Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages of operating expenses and other items to operating
revenue:
1998 1997 1996
------------------------
Operating revenue 100.0% 100.0% 100.0%
Operating expenses and costs
Salaries, wages and benefits 61.0% 60.8% 60.9%
Operating supplies and expenses 8.0% 8.6% 8.2%
Operating taxes and licenses 4.2% 4.1% 4.4%
Insurance 3.2% 3.0% 3.7%
Communications and utilities 1.8% 1.7% 1.9%
Depreciation and amortization 5.7% 6.0% 6.4%
Rents and purchased transportation 5.9% 6.4% 6.2%
Other 4.1% 4.2% 4.6%
------------------------
Total operating
expenses and costs 93.9% 94.8% 96.3%
------------------------
Operating income 6.1% 5.2% 3.7%
Interest expense 1.6% 1.9% 2.0%
Other income, net 0.2% 0.1% 0.1%
------------------------
Income before income taxes 4.7% 3.4% 1.8%
Income taxes 1.9% 1.3% 0.7%
------------------------
Net income 2.8% 2.1% 1.1%
========================
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
- ---------------------
Operating Revenue
- -----------------
Operating revenue for 1998 was $986,286,000, up 13.3%, compared to
$870,319,000 for 1997. The growth in operating revenue was
primarily the result of increased tonnage from new and existing
customers and increased revenue per hundred weight.
Tonnage handled by the Company during 1998 increased 9.2% over
levels handled during 1997. This increase in tonnage was mainly a
result of the following:
- - Effective January 1, 1998, the Company increased its all-points
coverage to 28 states with the addition of the state of Michigan.
- - The Company continued to increase its market penetration into
existing service territories, particularly those geographic areas
added during 1995, 1996 and 1997. During 1995, the Company
expanded its all-points coverage to the states of Colorado,
Florida, Iowa, Nebraska, North Carolina, South Carolina
and Wisconsin. 1996 expansions included the states of Delaware,
Maryland, Minnesota, Virginia and West Virginia. Effective August
4, 1997, all-points coverage was added to the state of New Mexico.
- - The continued increase in intrastate tonnage following the
deregulation of intrastate commerce effective January 1, 1995.
- - Freight volumes handled with marketing partners in Alaska,
Canada, Guam, Hawaii, Mexico and Puerto Rico continued to increase
at a rapid pace. The initial marketing partnership commenced in
1996 with service to Canada and Mexico. Puerto Rico was added in
1997, with service to Alaska, Guam, and Hawaii added in 1998.
Revenue per hundred weight for 1998 was up 3.6% from levels
experienced in 1997. Factors most impacting revenue per hundred
weight were:
- - General rate increases of approximately 5.5% and 5.5% to 5.9%,
effective January 1, 1998 and November 1, 1998, respectively. The
increases applied to the Company's interstate and intrastate common
carrier freight rates published in its 5000 series tariff. The
Company derives approximately 50% of its revenue from the 5000
tariff. The remaining revenue is derived from contracts and
guarantees, which are negotiated throughout the year.
- - A fuel surcharge, included in revenue, was in effect during
1997, but not in effect for the majority of 1998. The Company
initiated a fuel surcharge, in effect from September 16, 1996 until
January 7, 1998, to help recover the increased costs of fuel. This
surcharge is tied to the Department of Energy's National Diesel
Fuel Index and ranged from 0.7% to 1.6% during the time it was in
effect. The surcharge was designed to suspend at the time this
national index moved below $1.15 per gallon.
Management expects that growth in operating revenue is sustainable
in the near term. The major focus for growth in operating revenue
in the near term will be further penetration of existing markets.
In addition, on April 19, 1999, the Company will increase its
direct, all-points coverage to 30 states with the addition of
Pennsylvania and New Jersey.
Operating Expenses
- ------------------
Operating expenses as a percentage of operating revenue improved to
93.9% in 1998 from 94.8% in 1997. This overall improvement was
primarily attributable to:
- - Operating supplies and expenses as a percentage of operating
revenue improved to 8.0% in 1998 from 8.6% in 1997. This
improvement primarily relates to lower diesel prices, which is
partially offset by increased maintenance costs of equipment and
facilities. Management expects that maintenance costs will
continue to gradually increase as the Company's fleet ages.
- - Depreciation as a percentage of operating revenue improved to
5.7% in 1998 from 6.0% in 1997. This improvement was largely due
to the increased usage of operating lease financing of revenue
equipment. Depreciation expense for 1998 was also reduced by a
gain of approximately $965,000 recognized on revenue equipment
disposals and recorded as a reduction of depreciation expense.
- - Rents and purchased transportation as a percentage of operating
revenue improved to 5.9% in 1998 from 6.4% in 1997. The
improvement was a result of three principal reasons: 1) Short-term
transportation equipment rental declined as compared with 1997.
The August 1997 strike by the International Brotherhood of
Teamsters against United Parcel Service created an increase in
freight volumes resulting in a temporary need for additional
equipment. 2) During the third quarter of 1998 the Company
decreased its utilization of owner operators in its pick up and
delivery operations, and 3) the Company's usage of purchased
transportation in selected line haul lanes has declined in relation
to overall mileage. These improvements were partially offset by
increased usage of operating lease financing. Management expects
rents and purchased transportation as a percentage of operating
revenue to remain at current levels. The amount of rent expense,
will however, be significantly impacted by future decisions as to
the use of operating lease financing. Those decisions will be
dependent upon the overall costs of ownership versus lease
financing available at the time of asset additions.
Improvements in operating expenses as a percentage of operating
revenue were partially offset by an increase in the following area:
- - Salaries, wages and benefits as a percentage of operating
revenue increased to 61.0% in 1998 from 60.8% in 1997. This
increase was largely the result of significantly increased costs in
the areas of workmen's compensation and health care. The increase
was partially offset by improvements made in salaries and wages
resulting from ongoing educational programs and changes in
operations providing productivity gains in the form of improved
pickup and delivery density, increased line haul load factor and
more direct line haul schedules.
