EXHIBIT 99.2
Consolidated Financial Statements
Carolina Freight Corporation *
December 31, 1994 and 1993 with
Report of Independent Public Accountants
* Shareholders of Carolina Freight Corporation approved a name change to
WorldWay Corporation in April 1995.
CONSOLIDATED BALANCE SHEETS
Carolina Freight Corporation
December 31,
----------------------
(Dollars in thousands) 1994 1993
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ASSETS
Current Assets:
Cash $ 4,710 $ 6,502
Temporary investments 5,011 -
Investments restricted under letter of credit
arrangements (at cost, which approximates market) 1,383 1,370
Customer and interline receivables, net 16,924 10,091
Customer receivables held by trust, net 38,782 35,787
Other receivables, net 13,260 6,985
Reinsurance balances receivable 12,149 13,815
Prepayments -
Tires on equipment in use 12,869 13,632
Other 6,871 5,755
Inventories of operating supplies 2,882 2,869
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Total current assets 114,841 96,806
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Plant and Equipment, at cost:
Revenue and service equipment 260,378 267,112
Land and structures 180,706 179,220
Other equipment 63,947 57,356
Leasehold improvements 2,048 1,512
- -------------------------------------------------------------------------------
507,079 505,200
Less - Accumulated depreciation and amortization (275,145) (258,772)
- -------------------------------------------------------------------------------
Net plant and equipment 231,934 246,428
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Investments restricted under letter of credit
arrangements (at cost, which approximates market) 8,492 8,799
Other Assets 15,047 11,905
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$ 370,314 $ 363,938
===============================================================================
December 31,
------------------
(Dollars in thousands, except share data) 1994 1993
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 34,525 $ 33,266
Accrued wages, salaries and vacation pay 36,114 34,191
Claims and insurance accruals 31,860 33,084
Income taxes
Current 1,439 522
Deferred -- --
Other payables and accrued expenses 13,779 11,496
Current maturities of long-term debt 3,206 5,494
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Total current liabilities 120,923 118,053
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Long-Term Debt:
6.25% Convertible Subordinated Debentures, Due 2011 49,994 49,994
Other long-term debt 18,283 21,182
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Total long-term debt 68,277 71,176
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Reserves and Deferred Credits:
Income taxes 17,779 15,168
Other deferred liabilities 7,813 8,211
Insurance claims 27,176 29,718
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Total reserves and deferred credits 52,768 53,097
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Leases, Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $100 par value, 4% cumulative, authorized
25,000 shares, outstanding 22,112 shares 2,211 2,211
Common stock, $.50 par value, authorized 20,000,000
shares, outstanding 6,561,672 shares in 1994 and 1993 3,281 3,281
Paid-in capital 44,393 44,349
Retained earnings 78,461 71,771
- --------------------------------------------------------------------------------
Total stockholders' equity 128,346 121,612
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$370,314 $363,938
================================================================================
The notes to consolidated financial statements are an integral part of these
balance sheets.
CONSOLIDATED STATEMENTS OF OPERATIONS
Carolina Freight Corporation
For the years ended December 31,
------------------------------------------
(Dollars in thousands, except share data) 1994 1993 1992
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OPERATING REVENUE $935,940 $845,350 $801,138
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OPERATING EXPENSES:
Employee compensation
Linehaul 156,790 149,514 139,474
Pickup and delivery 145,356 141,033 134,257
Platform and terminal 188,489 181,192 169,370
Other 73,960 66,388 62,894
- ---------------------------------------------------------------------------------------------------------
Total employee compensation 564,595 538,127 505,995
Fuel and fuel taxes 46,611 43,364 41,035
Tires, repair parts and other operating expenses 43,482 39,523 35,524
Operating taxes and licenses 12,610 12,352 11,962
Insurance premiums and claims 24,103 24,386 26,413
Communications and utilities 11,825 11,185 11,545
Depreciation and amortization, net of gain
(loss) on disposition of operating assets
{1994-($15); 1993-$3,222; 1992-($886)} 34,690 31,887 40,670
Purchased transportation 124,496 100,717 88,233
Equipment and building rents 5,463 5,041 5,063
General supplies and expenses 40,831 33,730 30,905
Nonrecurring charges 1,026 4,408
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Total operating expenses 909,732 840,312 801,753
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EARNINGS (LOSS) FROM OPERATIONS 26,208 5,038 (615)
- ---------------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSES):
Interest expense (6,232) (6,553) (6,565)
Interest income 764 415 509
Other expense, net (5,912) (4,229) (3,229)
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(11,380) (10,367) (9,285)
