable industry segment: transporting automobiles and light trucks from manufacturing plants, ports, auctions, and railway distribution points to automotive dealerships. Geographic financial information for 1998, 1997, and 1996 is as follows (in thousands):
1998 1997 1996 ---------- -------- -------- Revenues: United States $ 858,772 $425,090 $264,909 Canada 168,027 156,440 127,638 ---------- -------- -------- $1,026,799 $581,530 $392,547 ========== ======== ========
F-21 46
1998 1997 1996 ---------- -------- -------- Long-lived assets: United States $ 350,897 $333,061 $280,301 Canada 74,971 76,205 63,334 ---------- -------- -------- $ 425,868 $409,266 $343,635 ========== ======== ========
Revenues are attributed to the respective countries based on the location of the origination terminal. 11. STOCKHOLDERS' EQUITY The Company has authorized 5,000,000 shares of preferred stock with no par value. No shares have been issued, and therefore, there were no shares outstanding at December 31, 1998 and 1997. The board of directors has the authority to issue these shares and to fix dividends, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions. In addition, the Company adopted a long-term incentive plan which allows the issuance of grants or awards of incentive stock options, restricted stock, stock appreciation rights, performance units, and performance shares to employees and directors of the Company to acquire up to 650,000 shares of the Company's common stock. During 1998 and 1996, the Company granted 54,523 and 85,000 shares, respectively, of restricted stock to certain employees of the Company. In connection with the award of the restricted stock, the Company recorded $1,730,000 of unearned compensation in the accompanying balance sheet which is amortized to compensation expense over five years, the vesting period of the restricted stock. During 1997, 8,000 shares of restricted stock were canceled. In addition, the Company has granted nonqualified stock options under the long-term incentive plan. Options granted become exercisable after one year in 20% or 33 1/3% increments per year and expire ten years from the date of the grant. F-22 47
WEIGHTED AVERAGE OPTION PRICE EXERCISE SHARES (PER SHARE) PRICE ------- ------------- ---------- Outstanding as of December 31, 1995 137,050 $9.50-$11.75 $ 9.64 Granted 34,000 $9.00 9.00 Exercised 0 N/A N/A Canceled 0 N/A N/A ------- Outstanding as of December 31, 1996 171,050 $9.00-$11.75 9.51 Granted 10,000 $17.13 17.13 Exercised (17,495) $9.00-$11.75 9.42 Canceled (18,500) $9.00-$11.75 9.07 ------- Outstanding as of December 31, 1997 145,055 $9.00-$17.13 10.11 Granted 15,000 $10.38 10.38 Exercised (2,500) $9.50 9.50 Canceled 0 N/A N/A ------- Outstanding as of December 31, 1998 157,555 $9.00-$17.13 10.14 =======
1998 1997 1996 -------- ------- ------- Options exercisable at year-end 115,855 75,048 41,867 Weighted average exercise price of options exercisable at year-end $9.85 $9.70 $9.81 Per share weighted average fair value of options granted during the year $5.09 $8.27 $3.74
The weighted average remaining contractual life of options outstanding at December 31, 1998 was seven years. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the long-term incentive plan. If the Company had elected to recognize compensation cost for the long-term incentive plan based on the fair value at the grant dates for awards under the plan, consistent with the method prescribed by SFAS No. 123, net income and earnings per share would have been changed to the pro forma amounts indicated below at December 31, 1998, 1997, and 1996 (in thousands, except per share data):
1998 1997 1996 ------ ------ ------ Net income: As reported $8,477 $2,402 $3,986 Pro forma 8,367 2,305 3,900 Earnings per share: As reported: Basic $ 1.09 $ 0.31 $ 0.52 Diluted 1.08 0.31 0.52 Pro forma: Basic 1.08 0.30 0.50 Diluted 1.07 0.30 0.50
F-23 48 The fair value of the Company's stock options used to compute pro forma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option pricing model with the following weighted average assumptions for 1998 and 1997: dividend yield of 0%, expected volatility of 49% and 34%, respectively, a risk-free interest rate of 5.09% and 5.7%, respectively, and an expected holding period of five years. The Black-Scholes option pricing 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 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 its employee stock options. 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
1998 ---------------------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues $253,390 $280,641 $ 217,468 $275,300 Operating income (loss)* 6,787 19,324 (3,418) 15,187 Net income (loss)* 690 7,697 (4,960) 5,050 Net income (loss) per share:* Basic $ 0.09 $ 0.99 $ (0.64) $ 0.65 Diluted 0.09 0.98 (0.64) 0.65 Average shares outstanding: Basic 7,746 7,748 7,748 7,748 Diluted 7,746 7,861 7,748 7,829 Stock prices: High $ 22.500 $ 22.313 $ 21.938 $ 16.750 Low 18.000 17.750 10.250 11.375