Other
- -----
Interest expense as a percentage of operating revenue decreased to
1.6% in 1998, compared to 1.9% in 1997. This improvement is
primarily the result of lower interest rates during 1998, as well
as 1998 debt levels that were relatively constant as compared with
an increased revenue base.
The effective tax rate of the Company was 40.6% for 1998, up from
39.2% for 1997. This increase was primarily due to higher federal
tax rates applied to the increased level of 1998 taxable income.
The increased federal tax was partially offset by reduced state tax
expenses from state incentives on Company business expansions. Net
income for 1998 was $27,501,000, up 54.5%, from $17,801,000 for
1997.
1997 Compared to 1996
- ---------------------
Operating Revenue
- -----------------
Operating revenue for 1997 was $870,319,000, up 19.4%, compared to
$729,042,000 for 1996. The growth in operating revenue was
primarily the result of increased revenue per hundred weight and
increased tonnage from new and existing customers.
Revenue per hundred weight for 1997 was up 6.8% from levels
experienced in 1996. Factors contributing to the increase in
revenue per hundred weight were:
- - A general rate increase of approximately 5.9% effective January
1, 1997. General rate increases initially affect approximately 45%
of the Company's customers. The remaining customers' rates are
determined by contracts and guarantees and are negotiated
throughout the year.
- - The Company initiated a fuel surcharge beginning September 16,
1996 to help recover the increased costs of fuel. This surcharge
is tied to the Department of Energy's National Diesel Fuel Index
and was 0.7% for LTL shipments as of December 31, 1997. The
surcharge is designed to suspend at the time this national index
moves below $1.15 per gallon. Effective January 7, 1998, the fuel
surcharge was suspended.
- - The percentage of the Company's total revenue that was derived
from truckload shipments (greater than 10,000 pounds) declined to
5.7% during 1997 as compared to 6.7% during 1996.
Tonnage handled by the Company during 1997 increased 11.7% over
levels handled during 1996. This increase in tonnage was mainly a
result of the following:
- - The Company continued to increase its market penetration into
existing service territories, particularly those geographic areas
added during 1995 and 1996. During 1995, the Company expanded its
all-points coverage to the states of Colorado, Florida, Iowa,
Nebraska, North Carolina, South Carolina and Wisconsin. 1996
expansions included the states of Delaware, Maryland, Minnesota,
Virginia and West Virginia.
- - The continued increase in intrastate tonnage following the
deregulation of intrastate commerce effective January 1, 1995.
- - Effective August 4, 1997, the Company increased its all-points
coverage to 27 states with the addition of the state of New Mexico.
Operating Expenses
- ------------------
Operating expenses as a percentage of operating revenue improved to
94.8% in 1997 from 96.3% in 1996. This overall improvement was
primarily attributable to:
- - Salaries, wages and benefits as a percentage of operating
revenue improved to 60.8% in 1997 from 60.9% in 1996. This
improvement was largely the result of the increased usage of
purchased transportation. However, salaries, wages and benefits as
a percentage of operating revenue did not improve during 1997 to
the degree anticipated by management. Improvement in this area was
slower than expected principally due to the following factors: 1)
slower than anticipated productivity gains resulting from
operational changes initiated during 1996 and continued during
1997, 2) labor costs increased disproportionately in relation to
operating revenue during the strike by the International
Brotherhood of Teamsters against United Parcel Service during
August of 1997, and 3) expenses incurred during 1997 to educate the
workforce.
- - Insurance as a percentage of operating revenue decreased to 3.0%
in 1997 from 3.7% in 1996. This improvement was largely due to
improved experience involving vehicle accidents and cargo claims.
- - Depreciation as a percentage of operating revenue improved to
6.0% in 1997 from 6.4% in 1996. This improvement was largely due
to the increased usage of purchased transportation and off-balance
sheet financing of revenue equipment.
- - Other expenses as a percentage of operating revenue improved to
4.2% in 1997 from 4.6% in 1996. This improvement was mostly due to
decreased hotel costs for line haul drivers. The Company
reconfigured its line haul network during the last half of 1996.
The purpose of this reconfiguration was to place renewed emphasis
on serving the regional and intrastate markets and to improve asset
utilization. One of the benefits of this reconfiguration was that
line haul drivers were required to spend less time in hotels.
- - Operating taxes and licenses as a percentage of operating
revenue improved to 4.1% in 1997 from 4.4% in 1996. There were two
primary reasons for this improvement. The first was fuel tax
expense as a percent of operating revenue decreased because of the
increased utilization of purchased transportation. The second
reason was that the line haul reconfiguration, coupled with the
increased usage of purchased transportation, required few additions
to the fleet during 1997. Therefore, licensing expenses declined
as a percentage of operating revenue.
These improvements in operating expenses as a percentage of
operating revenue were partially offset by increases in the
following areas:
- - Operating supplies and expenses as a percentage of operating
revenue increased to 8.6% in 1997 from 8.2% in 1996. This increase
primarily relates to increased maintenance costs of equipment and
facilities. Fuel expenses as a percentage of operating revenue
declined moderately during 1997 as compared to 1996 due to overall
lower diesel prices and the increased use of purchased
transportation during 1997.
- - Rents and purchased transportation as a percentage of operating
revenue increased to 6.4% in 1997 from 6.2% in 1996. This increase
was primarily a result of the utilization of purchased
transportation in selected lanes in order to improve asset
utilization and decrease overall costs of operations.
Other
- ---------
Interest expense as a percentage of operating revenue decreased to
1.9% in 1997, compared to 2.0% in 1996.
The effective tax rate of the Company was 39.2% for 1997, up from
38.6% for 1996. This increase was mostly due to increased federal
tax rates on higher levels of income. Net income for 1997 was
$17,801,000, up 126.6%, from $7,856,000 for 1996.