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EARNINGS (LOSS) BEFORE INCOME TAXES 14,828 (5,329) (9,900)
INCOME TAX PROVISION (BENEFIT) 6,828 (1,167) (3,712)
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Net earnings (loss) before cumulative effect
of changes in accounting principles 8,000 (4,162) (6,188)
Cumulative effect of changes in accounting principles (1,222) 9,836
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NET EARNINGS (LOSS) $ 6,778 ($ 4,162) $ 3,648
=========================================================================================================
Net earnings (loss) per share before cumulative
effect of changes in accounting principles $ 1.21 ($ .65) ($ .96)
Cumulative effect of changes in accounting principles (.19) - 1.50
- ---------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE $ 1.02 ($ .65) $ .54
=========================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Carolina Freight Corporation
For the years ended December 31,
-------------------------------------------
(Dollars in thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) for the year $ 6,778 $ (4,162) $ 3,648
Noncash items included in earnings (loss):
Depreciation and amortization 34,675 35,109 39,784
Deferred income taxes 1,095 (3,612) (3,439)
Cumulative effect of accounting principle
change on deferred tax accounts (777) - (12,203)
Net proceeds from sales of receivables - 25,000 -
Increase in customer and interline receivables (9,828) (14,445) (5,055)
Increase in accounts payable 1,259 909 7,344
Increase (decrease) in claims payable and insurance accruals (3,766) 2,500 11,331
Net increase (decrease) in other working capital items 135 2,457 (253)
Other, net (414) (3,187) (345)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,157 40,569 40,812
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of plant and equipment:
Revenue and service equipment (17,392) (17,283) (22,235)
Land and structures (4,048) (4,665) (10,152)
Other equipment and leasehold improvements (6,907) (7,354) (4,192)
Proceeds from disposal of plant and equipment 7,685 13,497 2,570
- -----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (20,662) (15,805) (34,009)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 812 578 1,567
Repayment of long-term debt (6,000) (6,265) (3,258)
Net proceeds from (repayments of)
revolving credit agreements - (18,000) (500)
Common stock issued - - 6
Dividends on common and preferred stock (88) (1,401) (3,369)
- -----------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (5,276) (25,088) (5,554)
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS 3,219 (324) 1,249
CASH AND TEMPORARY INVESTMENTS AT BEGINNING OF YEAR 6,502 6,826 5,577
- -----------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY INVESTMENTS AT END OF YEAR $ 9,721 $ 6,502 $ 6,826
=================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for:
Interest $ 5,374 $ 6,563 $ 6,511
Income taxes 5,593 682 831
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
A capital lease obligation of $3,196,000 was incurred
in 1992 when the Company entered into a lease for
new computer equipment.
=================================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Carolina Freight Corporation
Preferred Common Paid-in Retained
(Dollars in thousands) Stock Stock Capital Earnings
- ------------------------------------------------------------------------------
Balances at December 31, 1991 $2,211 $3,281 $44,343 $77,055
Net earnings for the year - - - 3,648
Dividends declared:
Preferred stock - $4.00 per share - - - (88)
Common stock - $.50 per share - - - (3,281)
Debentures converted (126 shares) - - 6 -
- ------------------------------------------------------------------------------
Balances at December 31, 1992 2,211 3,281 44,349 77,334
Net loss for the year - - - (4,162)
Dividends declared:
Preferred stock - $4.00 per share - - - (88)
Common stock - $.20 per share - - - (1,313)
- ------------------------------------------------------------------------------
Balances at December 31, 1993 2,211 3,281 44,349 71,771
Net earnings for the year - - - 6,778
Dividends declared:
Preferred stock - $4.00 per share - - - (88)
Contributed capital - - 44 -
- ------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 $2,211 $3,281 $44,393 $78,461
==============================================================================
The notes to consolidated financial statements are an integral part of these
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carolina Freight Corporation
December 31, 1994, 1993 and 1992
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
Carolina Freight Corporation (the Corporation) and its wholly owned
subsidiaries, Carolina Freight Carriers Corporation (CFCC), Red Arrow Freight
Lines, Inc. (Red Arrow), G.I. Trucking Company (G.I.), Cardinal Freight
Carriers, Inc., CaroTrans International, Inc., Carrier Computer Services, Inc.,
The Complete Logistics Company, Innovative Logistics Incorporated, Carolina
Breakdown Services, Inc., Carolina Freight Funding Corporation, Motor Carrier
Insurance, Ltd. (MCI), CaroTrans Canada, Ltd., and Carolina Freight de Mexico,
S.A. de C.V. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain amounts for prior years have been reclassified to conform with
statement presentations for 1994. The reclassifications have no effect on
stockholders' equity or net income as previously reported.