*The Company's second and third quarter earnings were impacted by an eight-week work stoppage at most General Motors manufacturing plants. Also, during the fourth quarter, the Company expensed approximately $2.0 million for the VERP. F-24 49
1997 -------------------------------------------------- First Second Third Fourth ------- -------- -------- -------- (In Thousands, Except Per Share Amounts) Revenues $96,393 $112,576 $ 91,384 $281,177 Operating income (loss)** 2,806 8,644 (7,156) 13,485 Net income (loss)** 198 3,513 (5,674) 4,365 Basic and diluted net income (loss) per share** $ 0.03 $ 0.45 $ (0.73) $ 0.56 Average shares outstanding: Basic 7,725 7,725 7,725 7,725 Diluted 7,725 7,725 7,725 7,810 Stock prices: High $ 8.250 $ 11.125 $ 23.375 $ 24.000 Low 6.250 5.500 11.000 13.750
**During the third quarter of 1997, the Company recorded a pretax charge of approximately $8.9 million upon completion of the Ryder Carrier Group acquisition to write down Company rigs and terminal facilities that will be idled or closed as a result of the acquisition. F-25 50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Allied Holdings, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in ALLIED HOLDINGS, INC.'S 1998 annual report to stockholders and this Form 10-K, and have issued our report thereon dated February 8, 1999. Our audit was made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule listed in Item 14 of this Form 10-K is the responsibility of the Company's management, is presented for purposes of complying with the Securities and Exchange Commission's rules, and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia February 8, 1999 51 ALLIED HOLDINGS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS ADJUSTMENTS OF YEAR - --------------------------------------- ------------ ----------- ------------ ------------ ------- YEAR ENDED DECEMBER 31, 1998: Allowance for doubtful accounts $2,078 $201 (734)(a) $ 0 $1,545 YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts 564 159 (19)(a) 1,374(b) 2,078 YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful accounts 689 0 (125)(a) 0 564
(a) Write-off of uncollectable accounts. (b) Balance assumed from the acquisition of Ryder Automotive Carrier Group. S - 2 EX-10.7 2 AGREEMENT BETWEEN THE COMPANY AND GENERAL MOTORS 1 EXHIBIT 10.7 CONTRACT FOR MOTOR TRANSPORTATION This Agreement, made as of October 1, 1997, by and between Allied Automotive Group, Inc, ("AAG") as Managing General Partner of Allied Systems, Ltd. ("ALLIED") and as agent for allied as well as Agent FOR F.J. Boutell, Inc. and Allied Freight Brokers, Inc. (hereinafter sometimes referred to as "Boutell" and "Brokers"; Allied, Boutell, and Brokers each hereinafter referred to as "Carrier"), all having their principal location at 160 Clairmont Avenue, Suite 600, Decatur, Georgia 30030 and General Motors Corporation, a Delaware corporation, with a principal location at 3044 West Grand Boulevard, Detroit, Michigan 48202 (hereinafter referred to as "GM"). WITNESSETH: GM is a corporation engaged in the business of manufacturing and assembling motor vehicles at numerous points throughout North America and is desirous of using the motor transportation services of Carrier for the transportation of said property from and to points within the scope of Carrier's appropriately authorized operations. In this context, GM has a need for Carrier's service to effect the efficient and prompt delivery of said property to, from or between its various dealers, distributors, agents, warehouses, and other origins and destinations that GM may designate, such service being an essential factor in the operation of GM's business. Carrier is ready, willing and able to provide the transportation service for GM, has complied with all applicable laws and regulations, and is fully qualified as of the date of execution hereof to engage in the service as herein contemplated from, to, and between points identified herein. Now, therefore, for good and valuable consideration and upon the covenants and promises that follow, the parties do agree: 1. TRANSPORTATION SERVICE. Carrier will, when requested by GM, furnish to GM a complete delivery and Transportation Service (hereinafter "Transportation Service"), which service, without limiting the generality thereof, will include transporting motor vehicles and related components from, to and between points identified in one or more Appendix hereto. GM will employ Carrier to perform such services on an as required nonexclusive basis during the period of this Agreement in accord with its terms. Notwithstanding the above and foregoing, or any provision of this Agreement, the parties agree that the agreement set forth and memorialized in the May 22, 1997 letter attached hereto as Exhibit 1 and made a part hereof, shall coincide with the duration of this agreement and shall be binding upon the parties hereto. 