LIQUIDITY AND CAPITAL RESOURCES
Capital requirements during 1998 consisted of $91,170,000 in
investing activities. The Company invested $94,392,000 in capital
expenditures during 1998 comprised of $26,959,000 in additional
revenue equipment, $43,776,000 in new customer center facilities or
the expansion of existing facilities and $23,657,000 in other
equipment. Management expects capital expenditures for the full
year of 1999 will be $100,000,000, primarily due to anticipated
investments in new and existing customer center facilities.
However, the actual amount of capital expenditures required in 1999
will be dependent on the growth rate
of the Company, the timing and
size of future expansions of service territory, and progress in
site selection and construction of several customer center
projects. At December 31, 1998, the Company had commitments for
land, customer centers, revenue and other equipment of
approximately $45,149,000.
The Company provided for its capital resource requirements in 1998
with cash from operations and financing activities. Cash from
operations totaled $87,720,000 during 1998 compared to $76,284,000
provided by operations during 1997. Financing activities augmented
cash flow by $4,969,000 in 1998, utilizing two primary sources of
credit financing; the revolving line of credit and the Master Shelf
facility.
- - The Company experiences periodic cash flow fluctuations common
to the industry. Cash outflows are heaviest during the first part
of any given year while cash inflows are normally weighted towards
the last two quarters of the year. To smooth these fluctuations
and to provide flexibility to fund future growth, the Company
utilizes a variable-rate, unsecured revolving line of credit of
$160,000,000 provided by Bank of America (agent), Chase Bank of
Texas, N.A., Wachovia Bank, N.A., ABN-AMRO Bank N.V. and Bank One.
At December 31, 1998, $70,000,000 was outstanding on the revolving
line of credit, leaving $90,000,000 available for borrowing. The
Company also had $3,024,000 available under its short-term,
unsecured revolving $15,000,000 line of credit with Bank of
America. This line of credit is also used to obtain letters of
credit required for its self-insurance program. At December 31,
1998, the Company had borrowings on the line of credit outstanding
of $8,000,000 and had obtained letters of credit totaling
$3,976,000 for this purpose.
- - To assist in financing longer-lived assets, the Company has an
uncommitted Master Shelf Agreement with the Prudential Insurance
Company of America which provides for the issuance of up to
$140,000,000 in medium to long-term unsecured notes at an interest
rate calculated at issuance. At December 31, 1998, the Company had
$125,250,000 outstanding under this facility.
Management expects that the Company's existing working capital and
its available lines of credit are sufficient to meet the Company's
commitments as of December 31, 1998, and to fund current operating
and capital needs. However, if additional financing is required,
management believes it will be available.
The Company uses off-balance sheet financing in the form of
operating leases primarily in the following areas; land and
structures, revenue equipment and other equipment. At December 31,
1998, future rental commitments on operating leases were
$113,359,000 (See Note 6 of the Notes to Consolidated Financial
Statements). The Company prefers to utilize operating leases for
these areas and plans to use them in the future when such financing
is available and suitable.
YEAR 2000 ISSUES
The Company recognizes the Year 2000 problem and has developed a
Board of Director sponsored Project Plan that identifies all date
related issues relating to the Company's Information Technology
(IT) applications, end user supported applications, IT
infrastructure, embedded devices and business partners. At year-
end 1998, all application modifications and infrastructure upgrades
were completed with the exception of modifications required of
certain document scanning systems. Completion of the plan for this
application is expected by September 30, 1999. Final testing and
production implementation of all other applications is expected to
be completed by June 30, 1999. The Company's mission critical
systems, written in-house, are already Year 2000 ready. At
December 31, 1998, Year 2000 ready upgrades were installed for all
purchased software. The costs incurred specifically to address
Year 2000 readiness have not been and are not expected to become
material to the Company because many of the systems did not require
significant modifications to make them Year 2000 ready, were
replaced for other business reasons or were already Year 2000
ready.
The Company has initiated discussions with its significant
customers and suppliers to determine the extent to which the
Company's interface systems would be vulnerable to those third
parties' failure to remediate their own Year 2000 issues. The
Company has not received written assurances from its significant
customers and suppliers that their systems will be timely converted
and would not have an adverse effect on the Company's systems. It
is not possible at this time to quantify the amount of business
that might be lost or the costs that could be incurred by the
Company as a result of the Company's significant customers' and
suppliers' failure to remediate their Year 2000 Issues.
To date, the Company has not established a contingency plan for
possible Year 2000 issues. The Company will establish, where
needed, contingency plans based on our actual testing experience.
While the Company believes its efforts to address the Year 2000
Issue will be successful in avoiding any material adverse effect on
the Company's operations, it recognizes that failure to resolve
Year 2000 Issues on a timely basis could significantly limit its
ability to process its daily business transactions for a period of
time, especially if such failure is coupled with third party or
infrastructure failures. Similarly, the Company could be
significantly affected by the failure of one or more significant
business partners or components of the infrastructure to conduct
their respective operations after 1999. Adverse effects could
include, but are not limited to, loss of communication links with
customer centers, inability to process transactions, or engage in
similar normal business activities.
The foregoing statements regarding the Company's state of
readiness, costs of conversion, risks and contingency plans for
Year 2000 are based on management's current estimates and
evaluations using available information. There can be no
assurances that management's estimates and evaluations will prove
to be accurate, and actual results could differ materially from
those currently anticipated. Factors which might cause material
changes include, but are not limited to, the availability of Year
2000 personnel, the readiness of third parties and the Company's
ability to respond to unforeseen Year 2000 complications.