- --------------------------------------------------------------------------------
Securitization of Receivables:
In December 1993, the Corporation entered into an agreement to sell, on a
revolving basis, a $60 million ownership interest in a designated pool of its
customer receivables. The pool of receivables eligible for sale is held by a
trust in which the Corporation retains the residual ownership interest. As of
December 31, 1994 and 1993, customer and interline receivables are shown net of
$98,782,000 and $95,786,000 respectively of receivables transferred to the
trust. The Corporations interest in the pool of receivables held by the trust
is included in customer receivables held by trust, net, on the accompanying
1994 and 1993 balance sheets.
The agreement for this revolving sale of receivables expires in December
2000. Investment banking, legal and other costs associated with executing this
transaction of $750,000 are included in other expense, net, on the accompanying
1993 statement of operations.
The Corporation maintains an allowance for doubtful accounts ($5,683,000
in 1994 and $5,182,000 in 1993) based upon the expected collectibility of all
customer and interline receivables, including receivables sold.
The ongoing cost of these programs of $3,937,000 in 1994 and $1,494,000
in 1993 are included in other expense, net, on the accompanying statements of
operations.
- --------------------------------------------------------------------------------
Reinsurance Receivables:
Reinsurance receivables represent amounts due to MCI, the Corporations
wholly-owned captive insurance subsidiary, from United Insurance Company
(United) for reinsurance premiums and amounts advanced to United for payment of
insurance claims.
- --------------------------------------------------------------------------------
Plant and Equipment:
The cost of revenue equipment does not include the cost of tires, which is
carried as a prepaid expense and amortized over the estimated tire lives.
Depreciation of plant and equipment is computed on the straight-line basis for
financial statement purposes over the following estimated useful lives: revenue
and service equipment (3 to 10 years, 5-15% salvage); structures (15 to 50
years); other equipment (3 to 10 years, 0-10% salvage); and leasehold
improvements (lease term).
- --------------------------------------------------------------------------------
Maintenance and Repairs:
Expenditures for normal maintenance and repairs are expensed, whereas those for
renewals or betterments that affect the nature of an asset or increase its
useful life are capitalized. Upon the retirement of fixed assets, the related
accumulated depreciation is removed from the accounts and any gain or loss is
reflected in the Corporation's statement of earnings with the exception of gains
on trade-ins, which are included in the bases of the new assets.
- --------------------------------------------------------------------------------
Claims and Insurance Accruals:
Claims and insurance accruals reflect the Corporation's estimated cost of
uninsured claims incurred but not paid prior to year-end for cargo loss and
damage, bodily injury and property damage, workers compensation, noncontractual
employees medical expenses, and revenue adjustments. The present value of such
claims is accrued using a risk free treasury rate that averaged 7.7% for 1994
and a discount rate of 7% for 1993. The total undiscounted liability (both
current and long-term) was $67,715,000 as of December 31, 1994, and $73,474,000
as of December 31, 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carolina Freight Corporation
- --------------------------------------------------------------------------------
Environmental Accruals:
Costs incurred to remediate environmental contamination, caused primarily by
defective underground storage tanks, are recorded when it is probable that a
liability has been incurred and the related amount can be reasonably estimated.
In situations where a single estimate of such costs cannot be developed, it is
the Corporations policy to record its estimated minimum exposure. Losses
resulting from environmental liabilities are reduced by claims for potential
recoveries from third parties when collection of the recoverable amounts is
probable.
- --------------------------------------------------------------------------------
Income Taxes:
The Corporation recognizes income taxes in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes", which utilizes an asset and liability method
of accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory tax rates to differences between financial
statement carrying amounts and tax bases of existing assets and liabilities.
Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. The
Company recorded an additional $580,000 deferred tax in 1993 to reflect the
corporate tax rate increase to 35%.
- --------------------------------------------------------------------------------
Post-retirement Benefits Other Than Pensions:
The Corporation recognizes post-retirement benefits in accordance with SFAS No.
106, "Employers Accounting for Post-retirement Benefits Other than Pensions".
Under SFAS No. 106, the Corporation is required to accrue the estimated cost of
post-retirement benefits other than pensions during its employees active
service periods.
- --------------------------------------------------------------------------------
Post-employment Benefits:
Effective January 1, 1994, the Corporation adopted SFAS No. 112, "Employers
Accounting for Post-employment Benefits". Under SFAS No. 112, the Corporation is
required to accrue the estimated cost of post-employment benefits during its
employees' active service periods. Prior to January 1, 1994, the Corporation
expensed the cost of these benefits when paid.