2. VEHICLES. DRIVERS, ETC. As part of said Transportation Service, Carrier shall provide all facilities (with the exception of GM Assembly Center locations), properly licensed drivers and other personnel and equipment necessary to perform the required Transportation Services in a safe and efficient manner. Carrier shall also provide, operate and maintain in good working condition the motor vehicles, trailers and related equipment necessary for the performance of this service. 1 2 3. CONTROL OF TRANSPORTATION SERVICE. Carrier shall have sole and exclusive control over the manner in which Carrier and its employees perform the Transportation Service provided for hereunder, and carrier shall engage and employ such individuals as it may deem necessary in connection therewith. Such individuals shall be considered employees of Carrier only and shall be subject to employment, discharge, discipline and control solely and exclusively by Carrier. While on GM property, such Carrier employees will be directed to follow applicable GM rules communicated to Carrier or its employees by GM, including by appropriate GM plant security and dock personnel. GM reserves the right to instruct Carrier to remove any employee from GM related Transportation Service. 4. QUALITY SERVICE REQUIREMENTS. GM requires quality transportation services. Carrier will provide such services in accord with the best standards of the transportation industry and in compliance with applicable GM procedures. Such services include the following: (a) Establish and maintain a Quality Improvement team focused on damage elimination, service, and cost reduction items. They shall communicate and participate with GM Quality Improvement Teams. (b) Complete self audits as required by GM NAO Vehicle Logistics. (c) Maintain a Damage Frequency Rate of [* material omitted] or less. If this target is not met, Carrier will pay a [* material omitted] of the total annual invoiced amount for each location not in compliance. Damage Frequency will be monitored by location of operation and reported monthly to GM NAO Vehicle Logistics. The Damage Frequency will be based on paid claims. The assessment will be completed annually in August. Any payment due will be made within 30 days after this assessment. (d) ISO 9001/2 Full Certification by July 31, 1998. The ISO 9000 standards can be obtained from ANSI at (212)642-4900. Quality system assessment documents can be obtained from the AIAG at (248)358-3003. Failure to achieve certification to ISO 9001 and ISO 9002 may result in disqualification as a GM carrier. In addition to ISO 9001/2, the following GM quality procedures must be adhered to. It is GM's expectations that Carrier is knowledgeable of our quality procedures and have the appropriate systems, processes and documentation in place to ensure compliance. 1. APQP - Advance Product Quality Planning 2. GP-5T Problem Reporting and Resolutions 3. GP-8T Continuous Improvement Procedures 4. GP-9T Run at Rate (e) Control Plans will be submitted for all locations. (f) Driver certification and training programs are to be established. A periodical rectification program for continuous improvement of driver skills will be established. (g) All trucks and trailers will be equipped with a "Decks Up" warning system to alert the operator. (h) Vehicles must be shipped in accordance with the latest revision of the GM Vehicle Shipping Manual. (i) A second tier supplier used for trip leasing must be pre-approved by GM NAO Vehicle Logistics Vehicle Quality Assurance. (j) Carrier will provide a loading inspector to cover all hours of loading operations. (k) A third party inspection will be required at all operations. The third party will be selected by GM. The cost of this third party will be shared by each Carrier at the same location. (1) Security shall be provided by Pinkerton at all Assembly Centers and paid for by the Carrier. Such security is required for plant yard areas falling under Carrier responsibility. (m) All facility layout changes must be pre-approved by GM NAO Vehicle Logistics Quality Assurance Manager. - ---------- * Deleted per the Company's request for confidential testament and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934. 2 3 5. OPERATIONAL REQUIREMENTS. Carrier will provide operational services in accord with the best standards of the transportation industry and in compliance with the latest GM guidelines. Such operational requirements include the following: (a) [ * material omitted] (b) Operations must be appropriately fleet sized for both equipment and drivers based on an annual forecast and capacity review between the Carrier and the GM NAO Vehicle Logistics Operations Manager. 