MARKET RISK
Market risks relating to the Company's operations result primarily
from changes in interest rates. The Company does not use financial
instruments for trading purposes and is not a party to any
derivatives. The following table provides information about the
Company's financial instruments that are sensitive to changes in
interest rates. The table presents the Company's debt obligations,
principal cash flows, related weighted-average interest rates by
expected maturity dates and fair values.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
FAIR
(DOLLARS IN THOUSANDS) THERE- VALUE
1999 2000 2001 2002 2003 AFTER TOTAL 12/31/98
- -------------------------------------------------------------------------------------------
Liabilities
Long-term Debt, Including Current Portion
Fixed Rate $11,679 $12,974 $14,700 $12,666 $12,625 $83,150 $147,794 $161,923
Avg. Interest Rate 7.88% 7.91% 7.92% 7.90% 7.93% 8.09%
Variable Rate $ 8,000 $ - $ - $ - $70,000 $ - $ 78,000 $ 78,000
Avg. Interest Rate 5.68% 5.76% 5.66% 5.68% 5.70%
- -------------------------------------------------------------------------------------------
ENVIRONMENTAL
At December 31, 1998, the Company had no outstanding inquiries with
any state or federal environmental agency.
INFLATION
Most of the Company's expenses are sensitive to inflation as
increases in inflation generally result in increased costs. The
effect of inflation on the operating results of the Company was
minimal during 1998.
SEASONALITY
In the trucking industry, results of operations show a seasonal
pattern because customers reduce shipments during winter months.
In addition, the Company's operating expenses as a percentage of
operating revenues have historically been higher during the winter.
RECENT EVENTS
On January 11, 1999, the Company announced that on April 19, 1999,
it will increase its direct, all-points coverage to 30 states with
the addition of Pennsylvania and New Jersey. Intrastate, regional
and interregional service will be provided by the opening of eleven
customer centers.
American Freightways Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Per Share Data)
DECEMBER 31
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents (Note 10) $ 3,274 $ 1,755
Trade receivables, less allowance for
doubtful accounts (1998--$1,937,
1997--$1,774) 94,464 78,700
Operating supplies and inventories 4,139 2,882
Prepaid expenses 11,318 8,671
Deferred income taxes (Note 4) 19,089 13,306
Income taxes receivable 2,763 1
-------- --------
Total current assets 135,047 105,315
Property and equipment (Notes 3 and 6):
Land and structures 214,061 186,033
Revenue equipment 389,867 374,982
Service, office and other equipment 136,160 114,075
Land improvements 3,600 2,973
Construction in progress 34,017 21,113
Accumulated depreciation
and amortization (272,960) (230,870)
-------- --------
504,745 468,306
Other assets:
Bond funds (Notes 3 and 10) 896 878
Other 1,373 1,074
-------- --------
2,269 1,952
-------- --------
$642,061 $575,573
======== ========
DECEMBER 31
1998 1997
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 16,766 $ 12,910
Accrued expenses (Note 2) 70,809 54,114
Current portion of long-term debt 19,679 11,497
-------- --------
Total current liabilities 107,254 78,521
Long-term debt, less current portion
(Notes 3 and 10) 206,115 210,411
Deferred income taxes (Note 4) 72,678 59,225
Shareholders' equity (Notes 3, 5, 7 and 8):
Common stock, par value $.01 per share;
authorized 250,000 shares; issued and
outstanding 31,695 shares in 1998 and
31,568 in 1997 317 316
Additional paid-in capital 106,053 104,832
Retained earnings 149,769 122,268
Treasury stock, at cost; 15 shares in
1998 and 0 in 1997 (125) -
-------- --------
256,014 227,416
Commitments (Note 6)
-------- --------
$642,061 $575,573
======== ========
See accompanying notes.
American Freightways Corporation and Subsidiaries
Consolidated Statements of Income
(In Thousands Except Per Share Data)
YEAR ENDED DECEMBER 31
1998 1997 1996
-------- -------- --------
Operating revenue $986,286 $870,319 $729,042
Operating expenses and costs:
Salaries, wages and benefits 601,813 528,695 444,041
Operating supplies and expenses 79,219 75,085 59,640
Operating taxes and licenses 41,687 35,339 31,827
Insurance 31,964 26,327 27,113
Communications and utilities 17,361 14,907 13,822
Depreciation and amortization 55,712 52,596 46,918
Rents and purchased transportation 58,093 55,215 44,844
Other 40,227 36,899 33,728
-------- -------- --------
926,076 825,063 701,933
-------- -------- --------
Operating income 60,210 45,256 27,109
Other income (expense):
Interest expense (15,530) (16,256) (14,708)
Interest income 307 247 137 247
Gain (loss) on disposal of assets 1,203 (52) 90
Other, net 117 83 166
-------- -------- --------
(13,903) (15,978) (14,315)
-------- -------- --------
Income before income taxes 46,307 29,278 12,794
Federal and state income
taxes (Note 4):
Current (credit) 11,136 5,310 (3,093)
Deferred 7,670 6,167 8,031
-------- -------- --------
18,806 11,477 4,938
-------- -------- --------
Net income $ 27,501 $ 17,801 $ 7,856
======== ======== ========
Per share (Notes 1 and 8):
Net income-basic $ 0.87 $ 0.57 $ 0.25
Net income-assuming dilution $ 0.87 $ 0.56 $ 0.25
======== ======== ========
Average shares outstanding
(Notes 1 and 8):
Basic 31,624 31,372 31,070
Assuming dilution 31,689 31,672 31,266
======== ======== ========
See accompanying notes.
American Freightways Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
COMMON STOCK ADDITIONAL
-------------
PAR PAID-IN RETAINED TREASURY
SHARES VALUE CAPITAL EARNINGS STOCK TOTAL
-------------------------------------------------
(In Thousands)
Balances at January 1, 1996 30,931 $309 $ 98,514 $ 96,611 $ - $195,434
Stock option
and purchase plans 311 3 3,005 - - 3,008
Net income - - - 7,856 - 7,856
-------------------------------------------------
Balances at December 31, 1996 31,242 312 101,519 104,467 - 206,298
Stock option and
and purchase plans 326 4 3,313 - - 3,317
Net income - - - 17,801 - 17,801
-------------------------------------------------
Balances at December 31, 1997 31,568 316 104,832 122,268 - 227,416
Stock option
and purchase plans 127 1 1,221 - - 1,222
Purchase of 15 treasury
shares - - - - (125) (125)
Net income - - - 27,501 - 27,501
-------------------------------------------------
Balances at December 31, 1998 31,695 $317 $106,053 $149,769 $(125) $256,014
=================================================
See accompanying notes.