- --------------------------------------------------------------------------------
Insurance Reserves Discount Rate:
Effective January 1, 1994, the Corporation adopted the Securities and Exchange
Commission directive for publicly held corporations that insurance liabilities
be reduced to present values at a "risk free" rate. Prior to January 1, 1994 the
Corporation used a 7% interest rate.
- --------------------------------------------------------------------------------
Recognition of Revenue:
The Corporation's revenue recognition policy is to recognize revenue on a
percentage-of-completion basis.
- --------------------------------------------------------------------------------
Earnings Per Share:
Earnings per share have been computed based on the weighted average number of
common shares outstanding, which was 6,563,705 in 1994, 6,561,672 in 1993, and
6,561,634 in 1992.
- --------------------------------------------------------------------------------
Statement of Cash Flows:
The Corporation considers all highly liquid investments with a maturity of
three months or less when purchased to be temporary investments.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES:
As discussed in the Accounting Policies footnote, the Corporation changed its
methods of accounting for post-employment benefits as of January 1, 1994. The
cumulative effect of this change in 1994 is immaterial. The Corporation also
changed the interest rate used to reduce insurance reserves to their present
value to a "risk free" rate effective January 1, 1994. The cumulative effect of
this change on 1994 net earnings is a reduction of $1,222,000. The Corporation
changed its methods of accounting for income taxes, post-retirement benefits
other than pensions and revenue recognition as of January 1, 1992. The
cumulative effect of each of these changes on 1992 net earnings is discussed in
the following footnotes and is summarized as follows (in thousands):
Change in accounting for
deferred tax liabilities $12,203
Record liability for post-retirement
benefits, net of related income taxes (570)
Change in method of revenue recognition,
net of related income taxes (1,797)
- --------------------------------------------------------------------------------
$ 9,836
================================================================================
INCOME TAXES:
The Corporation adopted SFAS No. 109, "Accounting for Income Taxes", effective
January 1, 1992. The cumulative effect on prior years of this change in
accounting principle increases 1992 net earnings by $12,203,000 or $1.86 per
share, and is reported as part of the cumulative effect of changes in
accounting principles in the accompanying 1992 consolidated statements of
operations.
The provision for income taxes consists of the following:
(in thousands) 1994 1993 1992
- -------------------------------------------------------------------------------
Current provision (benefit)
Federal $ 3,887 $ 1,856 $ (276)
State 1,846 589 3
- -------------------------------------------------------------------------------
5,733 2,445 (273)
- -------------------------------------------------------------------------------
Deferred taxes arising from
Accelerated depreciation
and other book/tax
differences for plant
and equipment (2,172) (1,542) 616
Prepaid tires expensed
for tax purposes (293) (18) (137)
Reserves not currently
deductible (1,530) (3,493) (1,905)
Revenue not currently
taxable 115 531 413
Effect of alternative
minimum tax 4,859 839 (1,668)
Effect of increase
in tax rate - 580 -
Other, net 116 (509) (496)
- -------------------------------------------------------------------------------
1,095 (3,612) (3,177)
Investment tax credit-
Amortization - - (262)
- -------------------------------------------------------------------------------
Total provision (benefit) $ 6,828 $(1,167) $(3,712)
===============================================================================
The total provision for income taxes varies from the statutory corporate
tax rate for the following reasons:
(in thousands) 1994 1993 1992
- ------------------------------------------------------------------------------
Statutory federal tax rate 35.0% (35.0%) (34.0%)
Increase(reduction) in
taxes resulting from:
Increase in tax rate to 35% - 10.9 -
Amortization of investment
tax credit,net of tax basis
reduction impact - - (2.6)
Nondeductible business
expenses 5.2 6.4 1.9
Nontaxable life insurance
(proceeds) costs, net (1.1) (2.9) (1.7)
State income taxes,
net of federal tax benefit 4.4 (3.4) (3.9)
Other items, net 2.5 2.1 2.8
- ------------------------------------------------------------------------------
Actual tax rate 46.0% (21.9%) (37.5%)
==============================================================================
The tax effect of temporary differences giving rise to the Company's
consolidated deferred tax liability at December 31, 1994 and December 31, 1993
are as follows:
1994 1993
- -------------------------------------------------------------------------------
Deferred tax assets
Claims and insurance reserves $ 19,481 $ 17,878
Alternative minimum tax
credit carryforward 843 5,702
Allowance for bad debts 2,218 2,010
Accrued vacation payable 5,658 5,049
Deferred compensation costs 1,281 1,921
Other 2,024 215
- -------------------------------------------------------------------------------
Deferred tax assets 31,505 32,775
Deferred tax liabilities
Depreciation and other
differences for plant
and equipment (29,365) (31,192)
Accrued pension costs (6,791) (5,862)
Prepaid tires (5,070) (5,303)
Unearned revenue (4,933) (4,754)
- -------------------------------------------------------------------------------
Deferred tax liabilities (46,159) (47,111)
Net deferred tax liabilities $(14,654) $(14,336)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carolina Freight Corporation
The Company did not record any valuation allowances against deferred
tax assets. In the opinion of management, the reversal of taxable temporary
differences will allow the realization of the deferred tax assets.