6. PROPERTY DAMAGE AND LOSS. Carrier will have exclusive care, custody and control of all goods hereunder including motor vehicles and related components from the time delivered to it until delivery to a consignee named by GM. Carrier assumes full responsibility for any and all loss or damage to said property while in its care, custody or control unless such loss or damage is caused by a force majeure event as that term is defined in Section 23. The value of said property will be based on the normal GM invoice price thereof plus freight charges, with the exception of certain major vehicle damage claims described below. (a) Major vehicle damage claim settlements will be handled as follows: 1. Vehicles which sustain damage while in the hands of the Carrier, to the extent that such damage affects the merchantability, safety, durability or reliability of the vehicle, will be handled as major transportation damage claims. GM will have the sole responsibility for determining vehicle repairability. 2. As the vehicle manufacturer, GM alone will determine whether repair of a damaged vehicle is capable of fully restoring that vehicle to a marketable condition, complying with all applicable government motor vehicle standards. 3. If it is determined by GM that a vehicle will not be repaired, it will immediately be returned by the Carrier as directed to the possession of GM. 4. When it is determined that a vehicle will not be repaired, a claim will be processed utilizing the vehicle's dealer net price, minus 35% as the salvage value, plus DFC (Destination Freight Charge). 5. All major damage claims will be reviewed and either paid or rejected by the Carrier within thirty (30) days of transmittal to Carrier. (b) Claims for loss or damage will be accepted by Carrier in writing or via electronic transmission for a period of nine (9) months following delivery by Carrier as follows: 1. Claims received at the GM Corporate Claim Center within nine (9) months after delivery of lost or damaged motor vehicles or related components by Carrier will be deemed accepted by Carrier, provided any such claim is transmitted to Carrier within (12) months after delivery by Carrier. 2. Claims filed against one Carrier on a joint line, or joint line cross-border movement, will be deemed a filing against all connecting Carriers within the time limits in (1) above. (c) Carrier will render payment, or provide written reasons for nonpayment, of any claim within thirty (30) days of receipt of such claims. - ---------- * Deleted per the Company's request for confidential testament and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934. 3 4 7. STANDARD INSURANCE REQUIREMENTS. Carrier shall obtain and maintain pursuant to the terms of this agreement, at its sole expense, the following types of insurance coverage, with minimum limits as set forth below, unless increased types and amounts are required due to the equipment of service requirements in specific Appendices: (a) Commercial General Liability covering liability arising from premises, operations, independent contractors, products-completed operations, personal and advertising injury, and liability assumed under an insured contract - $5,000,000 each occurrence. (b) Commercial Automobile Liability covering all owned, hired, and non-owned vehicles - $5,000,000 each occurrence, including all statutory coverages for all states of operation. (c) Workers Compensation - statutory limits ($20,000,000 specific excess if self-insured) for all states of operation. (d) Employers Liability - $ 1,000,000 each employee for bodily injury by accident and $ 1,000,000 each employee for bodily injury by disease. (e) Cargo Insurance, including loading and unloading, with a limit equal at least to the value of the property shipped and in any event not less than $250,000 per occurrence. (f) Any insurance coverage required by any government body for the types of Transportation Services specified in the Appendices. (g) Any deductible or self-insured retention in excess of $250,000 must be declared to and approved by GM. Carrier shall provide GM with a certificate of insurance evidencing compliance with the insurance requirements set forth above. Certificate will provide that GM shall be named an additional insured for liability arising from the operations of the carrier on all liability policies (except Cargo Insurance, Workers' Compensation and Employers Liability) and state that the above required coverages shall apply as primary insurance with respect to any other insurance or self-insurance programs afforded to GM. In addition, the certificate shall provide that GM will receive thirty (30) days' prior written notice from the insurer of any termination or reduction in the amount or scope of coverage. Such certificates shall be in a form acceptable to, and underwritten by, insurance company(ies) reasonably satisfactory to GM. The purchase of appropriate insurance coverage by Carrier or the furnishing of certificate(s) of insurance shall not release Carrier from its respective obligations or liabilities under this Agreement. 