American Freightways Corporation and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Cash received from customers $968,497 $856,742 $714,932
Cash paid to suppliers and
employees (851,762) (763,134) (641,956)
Interest received 307 247 137
Interest paid (15,438) (15,635) (14,413)
Income taxes (paid) received (13,884) (1,936) 4,552
----------------------------
Net cash provided by operating
activities 87,720 76,284 63,252
INVESTING ACTIVITIES
Proceeds from sales of equipment 3,222 2,483 2,631
Capital expenditures (94,392) (67,880) (107,383)
-----------------------------
Net cash used by investing
activities (91,170) (65,397) (104,752)
FINANCING ACTIVITIES
Proceeds from notes payable and
long-term borrowings 45,657 55,400 78,000
Principal payments on long-term
debt (41,771) (71,731) (37,392)
Proceeds from issuance of common
stock 1,208 2,805 2,644
Purchase of treasury stock (125) - -
----------------------------
Net cash provided (used) by
financing activities 4,969 (13,526) 43,252
----------------------------
Net increase (decrease) in cash
and cash equivalents 1,519 (2,639) 1,752
Cash and cash equivalents at
beginning of year 1,755 4,394 2,642
----------------------------
Cash and cash equivalents at end
of year $ 3,274 $ 1,755 $ 4,394
============================
American Freightways Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------
(IN THOUSANDS)
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $27,501 $17,801 $ 7,856
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 55,654 52,484 46,811
Amortization 58 112 107
Provision for losses on accounts
receivable 2,142 1,633 1,721
Current tax effect of exercise of
stock options 14 27 188
(Gain) loss on sale of equipment (1,203) 52 (90)
Casualty loss on destroyed equipment 280 153 135
Deferred income taxes 7,670 6,167 8,031
Changes in operating assets and
liabilities:
Trade receivables (17,906) (13,660) (14,275)
Operating supplies and inventories (1,257) (389) (357)
Prepaid expenses (2,647) (4,023) 856
Income taxes receivable (2,762) 3,096 1,271
Other assets (375) 259 417
Trade accounts payable 3,856 3,485 (1,107)
Accrued expenses 16,695 8,836 11,688
-------------------------
Total adjustments 60,219 58,483 55,396
-------------------------
Net cash provided by operating
activities $87,720 $76,284 $63,252
=========================
See accompanying notes.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of
American Freightways Corporation and its subsidiaries
(collectively, the "Company"). All significant intercompany
accounts and transactions have been eliminated.
BUSINESS
The Company primarily operates as a regional and an interregional,
scheduled, for hire, less-than-truckload motor carrier, serving all
points in 28 contiguous states from a network of 223 customer
centers. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Historically,
credit losses have been within management's expectations.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue and direct shipment costs upon the
delivery of the related freight.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. For financial reporting
purposes, the cost of such property is depreciated principally by
the straight-line method over the estimated useful lives of 3 to 12
years for revenue and service equipment, 15 to 40 years for
structures and improvements and 3 to 10 years for furniture and
office equipment. For tax reporting purposes, accelerated
depreciation or applicable cost recovery methods are used. Gains
and losses are recognized in the year of disposal. Gains or losses
on revenue equipment are recorded as adjustments to depreciation
expense.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INSURANCE
As of December 31, 1998, the Company was generally self-insured up
to specified limits for workers compensation and cargo loss and
damage claims. In the states of Colorado, Delaware, Iowa,
Maryland, Michigan, Minnesota, Nebraska, New Mexico, Texas and
Wisconsin, however, workers' compensation claims are insured under
a $1,000,000 deductible plan. In the state of North Dakota,
workers' compensation claims are insured under the mandatory state
plan as private plans are not permitted.
General and automobile liability claims are insured with a
retention limit of $1,000,000 per occurrence, with excess coverage
on a fully insured basis providing catastrophic coverage.
INCOME TAXES
Deferred income taxes are accounted for under the liability method.
Deferred income tax assets and liabilities reflect the effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and the amounts used for income
tax purposes.
EARNINGS PER SHARE
The Company calculates earnings per common share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share" which was issued by the Financial Accounting
Standards Board in 1997. SFAS No. 128 requires the use and
disclosure of two methods for calculating earnings per share:
Earnings per share-basic is computed based on the weighted
average number of shares outstanding during each year.
Earnings per share-assuming dilution is computed based on the
weighted average number of shares outstanding during each year,
adjusted to include common stock equivalents attributable to
dilutive stock options.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per share amounts for 1996 have been restated to conform
to SFAS No. 128 requirements.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option
grants in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and
accordingly, recognizes no compensation expense for the stock
option grants.
IMPAIRMENT OF ASSETS
The Company accounts for any impairment of its long-lived assets
using SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Under SFAS
No. 121, impairment losses are recognized when information
indicates the carrying amount of long-lived assets, identifiable
intangibles and goodwill related to those assets will not be
recovered through future operations or sale.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting of Comprehensive
Income" in 1998. Because the Company had no other items of
comprehensive income, the impact of adoption was not material.
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which requires public business
enterprises to report financial and descriptive information about
its reportable segments. The Company has one business segment.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use".