In 1992, the Corporation was in an alternative tax position as the
Corporation's alternative minimum tax benefit was less than its regular tax
benefit by $1,668,000. In 1994 and 1993, the Corporation was in a regular tax
position and was able to partially utilize its existing minimum tax credit
carryforward. The cumulative alternative minimum tax in excess of regular tax
of $843,000 at December 31, 1994 is available as a credit in future years when
regular tax exceeds alternative minimum tax.
The Internal Revenue Service (IRS) has substantially completed its
examinations of the Company's federal income tax returns for the three years
ended December 31, 1991, and has raised potential adjustments in several areas.
The IRS is expected to issue a statutory Notice of Deficiency in 1995 for
additional taxes, plus interest, relating to those years. The most significant
issue raised relates to the deductibility of certain pension payments made by
the Company to underfunded multi-employer pension plans, deductions that in
managements opinion have been consistently taken throughout the industry. The
Company disagrees with the IRS on the matter of the pensions and intends to
pursue its judicial remedies as necessary. Full loss of the disputed pension
matter, plus interest costs through December 31, 1994, would result in a charge
to net earnings of approximately $2,500,000 or $.38 per share. In the opinion
of management, adequate provision has been made for all income taxes and
related interest; any liability that may arise for prior periods, as a result
of the proposed IRS adjustments (excluding the final resolution of the pension
issue), will not have a material effect on the Company's consolidated financial
position or its results of operations.
LONG-TERM DEBT:
Long-term debt at December 31, 1994 and 1993 consisted of the following (in
thousands):
1994 1993
- ---------------------------------------------------------------------------------------------------------
Long term Current Long-term Current
Portion Portion Portion Portion
- ---------------------------------------------------------------------------------------------------------
6.25% Convertible Subordinated Debentures,
Due 2011, issued in April 1986 $49,994 $ - $49,994 $ -
9.4% Note - due $365,000 quarterly through January 1995
with balance of $545,000 due April 1995 - - - 2,370
7.25% to 8.125% Industrial Revenue Bonds due through 1996,
collateralized by certain terminal properties - - 236 294
Industrial Revenue Bonds due through October 2001,
bearing interest at 65% to 88% of prime rate,
collateralized by certain terminal properties 6,449 969 7,418 732
Industrial Revenue Bonds due through October 1998,
bearing interest at 65.6% of prime rate plus 2%,
collateralized by certain terminal properties 528 189 740 188
8% to 10% Notes - due monthly through August 2003,
collateralized by certain terminal properties
and computer equipment 271 66 337 60
Capitalized Computer Leases expiring December 31, 1997
with interest of 6.91% 4,394 1,978 6,372 1,846
Other (primarily borrowings against life insurance
policies bearing interest at 7.40% to 11.75%) 6,641 4 6,079 4
- ---------------------------------------------------------------------------------------------------------
Total $68,277 $3,206 $71,176 $5,494
=========================================================================================================
- --------------------------------------------------------------------------------
Carolina Freight Corporation
The 6.25% Convertible Subordinated Debentures may be converted into common
stock at $47.50 per share. The price of the common stock of the Corporation on
the date of issue was $38. The Corporation may redeem the debentures at a price
of 101.25% declining to 100% at April 15, 1996. FASB 107, "Disclosures about
Fair Value of Financial Instruments" requires that the fair value of the
debentures be disclosed. The debentures had a quoted market value of
$33,371,000 at December 31, 1994, and $42,995,000 at December 31, 1993. At
December 31, 1994 the Corporation had other fixed rate obligations of
$13,354,000. In the opinion of management, based on the borrowing rates
currently available to the Corporation for loans with similar terms and
maturities, the recorded amounts closely approximate fair value.
