EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentages of
operating expenses and other items to operating revenue:
1995 1994 1993
- -----------------------------------------------------------------
Operating revenue 100.0% 100.0% 100.0%
Operating expenses and costs:
Salaries, wages and benefits 58.6 53.1 51.4
Operating supplies and expenses 6.8 6.6 6.7
Operating taxes and licenses 4.3 4.1 3.8
Insurance 3.8 3.3 2.4
Communications and utilities 1.9 1.9 2.1
Depreciation and amortization 6.5 6.0 6.5
Rents and purchased transportation 8.1 9.8 12.9
Other 4.6 4.5 4.8
- -----------------------------------------------------------------
Total operating expenses 94.6 89.3 90.6
- -----------------------------------------------------------------
Operating income 5.4 10.7 9.4
Interest expense 1.8 1.5 1.3
Other income, net 0.1 0.2 0.1
- -----------------------------------------------------------------
Income before taxes 3.7 9.4 8.2
Income taxes 1.4 3.6 3.1
- -----------------------------------------------------------------
Income before extraordinary item 2.3 5.8 5.1
- -----------------------------------------------------------------
[graph appears here]
Average Shares Outstanding (in millions)
Year Amount
1984 10.60
1985 12.56
1986 14.79
1987 15.25
1988 16.63
1989 20.91
1990 22.40
1991 26.64
1992 28.13
1993 28.58
1994 30.36
1995 31.33
1
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Revenue
- -------
Operating revenue for 1995 was $572,100,000, up 22.9%, compared to $465,588,000
for 1994. This increase in operating revenue was due almost entirely to a 22.5%
increase in tonnage handled by the Company. Revenue per hundred weight was
basically unchanged in 1995 from 1994 despite the Company effecting a rate
increase of approximately 3.5% on January 1, 1995. This was primarily due to
aggressive, discounted pricing as a result of excess capacity within the less-
than-truckload industry. This excess capacity existed largely as a result of
overall economic conditions during 1995. In order to utilize its excess
capacity and better position the Company for the long-term, the Company elected
to accelerate the pace of expansion of its service territory. The following
expansions of service territory were initiated by the Company during 1995:
. On January 1, 1995, the Company expanded its all-points coverage to the states
of North Carolina and South Carolina with the opening of thirteen new
terminals.
. On April 17, 1995, the Company expanded its service territory with the
addition of terminal locations in: Colorado Springs, Denver, Fort Collins and
Pueblo, CO; Des Moines, IA; Minneapolis/St. Paul, MN; Omaha, NE; Madison and
Milwaukee, WI.
. On July 10, 1995, the Company expanded its all-points coverage to the states
of Colorado, Iowa, Nebraska and Wisconsin with the opening of twelve new
terminal locations.
. On August 14, 1995, the Company provided all-points coverage to the state of
Florida with the opening of seven new terminal locations and opened one
additional terminal in the the state of Georgia.
These expansions of service territory from 14 to 21 states during 1995 were the
primary reasons for the increase in tonnage handled by the Company. In
addition, tonnage was increased by the deregulation of intrastate commerce,
effective January 1, 1995, by the Federal Aviation Administration Authorization
Act of 1994, and by continued market penetration into existing service
territories.
[graph appears here]
Book Value per Share (in dollars)
Year Amount
1984 $0.08
1985 $0.14
1986 $0.17
1987 $0.28
1988 $0.47
1989 $1.36
1990 $1.61
1991 $2.80
1992 $3.19
1993 $3.83
1994 $5.84
1995 $6.24
2
Management expects that growth in operating revenue is sustainable in the near
term. However, the Company's planned expansions of service territory during 1996
are less aggressive than those initiated during 1995. Any near-term growth in
operating revenue will primarily be due to increased tonnage handled by the
Company.