Under the SOP, qualifying computer software costs are required to
be capitalized and amortized against income over the software's
estimated useful life. The SOP is effective for fiscal years
beginning after December 15, 1998. The Company does not anticipate
that the adoption of SOP 98-1 will have a material effect on
earnings or the financial position of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Statement is effective for all quarters of fiscal
years beginning after June 15, 1999 and establishes accounting and
reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability at
its fair value. The Company does not anticipate that the adoption
of SFAS No. 133 will have a material effect on earnings or the
financial position of the Company.
RECLASSIFICATIONS
Certain amounts previously reported in 1997 and 1996 have been
reclassified to conform with the 1998 presentation.
2. ACCRUED EXPENSES
1998 1997
----------------
(In Thousands)
Accrued salaries, wages and benefits $25,546 $24,476
Taxes other than income 7,098 3,910
Accident liability, cargo loss and
damage, health, and workers' 33,892 23,194
compensation claims reserves
Other 4,273 2,534
------------------
$70,809 $54,114
==================
3. LONG-TERM DEBT
1998 1997
------------------
(In Thousands)
Bonds payable (1) $ 6,360 $ 6,700
Revolving credit agreements (2) 78,000 63,000
Mortgage notes (3) 801 958
Unsecured senior notes (4) 140,250 151,250
Other-computer equipment (5) 383 -
------------------
225,794 221,908
Less current portion (19,679) (11,497)
------------------
$206,115 $210,411
==================
(1)Represents the Company's liability under a loan agreement with
Arkansas Development Finance Authority, issuer of economic
development revenue bonds to construct customer centers and a
general office facility. The loan agreement provides that the
Company will make payments sufficient to pay the principal and
interest on the bonds. The bonds include a $370,000 term bond
due in 1999 and a $5,990,000 term bond due in 2009. The bonds
bear interest at fixed rates of 8.25% and 8.50%, respectively,
and are collateralized by land and structures with a net book
value of $7,721,000 at December 31, 1998. The loan agreement
requires that certain bond service funds be maintained. As of
December 31, 1998, there was $896,000 in a debt service reserve
fund. Mandatory annual sinking fund redemption payments began
in 1995.
(2)The revolving credit agreements at December 31, 1998, include an
unsecured revolving credit agreement which provides for
available borrowings of $160,000,000. Borrowings under this
revolving credit agreement at December 31, 1998 totaled
$70,000,000. The term of this agreement extends to April 1, 2003
(unless terminated or renewed). Interest is applied to
outstanding borrowings at variable interest rates based on the
London Interbank rate or the prime rate. The weighted average
rate on outstanding borrowings at December 31, 1998 was 6.12%.
The agreement contains covenants which limit, among other
things, indebtedness, loans, investments and dividend payments,
as well as require the Company to meet certain financial tests.
The Company pays an annual commitment fee based on the unused
commitment. At December 31, 1998, the commitment fee was
0.1875%. As of December 31, 1998, the amount available for
additional borrowing under this line of credit was $90,000,000.
The Company also has $15,000,000 of available borrowings and
letters of credit at December 31, 1998, under a separate
unsecured revolving credit agreement. The terms of this
agreement provide for borrowings up to $15,000,000 at a rate of
interest agreed upon at the time of any borrowings. Borrowings
outstanding at December 31, 1998 totaled $8,000,000 with an
interest rate of 6.63%. This agreement matures March 31, 1999,
unless terminated or renewed. At December 31, 1998, the
Company had utilized this line of credit to obtain letters of
credit totaling $3,976,000.
(3)Mortgage notes are due monthly or annually to November 2003 at
an average interest rate of 8.30%. The notes are collateralized
by land and structures with a net book value of $4,452,000 at
December 31, 1998.
(4)Includes an unsecured senior note for $15,000,000 payable in
equal annual installments of $5,000,000 through November 2001.
The note bears interest at a fixed rate of 8.91% payable semi-
annually.
Also includes seven notes totaling $125,250,000; all issued
under an unsecured and uncommitted $140,000,000 Master Shelf
Agreement with the following characteristics:
OUTSTANDING INTEREST
PRINCIPAL MATURITY DATE RATE
---------------------------------------
$ 5,250,000 August 2000 6.25%
4,000,000 October 2000 6.00
6,000,000 April 2001 7.55
15,000,000 January 2005 8.85
20,000,000 June 2005 6.92
25,000,000 May 2006 7.51
50,000,000 April 2012 8.11
All notes have fixed interest rates, payable quarterly. These
note agreements contain covenants which limit, among other
things, loans, indebtedness, investments and dividend payments,
and require the Company to meet certain financial tests.
(5)Represents the Company's liability under a loan agreement with
IBM Credit Corporation. Payments are due monthly until June
2001. The note bears interest at 5.51%
Annual maturities on long-term debt are $19,679,000 in 1999,
$12,974,000 in 2000, $14,700,000 in 2001, $12,666,000 in 2002,
$82,625,000 in 2003 and $83,150,000 thereafter.
Interest costs of $1,044,000, $831,000 and $1,655,000 in 1998,
1997, and 1996, respectively, were capitalized as part of the
construction cost of certain property and equipment.
4. FEDERAL AND STATE INCOME TAXES
Significant components of the Company's deferred tax liabilities
and assets as of December 31, 1998 and 1997, respectively, are as
follows:
1998 1997
----------------
(In Thousands)
Noncurrent deferred tax liabilities:
Tax over book depreciation $74,361 $70,983
Alternative minimum tax credit carryover - (10,525)
State loss and credit carryovers (1,683) (1,233)
----------------
Net noncurrent deferred tax liabilities $72,678 $59,225
================
Current deferred tax assets:
Accrued expenses not deductible until paid $18,498 $12,826
Allowance for doubtful accounts 507 437
Revenue recognition differences 1,016 767
----------------
Total current deferred tax assets 20,021 14,030
Current deferred tax liabilities:
Prepaid expenses (932) (724)
----------------
Net current deferred tax assets $19,089 $13,306
================
The reconciliation between the effective income tax rate and the
statutory federal income tax rate is presented in the following
table:
1998 1997 1996
-----------------------
(In Thousands)
Income tax at the statutory federal
rate of 35% $16,207 $10,247 $ 4,478
Federal income tax effects of:
State income taxes (666) (552) (280)
Nondeductible expenses 480 405 340
Effects of rates on taxable income
above (below) $15,000,000 882 (150) (400)
Other - (49) -
-----------------------
Federal income taxes 16,903 9,901 4,138
State income taxes 1,903 1,576 800
-----------------------
$18,806 $11,477 $ 4,938
=======================
Effective income tax rate 40.6% 39.2% 38.6%
=======================
Tax benefits of stock option and purchase plans recorded as paid-in
capital and which did not reduce income tax expense amounted to
$14,000, $512,000 and $364,000 in 1998, 1997 and 1996,
respectively.