On March 17, 1994, Carolina Freight Carriers Corporation and Red Arrow
Freight Lines entered into a new $45,000,000 revolving credit agreement with a
group of banks. Under this agreement, which currently provides approximately
$10,000,000 ($15,000,000 at December 31, 1994) of revolving line of credit
availability, $35,000,000 of letters of credit and expires June 30, 1996,
substantially all of their revenue and service equipment, $45.8 million of
their land and structures and the Corporation's customer receivables held by
trust, are pledged as collateral. This agreement and existing agreements
contain restrictions regarding the maintenance of specified debt, tangible net
worth, and cash flow ratios. CFCC paid off the 9.40% note and $456,000 of
certain other debt with amounts borrowed under this agreement. The interest
rate for borrowings under this agreement will be, at the Corporation's option,
the lead banks base rate or another variable rate which fluctuates (in part)
based on changes in certain financial ratios of the Corporation. This agreement
states that the occurrence of a material adverse change in the Corporations
financial condition, as determined by the participating banks, is an event of
default. If an event of default occurs, then the lenders may declare the
outstanding borrowings under the agreement, certain other debt, and all
interest thereon to be due and payable. At December 31, 1994 there was no
indebtedness under the revolving line of credit availability.
At December 31, 1993, Carolina had a loan commitment of $25 million under
an unsecured revolving credit agreement (credit agreement) with a group of
banks. The credit commitment was reduced by $10 million on December 29, 1993.
There was no indebtedness under the credit agreement as of Decem ber 31, 1993.
This agreement expired in March 1994 and was replaced by the $45 million
revolving credit agreement discussed above.
The maximum amount outstanding under the agreement at any month-end, the
average amount outstanding during the year, and the weighted average interest
rates were (in thousands):
1994 1993 1992
- -------------------------------------------------------------------------------
Maximum amount
outstanding at
month-end $12,000 $35,000 $25,500
Average amount
outstanding 3,305 27,592 22,668
Average
interest rate 6.1% 4.8% 4.4%
The agreement carries a commitment fee which varies depending on changes
in certain financial ratios. Unused commitment fee was .375% in 1994.
The aggregate annual maturities of long-term debt for each of the five
years ending December 31 are as follows: 1995-$3,206,000; 1996-$3,945,000;
1997-$6,489,000; 1998-$3,754,000; and 1999-$3,489,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carolina Freight Corporation
EMPLOYEE RETIREMENT PLANS:
The Corporation has three pension plans to provide retirement benefits to
employees not covered by collective bargaining agreements.
The following table sets forth the defined benefit plans' funded status at
December 31 (in thousands):
1994 1993
- -------------------------------------------------------------------------------
Actuarial present value
of benefit obligations -
Vested benefits $ 55,523 $ 51,594
Nonvested benefits 2,342 2,636
Accumulated benefit obligations 57,865 54,230
Effect of projected future
compensation levels 16,263 13,950
Projected benefit obligations 74,128 68,180
Plans assets at fair market value 72,969 73,046
- -------------------------------------------------------------------------------
Plans assets in excess of projected
benefit obligations $ (1,159) $ 4,866
===============================================================================
Consisting of:
Unrecognized net assets at
January 1, 1986 net of
amortization over 13-19 years $ 2,137 $ 2,636
Unrecognized net gain due to
past experience different from
assumptions made 7,381 13,356
Less: Unfunded accrued
pension cost (10,677) (11,126)
- -------------------------------------------------------------------------------
Total $ (1,159) $ 4,866
===============================================================================
The plans assets consist primarily of corporate stocks, United States
government securities, common trust bond funds and real estate investments. The
plans hold approximately 38,000 shares of the Corporation's common stock. A 7.5%
weighted average discount rate and a 5.5% rate of increase in future payroll
costs were used in determining the actuarial present value of the projected
benefit obligations. The expected long-term rate of return on assets was 7.5%.
The net periodic pension cost of defined benefit plans include the
following components (in thousands):
1994 1993 1992
- -------------------------------------------------------------------------------
Service costs (benefits
earned during the year) $4,226 $4,466 $4,447
Interest cost on projected
benefit obligations 5,073 4,686 4,619
Actual return on
plan assets 1,458 (8,135) (3,921)
Net amortization
and deferral (7,702) 2,225 (2,977)
Net periodic
pension cost 3,055 3,242 2,168
===============================================================================
An additional benefit plan provides certain death and retirement
benefits for the officers and directors of the Corporation. As of December 31,
1993, the projected and accumulated benefit obligations of the plan were
$2,823,000, of which $2,662,000 represented vested benefits. The plan is not
funded; however, the Corporation has accrued a liability in an amount
approximating the projected benefit obligation. The unrecognized net liability
and unrecognized net gain components of the above are not significant. The
Corporation has purchased insurance on the participants lives (face coverage
amount - $20,240,000) which will effectively be used to fund the payment of plan
benefits. The Corporation is the owner and beneficiary of these policies.
In 1994, the Corporation terminated its Executive Deferred Compensation
Plan agreement with certain directors and officers. Plan benefits were accrued
and paid using the prime rate as the annual return on compensation that had
been deferred. The Corporation is owner and beneficiary of insurance policies
on the participants lives. This insurance will be retained and used to fund the
payment of certain death and retirement benefits as discussed in the preceding
paragraph.