8. RATES AND CHARGES. Carrier will charge GM, and GM will pay Carrier, for the Transportation Services herein contemplated the simplified rates and charges set forth in one or more Appendices attached. Such Appendix may be revised from time to time by mutual written agreement of the parties. Annual rate reductions are detailed in site specific Appendices. GM will not reimburse the carrier for overtime due to weekend activity. Weekend operations are scheduled at GM Assembly Center's discretion. 9. ELECTRONIC FUNDS TRANSFER - (EFT) Carrier will execute a separate EFT agreement. Carrier agrees to hold GM harmless for uncollected funds not properly or timely transferred from bank or depository in accordance with EFT or Appendices. 10. PAYMENT - ELECTRONIC DATA INTERCHANGE - (EDI). After GM receives a valid and acceptable electronic service record, GM will transmit to the Carrier an EDI 820 Transaction Set (Advance Payment Notification). Upon receipt of an EDI 820, Carrier will transmit to GM an EDI 997 Transaction Set 4 5 (Acknowledgment of the EDI 820) confirmation. GM shall transfer funds electronically (pay) to the bank designated by the Carrier in the applicable wire transfer agreement or appendices on the 10th and 25th of the following month from the date that service was performed. Balance Due payments will fall under the same rules as do line haul payments. [* material omitted] 11. OVERCHARGES AND UNDERCHARGES. Carrier will file any overcharges or undercharge claims within 120 days from the time GM receives a valid and acceptable electronic delivery record. Failure to so file will waive any such claims by or on behalf of Carrier. 12. PAYMENT SUNSET. Carrier will within nine (9) months manually or electronically transmit a delivery record from date of delivery or date service was performed. Failure to so transmit a delivery record will waive any future claims for payment by or on behalf of Carrier. 13. FINANCIAL STATEMENT. Carrier will provide GM, (a) true copies of any financial statements which have been prepared and filed with any regulatory body and which are available for public inspection, and (b) as a GM contract carrier the individual monthly financial statements for all GM Locations to be provided in electronic format. 14. REVISIONS. This Agreement may be revised from time to time by execution of an amendment signed by both parties. This Agreement cancels and supersedes any and all prior agreements and discussions between parties prior to the date hereof dealing with any matter covered hereby and by an Appendix hereto. 15. NOTICES. All notices required to be given under the terms of this Agreement, or which either party hereto may desire to give to the other, shall be in writing, signed by or on behalf of the party giving such notice, and sent by certified mail, or via fax and first class mail, to the following addresses or to such other address as either party may furnish the other in writing: If to GM: General Motors Corporation 3044 West Grand Boulevard Detroit, MI 48202 Attn: Michael E. MacDonald Director, Vehicle Logistics Fax: (313) 974-4001 If to Carrier: Allied Automotive Group 160 Clairmont Ave., Suite 600 Decatur, GA 30030 Attn: Joseph Collier President Fax: (404) 370-4216 16. TERMS OF AGREEMENT. This contract will continue in full force and effect for a period of three (3) years from the date of execution. Should the parties thereafter continue to operate under this Agreement, - ---------- * Deleted per the Company's request for confidential testament and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934. 5 6 it will continue from month to month until terminated by either party upon not less than thirty (30) days' prior written notice to the other. 17. INDEMNIFICATION. Carrier agrees to indemnify, defend and hold GM (including its officers, directors, employees, subcontractors and agents) harmless from and against any and all liabilities, damages, fines, penalties, costs, claims, demands and expenses (including costs of defense, settlement, and reasonable attorney's fees) of whatever type or nature, including damage or destruction of any property, or injury (including death) to any person, arising out of (a) any act or omission by Carrier, its agents, employees or subcontractors except negligence of GM, (b) any claims or actions by Carrier's agents, employees or subcontractors, or (c) the failure of Carrier, its agents, employees or subcontractors to comply with this Agreement, the Appendices hereto, or any applicable federal, provincial, and/or local law, statute, regulation, rule, ordinance, or government directive which may directly or indirectly regulate or affect the obligations of Carrier hereunder. 