5. EMPLOYEE BENEFIT AND COMPENSATION PLANS
STOCK PURCHASE PLAN
The Company maintains a stock purchase plan covering substantially
all employees of the Company. A total of 487,454 shares of common
stock remain reserved for issuance under this plan at December 31,
1998. Each year, an eligible employee can purchase the greater of
200 shares or $1,200 of stock. The price per share is 85% of the
lower of the fair market value at the date of grant or the date of
exercise, which is one year from the date of grant.
Shares have been issued during 1996, 1997 and 1998 as follows:
NUMBER OF PER SHARE
ISSUE DATE SHARES EXERCISE
ISSUED PRICE
- --------------------------------------------------------
April 30, 1996 90,284 $12.86
October 31, 1996 100,622 8.39
April 30, 1997 71,557 12.01
October 31, 1997 87,397 8.29
April 30, 1998 59,297 10.20
October 31, 1998 70,318 7.23
During 1998 employees enrolled for options to purchase 224,321
shares under the plan. In accordance with plan provisions, the
shares must be purchased during 1999.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The 1993 Stock Option Plan provides for the issuance of qualified
or nonqualified options to purchase common stock of the Company,
and the awarding of stock appreciation rights payable in shares or
cash. The stock appreciation rights currently outstanding were
issued in 1993 and are payable only in cash. No option or right may
be issued for less than the fair market value of the stock on the
date of grant. The options and rights vest over a five year period
from the date of grant and will expire if not exercised after ten
years from the date of grant. The Company also reserves shares for
issuance under the Chairman Stock Option Plan and the Nonemployee
Director Stock Option Plans.
Collective activity within the plans is summarized as follows:
STOCK SHARES WEIGHTED
APPRECIATION UNDER AVERAGE
RIGHTS OPTION PRICE RANGE PRICE
---------------------------------------------
Outstanding at January 1, 1996 138,290 1,497,780 $ 3.00 -$22.13 $12.86
Granted - 309,000 10.32 - 10.47 15.69
Exercised (3,660) (140,210) 4.25 - 13.07 6.46
Canceled (11,580) (100,800) 6.32 - 21.38 13.66
---------------------------------------------
Outstanding at December 31, 1996 123,050 1,565,770 3.00 - 22.13 12.93
Granted - 414,200 11.00 - 15.94 11.16
Exercised (20,940) (176,340) 3.00 - 17.88 8.36
Canceled (11,460) (204,460) 6.31 - 21.38 12.92
---------------------------------------------
Outstanding at December 31, 1997 90,650 1,599,170 3.00 - 22.13 13.06
Granted - 515,550 9.69 - 11.31 10.12
Exercised - (13,080) 6.31 - 7.63 7.50
Canceled (3,600) (93,850) 6.31 - 22.13 12.58
---------------------------------------------
Outstanding at December 31, 1998 87,050 2,007,789 $ 3.00 -$22.13 $12.33
=============================================
The following table summarizes information concerning currently
outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED
RANGE OF AVERAGE WEIGHTED WEIGHTED
EXERCISE NUMBER REMAINIING AVERAGE AVERAGE
PRICES OUTSTANDING LIFE EXERCISE NUMBER EXERCISE
(YEARS) PRICE EXERCISABLE PRICE
- ----------------------------------------------------------------------------
$3-$5 18,000 0.3 $ 3.00 18,000 $ 3.00
$5-$10 195,280 5.0 8.26 115,280 7.27
$10-$15 1,505,320 6.1 11.54 725,267 12.64
$15-$20 127,410 5.3 17.77 96,477 17.84
Greater than $20 161,780 5.5 21.38 96,060 21.38
------------------ ---------
Total 2,007,790 5.8 1,051,084
================== =========
The number of shares of common stock reserved for granting future
options under these plans was 864,870, 1,460,950 and 1,686,770, at
December 31, 1998, 1997, and 1996, respectively. At December 31,
1998, options were exercisable to purchase 1,051,084 shares.
There was no benefit or expense related to the change in value of
stock appreciation rights for 1998, 1997 or 1996.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations in accounting for
its stock option plans and, accordingly, does not recognize
compensation expense. If the Company had elected to recognize
compensation expense based on the fair value of options granted at
grant date as prescribed by SFAS No. 123, "Accounting for Stock-
Based Compensation", net income and earnings per share-assuming
dilution would have been reduced to the pro forma amounts indicated
in the table below:
(in thousands except per share amounts) 1998 1997 1996
---------------------------
Net income - as reported $27,501 $17,801 $ 7,856
Net income - pro forma 26,219 16,951 6,799
Earnings per share-assuming dilution
- as reported 0.87 0.56 0.25
Earnings per share-assuming dilution
- pro forma $ 0.83 $ 0.54 $ 0.22
The pro forma effect on net income for the years presented is not
representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995.