Carolina and Red Arrow contributed $31,842,000 in 1994, $30,810,000 in
1993, and $28,343,000 in 1992, to multi-employer pension plans for employees
covered by collective bargaining agreements.
As discussed in the Summary of Significant Accounting Policies, the
Corporation adopted SFAS No. 106, "Employees Accounting for Post-retirement
Benefits Other than Pensions", effective January 1, 1992. Until July 1, 1993
employees retiring from the Corporation after attaining age 62 who had
rendered at least 12 years of service to the Corporation were entitled to
post-retirement health care and dental benefit coverage until age 65. These
benefits are subject to deductibles and other limitations. This program was
discontinued effective with retirements after July 1, 1993. The accumulated
post-retirement benefit obligation at January 1, 1992 of $920,000 (net of
related income taxes of $350,000) was recognized by the Corporation as a
cumulative effect of change in accounting principle in 1992. This change
decreased 1992 net earnings by $570,000 or $.09 per share.
In determining the present value of the accumulated post-retirement
benefit obligations, the company used a 13% health care cost trend rate for
1994 and a 14% rate for 1993 and 1992 decreasing 1% per year until leveling off
at 5%. A 1% increase in the trend rate would increase the accumulated benefit
obligation as of December 31, 1994,
1993 and 1992 by approximately 2%. The weighted average discount rate used in
calculating the obligation for 1994, 1993 and 1992 was 7 1/2%
On September 1, 1992 the Corporation offered a Retirement Incentive
Program to eligible employees which provided for enhanced pension benefits and
extended health care, dental coverage and life insurance until age 65. Of the
172 individuals eligible, 112 elected to participate prior to its expiration in
late 1992. The implementation of the Retirement Incentive Program resulted in a
nonrecurring charge of $4,408,000 in 1992, which is comprised of a $3,331,000
increase in the post-retirement benefit obligation and $1,077,000 increase in
the net pension liability. The Corporation's post-retirement benefit obligations
are not funded.
In November of 1992, the Financial Accounting Standards Board issued a
new standard on accounting for postemployment benefits (FASB 112). This
standard requires that the expected costs of these benefits be charged to
expense during the years that the employees render service. The change was
adopted as of January 1, 1994 with an immaterial cumulative effect on the
Corporations reported financial position and results of operations.
CAPITAL STOCK:
The 4% cumulative preferred stock is redeemable by the Corporation, in whole or
in part, at any time at $104 per share plus accrued dividends. There are no
dividends in arrears on the preferred stock. The Corporation has established
four incentive stock option plans for its key personnel. These plans allow for
acceleration of option exercises in the event of a change in control of the
Corporation.
A summary of changes in stock options for the three-year period ended
December 31, 1994 follows:
Price Number
Ranges of Shares
- -------------------------------------------------------------------------------
Under option at December 31, 1991
(243,915 shares exercisable) 14.50 to 34.38 345,350
Granted 20.00 1,000
Lapsed 14.50 to 19.63 (12,350)
Under option at December 31, 1992
(274,780 shares exercisable) 16.38 to 34.38 334,000
Granted 13.38 to 14.50 314,250
Lapsed 17.31 to 20.00 (65,800)
Cancelled 16.38 to 34.38 (164,400)
Under option at December 31, 1993
(215,300 shares exercisable) 13.38 to 19.63 418,050
Granted 9.13 to 11.25 290,000
Lapsed 11.25 to 19.63 (151,600)
Under option at December 31, 1994
(202,020 shares exercisable) 9.13 to 19.63 556,450
- -------------------------------------------------------------------------------
At December 31, 1994, 662,838 shares were reserved for issuance under the stock
option plans.
LEASES, COMMITMENTS AND CONTINGENCIES:
The Corporation leases certain terminals and equipment under operating lease
agreements expiring at various dates through 2009. Aggregate future minimum
rentals payable under these operating leases are as follows (in thousands):
1995 $14,458
1996 13,249
1997 11,300
1998 6,258
1999 737
2000-2009 2,359
- --------------------------------------------------------------------------------
Total $48,361
================================================================================
The Corporation is contingently liable under letters of credit for
$36,577,000 in connection with its insurance programs and industrial revenue
bond terminal financings. As of December 31, 1994, the Corporation has pledged
approximately $9,875,000 of investments ($1,383,000 temporary and $8,492,000
long-term) as collateral under such letter of credit agreements at MCI. The
letters of credit serve to guarantee the payment of insurance claims by
Carolina, G.I., Red Arrow and MCI, which are provided for on their respective
balance sheets.