18. NO IMPLIED WAIVER. The failure of either party at any time to require performance by the other party of any provision of this Agreement shall in no way affect the right to require such performance at any time thereafter, nor shall the waiver of either party of a breach of any provision of this Agreement constitute a waiver of any succeeding breach of the same or any other provision. 19. NON-ASSIGNMENT. Carrier may not assign or delegate its obligations under this Agreement without GM's prior written consent. 20. RELATIONSHIP OF PARTIES. Carrier and GM are independent contracting parties and nothing in this Agreement shall make either party the agent or legal representative of the other for any purpose whatsoever, nor does this agreement grant either party any authority to assume or to create any obligation on behalf of or in the name of the other. 21. YEAR 2000 COMPLIANCE. Carrier, and any goods and services supplied by the Carrier, shall be Year 2000 compliant such that they shall function without error or fault in the processing (including calculating, managing, manipulating, comparing, and sequencing) of date and date related data, for the years 2000 and beyond. At GM NAO Vehicle Logistics' request, Carrier shall certify in writing its compliance with the foregoing. 22. COMPLIANCE WITH LAWS. Carrier agrees to comply with all applicable provisions of federal, provincial, state and/or local law or ordinance and all lawful orders, rules and regulations issued thereunder, and any provisions, representations or agreements, or contractual clauses required thereby to be included or incorporated by reference or by operation of law in this Agreement. Without limiting the foregoing, Carrier will, at its expense, comply with all statutes, rules and regulations (including obtaining all permits and licenses) applicable to the mode of transportation utilized by Carrier which are necessary for Carrier to provide Transportation Services for GM, and shall be responsible for complying with all applicable requirements of federal, provincial and/or local social security, unemployment compensation and tax withholding laws, and all applicable federal, provincial, state and/or local laws and regulations pertaining to (1) immigration, (2) occupational health and safety of its employees, (3) wages and hours of employment and (4) affirmative action, equal employment opportunity and employment practices, and in this connection, agrees that it will not discriminate in its employment practices due to age, sex, race, color, creed or national origin. 6 7 23. FORCE MAJEURE. Except as otherwise provided, the obligation of Carrier to furnish the Transportation Services provided for in this Agreement shall be temporarily suspended during any period(s) in which either of the parties is unable to comply with the requirements of this Agreement by reason of the acts of God or the public enemy, fire, flood, labor disorder, civil commotion, closing of the public's highway(s), government interference or regulations, or their contingencies similar or dissimilar to the foregoing beyond reasonable control of the affected party; provided that written notice of such delay (including the anticipated duration of the delay) shall be given to the other party within 10 days. 24. [* material omitted] GM retains the right to open to competitive bidding any traffic affected by CXD changes in the GM Vehicle Distribution Network. The Carrier shall be granted the last option to meet the bid submission considered to be Best in Class and retain the traffic. 25. SYSTEM REQUIREMENTS. All events must be reported into VTIMS (General Motors Vehicle Transportation Information Management System). Events include receipt, dispatch, delivery, and start of storage. Payment for each service is based on event reporting. VTIMS reporting must be completed the day the event occurs. Carrier systems must be able to electronically: (a) Receive advance shipping notices (ASN's). (b) Record receipt of vehicle and bay locations and communicate event (EV4B) to VTIMS. (c) Confirm routing based on response from VTIMS to reported EV4B. (d) Build loads to conform to operational and quality guidelines. (e) For rail dispatch (EV42) to VTIMS, report immediately since this generates 858 waybill for the railroad. (f) For truck dispatch (EV42) to VTIMS, reporting must coincide with the truck leaving the compound. (g) Other reporting as required: 1. Vehicle on hold (EV4D) 2. Return to plant (EV4P) 3. Downloading and responding to reconsignments in VTIMS. (h) All events must be reported in "real time". (i) Reporting will be in either LU6.2 system to system protocol or on line in VTIMS via dial-up modem. (j) Limited transactions are to be communicated via batch and EDI. - ---------- * Deleted per the Company's request for confidential testament and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934. 