The fair value of options was estimated as of the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
1998 1997 1996
Option Purchase Option Purchase Option Purchase
Plans Plans Plans Plans Plans Plans
-------------------------------------------------------
Expected dividend yield 0% 0% 0% 0% 0% 0%
Expected stock price
volatility 33.8% 38.5% 29.8% 34.9% 26.9% 30.6%
Risk-free interest rate 5.62% 4.63% 6.06% 5.69% 5.42% 5.54%
Expected life of options 4.3 years 1 year 4.4 years 1 year 4.4 years 1 year
Weighted average
value per option $3.68 $2.58 $3.87 $3.65 $3.29 $2.84
RETIREMENT PLAN
The Company maintains a profit sharing plan for the benefit of all
eligible employees. The plan qualifies under Section 401(k) of the
Internal Revenue Code thereby allowing eligible employees to make
tax deferred contributions to the plan. The plan permits, at the
discretion of the Board of Directors, elective and matching
employer contributions. During 1998, the Company made elective
contributions of 2 1/2% of each eligible participant's compensation,
in addition to a 25% match of the first 6% of compensation
contributed by participants. The Company's contributions to the
plan totaled $12,717,000, $10,786,000 and $8,313,000 for 1998, 1997
and 1996, respectively.
6. LEASES AND COMMITMENTS
Rent expense, exclusive of amounts related to purchased
transportation, totaled approximately $31,324,000 for 1998,
$25,054,000 for 1997 and $26,118,000 for 1996. The future minimum
rental commitments under noncancelable operating leases having
initial or remaining terms in excess of one year as of December 31,
1998 are as follows:
REVENUE OTHER
TOTAL STRUCTURES EQUIPMENT EQUIPMENT
---------------------------------------
(In Thousands)
1999 $ 31,716 $ 5,189 $ 14,316 $ 12,211
2000 29,903 2,887 14,316 12,700
2001 19,148 1,796 13,539 3,813
2002 15,297 1,303 13,787 207
2003 10,117 713 9,404 -
Thereafter 7,178 1,653 5,525 -
---------------------------------------
$113,359 $ 13,541 $ 70,887 $ 28,931
=======================================
Certain leases have renewal options for periods from one to five
years at the fair rental value of the related property at renewal.
Certain of the lease agreements contain fixed price purchase
options. The lease agreements require the lessee to pay property
taxes, maintenance and operating expenses.
Commitments for land, customer centers and revenue equipment
(including the cost to complete construction in progress)
aggregated approximately $45,149,000 at December 31, 1998.
7. COMMON STOCK
On August 17, 1998, the Company declared a dividend of one common
share purchase right ("Right") for each outstanding share of common
stock, ("Common Shares") of the Company at August 31, 1998 and
generally to shares issuable after that date. The Rights are not
currently exercisable and will automatically trade with the common
stock. However, if a person or group acquires more than 15% of the
Common Shares or announces a tender or exchange offer for more than
15% of the Common Shares, the Rights will become exercisable and
each right holder (other than the prospective acquiror) may use the
Rights to purchase $25 worth of Common Shares at one half of the
then market price. The Rights will expire on August 17, 2003,
unless extended or earlier redeemed.
8. EARNINGS PER SHARE
Net income for purposes of basic earnings per share and earnings
per share-assuming dilution was $27,501,000, $17,801,000 and
$7,856,000 for the years 1998, 1997 and 1996, respectively. A
reconciliation of average shares outstanding for both computations
is presented below:
1998 1997 1996
---------------------
(In Thousands)
Average shares outstanding-basic 31,624 31,372 31,070
Effect of dilutive stock options 65 300 196
----------------------
Average shares outstanding-assuming dilution 31,689 31,672 31,266
======================
Antidilutive stock options are not included in the earnings per
share calculation. Average antidilutive options were 1,545,000,
489,000 and 921,000 for 1998, 1997 and 1996, respectively.
9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations
for the years ended December 31, 1998 and 1997:
THREE MONTHS ENDED
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
--------------------------------------
(In Thousands, Except Per Share Data)
1998
Operating revenue $230,649 $246,402 $254,047 $255,188
Operating expenses and costs 221,344 230,515 236,835 237,382
Net income 3,172 7,658 8,191 8,480
Net income per share:
Basic .10 .24 .26 .27
Assuming dilution $ .10 $ .24 $ .26 $ .27
Average shares outstanding:
Basic 31,568 31,612 31,639 31,679
Assuming dilution 31,625 31,752 31,670 31,710
THREE MONTHS ENDED
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
--------------------------------------
(In Thousands, Except Per Share Data)
1997
Operating revenue $193,051 $219,088 $233,760 $224,419
Operating expenses and costs 186,649 203,516 216,775 218,122
Net income 1,458 6,986 7,895 1,462
Net income per share:
Basic .05 .22 .25 .05
Assuming dilution $ .05 $ .22 $ .25 $ .05
Average shares outstanding:
Basic 31,258 31,301 31,414 31,515
Assuming dilution 31,490 31,597 31,811 31,790
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents - the carrying amount reported in the
consolidated balance sheets for cash and cash equivalents
approximates fair value.
Bond funds - the Company's debt service reserve fund is invested in
money market funds and the carrying amount reported in the
consolidated balance sheets for bond funds approximates fair value.
Long-term debt - the fair values of the Company's long-term debt
are estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements.
The carrying amounts and fair values of the Company's financial
instruments at December 31 are as follows (in thousands):
CARRYING FAIR
AMOUNT VALUE
----------------------
1998
Cash and cash equivalents $ 3,274 $ 3,274
Bond funds 896 896
Long-term debt 225,794 239,923
1997
Cash and cash equivalents $ 1,755 $ 1,755
Bond funds 878 878
Long-term debt 221,908 232,777
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
American Freightways Corporation
We have audited the accompanying consolidated balance sheets of
American Freightways Corporation and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of
income, shareholders' 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of American Freightways Corporation and
subsidiaries at December 31, 1998 and 1997, and the consolidated
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.
/s/Ernst & Young LLP
Little Rock, Arkansas
January 20, 1999