The Corporation has been named by the Environmental Protection Agency and
by several state environmental agencies as a potentially responsible part at
six federal and state Superfund sites. CFCC's exposure in these matters is
either de minimis or is not expected to be material.
The Corporation is involved in various litigation arising in the normal
course of business. In the opinion of management, the ultimate recovery or
liability, if any, resulting from such matters will not materially affect the
financial position or results of operations of the Corporation.
RECOGNITION OF REVENUE:
The Corporation changed its revenue recognition policy effective January 1,
1992. The cumulative effect of this change in accounting principle created an
after-tax charge of approximately $1,800,000 or $.27 per share in the first
quarter of 1992 and is reported as part of the cumulative effect of changes in
accounting principles in the 1992 consolidated statements of earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carolina Freight Corporation
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents certain financial information for each quarter
during 1994 and 1993 (in thousands except per share data):
1994
---------------------------------------------------------
First Second Third Fourth Total
- -------------------------------------------------------------------------------------------------------
Operating Revenue $192,630 $263,203 $203,340 $276,767 $935,940
Operating Income (1,922) 18,974 4,545 4,611 26,208
Net earnings (loss) before cumulative
effect of change in accounting principle (2,918) 9,640 1,010 268 8,000
Cumulative effect of change
in accounting principle (1,222) - - - (1,222)
Net earnings (loss) (4,140) 9,640 1,010 268 6,778
=======================================================================================================
Net earnings (loss) per share
before cumulative effect of change
in accounting principle $ (0.44) $ 1.46 $ 0.15 $ 0.04 $ 1.21
Cumulative effect of change
in accounting principle (0.19) - - - (0.19)
Earning (loss) per share (0.63) 1.46 0.15 0.04 1.02
=======================================================================================================
1993
---------------------------------------------------------
First Second Third Fourth Total
- -------------------------------------------------------------------------------------------------------
Operating revenue $187,331 $196,773 $198,557 $262,689 $845,350
Operating income 1,357 1,403 1,159 1,119 5,038
Net loss (390) (548) (1,583) (1,641) (4,162)
- -------------------------------------------------------------------------------------------------------
Loss per share $ (0.06) $ (0.09) $ (0.24) $ (0.26) $ (0.65)
- -------------------------------------------------------------------------------------------------------
The Corporation's fiscal year consists of three quarters of 12 weeks each and a
final quarter of 16 weeks.
Operating results for the full year were impacted by a number of unusual
events. In the first quarter, G.I. Trucking (GITC), the Corporation's West Coast
less-than-truckload (LTL) subsidiary, was negatively impacted by a large earth-
quake in Southern California. Carolina Freight Carriers Corporation (CFCC), the
Corporations less-than-truckload subsidiary covering the Midwest, Northeast and
Southeast, experienced severe winter weather. Both of these factors reduced
revenue and decreased productivity.
During the second quarter, the International Brotherhood of Teamsters
(IBT) imposed a strike on most unionized trucking companies. CFCC and Red Arrow
Freight Lines, Inc., the Company's two unionized subsidiaries, avoided the work
stoppage by signing an interim agreement with the IBT. Business levels for all
of the Corporation's LTL subsidiaries increased significantly during the strike.
In the fourth quarter, most of the senior management team at CFCC was
replaced. James R. Hertwig, formerly a vice president of the holding company,
was named president of CFCC. As a result of these changes and other
retirements, the Company incurred nonrecurring charges relating to severance
and retirement benefits.
Fourth quarter results were favorably impacted by reductions in overcharge
and discount reserves in our LTL operations due to the positive impact on
post-invoice adjustments as a result of the Negotiated Rates Act of 1994 and
actual claim experience settling more favorably than anticipated in the first
half of the year. In addition, increasing discount rates reduced the level of
self-insurance reserves, therefore lowering insurance expenses in the fourth
quarter. Finally, the Corporation received notice of the preliminary results of
an ongoing Internal Revenue Service audit.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
of Carolina Freight Corporation:
We have audited the accompanying consolidated balance sheets of Carolina
Freight Corporation (a North Carolina corporation) and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1994. These financial statements are the
responsibility of the Corporation'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 Carolina Freight
Corporation and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in the notes to the consolidated financial statements,
effective January 1, 1994, the Corporation changed its method of utilizing
interest rates in its discounted insurance liabilities calculation.
Additionally effective January 1, 1992, the Corporation changed its methods of
accounting for revenue recognition, post-retirement benefits other than
pensions, reinsurance of insurance contracts, and income taxes.
Arthur Andersen LLP
Charlotte, North Carolina,
January 31, 1995.
37