7 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. In the presence of: Allied Automotive Group General Motors Corporation By: /s/ By: /s/ ------------------------------- ------------------------------ Title: Senior Vice President Sales Title: Director, Vehicle Logistics ---------------------------- Date: December 4, 1998 Date: 12/11/98 ---------------------------- ----------------------------- Witness: Witness: /s/ /s/ - ---------------------------------- ---------------------------------- 8 9 EXHIBIT 1 GM NAO Logistics General Motors Corporation (LOGO) 4th Prior Avenue 3044 West Grand Boulevard Detroit, Michigan 48202 ALLIED HOLDINGS INC. CONTRACT OFFER Re: ACD ACQUISITION Three-year contract; Effective with signing contract, the following provisions will apply: 1. Protects all current U.S. and Canadian business between Ryder and General Motors except [* material omitted] 2. Economics of [* material omitted] of current rates on Protected Business except: [* material omitted] 3. Economics on [* material omitted] will be to current rates over the 3-year contract. 4. Western Vehicle Distribution Centers: . Protected Business: [* material omitted] all with [* material omitted] to current rates . Unprotected Business U.S. Vehicle Distribution Centers of [* material omitted]; GM will Market Test 5. [* material omitted] 6. [* material omitted] 7. Allied agrees to maintain current GM Standards during transition to GM new contract requirements for Quality, Operations, Payment and Technology as provided in all current RFQ's. GM and Allied will establish an implementation plan for transition by location over the 3-year term of contract. 8. Allied to maintain a Detroit presence with decision making authority. 9. General Motors will work with Allied to use Axis for expansion of business opportunity in North America and Internationally where appropriate. 10. Allied will use its best efforts to source purchases from minority suppliers totaling approximately [* material omitted] annually over the 3-year contract. /s/ Michael E. MacDonald A. Mitchell Poole, Jr. ---------------------------- ---------------------------- Michael E. MacDonald A. Mitchell Poole, Jr. Signed: General Motors Corp. Signed: Allied Holdings Inc. - ---------- * Deleted per the Company's request for confidential testament and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934. 10 APPENDICES ALLIED RATE RETENTION MATRIX [* material omitted] - ---------- * Deleted per the Company's request for confidential testament and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934. EX-21.1 3 LIST OF SUBSIDIARY CORPORATIONS. 1 EXHIBIT 21.1 The subsidiaries of Allied Holdings, Inc. and the place of incorporation or organization are as follows: Allied Automotive Group, Inc. - Georgia Allied Industries Inc. - Georgia Haul Risk Management Services, Inc. - Georgia Link Information Systems, Inc. - Georgia Allied Southwoods, Inc. - Georgia Axis Group, Inc. - Georgia Allied Systems, Ltd. - Georgia Inter Mobile, Inc. - Georgia Legion Transportation, Inc. - Georgia Automotive Transport Services, Inc. - Georgia Allied Systems (Canada) Company - Nova Scotia Axis International, Inc. - Georgia Axis Truck Leasing, Inc. - Georgia Axis North America, Inc. - Georgia Kar-Tainer International, Inc. - Florida Canadian Acquisition Corp. - Georgia RC Management Corp. - Delaware GACS Incorporated - Florida Allied Freight Broker, Inc. - Virginia QAT, Inc. - Florida OSCHO, Inc. - Florida Terminal Service Co. - Washington F.J. Boutell Driveaway Co., Inc. - Michigan RMX, Inc. - Delaware Transport Support, Inc. - Delaware Commercial Carriers, Inc. - Michigan B&C, Inc. - Michigan Haul Insurance Limited - Cayman Islands AH Industries, Inc. - Canada Kar-Tainer International Limited - Bermuda Axis Netherlands, LLC - Netherlands Axis Netherlands, C.V. - Netherlands Axis do Brasil Ltda. - Brazil Axis Holdings Ltda. - Brazil Axis Areta, LLC - Mexico Areta SRL - Mexico 1 EX-23.1 4 CONSENT OF ARTHUR ANDERSEN LLP. 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 8, 1999, appearing on pages F-1 and S-1 of this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-76108, 33-90892, 333-3020, 333-37113, and 333-72053. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia March 26, 1999 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ALLIED HOLDINGS, INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 21,977 23,323 103,968 0 6,788 195,759 297,530 0 621,627 145,730 0 0 0 0 62,853 621,627 1,026,799 1,026,799 988,919 988,919 0 0 26,146 15,004 6,527 8,477 0 0 0 8,477 1.09 1.08
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