OPERATING EXPENSES
Operating expenses as a percentage of operating revenue increased to 94.6% in
1995 from 89.3% in 1994. This overall increase was primarily attributable to:
. Salaries, wages and benefits as a percentage of operating revenue increased to
58.6% in 1995 from 53.1% in 1994. The increase in salaries, wages and
benefits as a percentage of operating revenue was primarily a result of three
factors. First, the utilization of Company-operated terminals, rather than
contractor-operated terminals, in expansions of service territory contributed
to this increase. Second, the continuation of the Company's philosophy of
sharing its success with its associates through increased wages and enhanced
benefit packages contributed to this increase. On March 6, 1995, the Company
increased the wages of its drivers, dockmen and clerical associates by
approximately 5.5%. The third factor was the accelerated expansion of service
territory during 1995. Within the expansion territories, wages and benefits
were disproportionately high in relation to operating revenues as new
associates were added to establish an operating base. Management does not
expect salaries, wages and benefits as a percentage of operating revenue to
continue in an upward trend, but expects these expenses as they relate to
operating revenue to stabilize or gradually improve.
. Insurance as a percentage of operating revenue increased to 3.8% in 1995 from
3.3% in 1994. This increase was primarily a result of the Company's increased
experience of accidents and cargo claims, particularly in the areas of cargo
care and liability insurance. Management does not expect a continuation of
the upward trend in insurance expenses as they relate to operating revenue but
expects a stabilization of these expenses near historical levels.
[graph appears here]
Operating Revenue (in millions)
Year Amount
1984 $17.83
1985 $25.04
1986 $34.45
1987 $47.07
1988 $73.08
1989 $97.59
1990 $142.78
1991 $198.26
1992 $262.01
1993 $328.46
1994 $465.59
1995 $572.10
3
. Depreciation and amortization as a percentage of operating revenue increased
to 6.5% in 1995 from 6.0% in 1994. This increase was primarily due to two
factors. The first factor was the decreased usage of rented equipment in
favor of Company-owned equipment. The second factor was the rapid expansion
of service territory. During the initial stages of expansion of service
territory, depreciation expense is disproportionately high in comparison to
operating revenue. Management expects depreciation expense as a percentage of
operating revenue to stabilize or gradually improve.
[graph appears here]
Total Terminals
Year Amount
1984 31
1985 31
1986 44
1987 64
1988 76
1989 85
1990 100
1991 111
1992 116
1993 132
1994 144
1995 186
These increases in operating expenses as a percentage of operating revenue were
partially offset by improvements in the following area:
. Rents and purchased transportation as a percentage of operating revenue
improved to 8.1% in 1995 from 9.8% in 1994. This improvement was primarily
due to the Company's philosophy of utilizing Company-operated terminals rather
than contractor-operated terminals in expansions of service territory. In
addition, this improvement was partially due to the decreased usage of rented
equipment in favor of Company-owned equipment. Management expects rents and
purchased transportation as a percentage of operating revenue to stabilize
near current levels.
OTHER
Interest expense as a percentage of operating revenue increased to 1.8% in 1995
from 1.5% in 1994. This increase was primarily attributable to increased
borrowings incurred by the Company to finance the expansion of service territory
and support growth in operating revenue.
The effective tax rate of the Company was 38.6% for 1995, up from 38.0% in 1994.
This increase was primarily due to increased state income taxes. Net income for
1995 was $13,083,000, down 51.0%, from $26,696,000 for 1994.
4
1994 COMPARED TO 1993
Operating revenue for 1994 was $465,588,000, up 41.7%, compared to $328,464,000
for 1993. The growth in operating revenue was primarily attributable to a 34.5%
increase in tonnage handled by the Company from new and existing customers. The
major causes of this increase in tonnage were:
. On April 5, 1993, the Company opened nine new terminals to extend all-points
coverage to the state of Kentucky and the southern regions of Indiana and
Ohio. The year 1994 included a full year of operation of these terminals.
. On January 1, 1994, the Company expanded its all-points coverage to the states
of Indiana and Ohio with the opening of fourteen new terminals.
. The Company continued to increase its market penetration into service
territory that existed on January 1, 1994.
. The one-time increase in tonnage as a result of a strike in April 1994, by the
International Brotherhood of Teamsters against several companies in the less-
than-truckload industry. This one-time, strike-related increase in tonnage
resulted in extra operating revenue of approximately $12,000,000.
In addition to the increase in tonnage, operating revenue was increased by a
5.5% increase in revenue per hundred weight. The major factors contributing to
this increase in revenue per hundred weight were:
. A general rate increase of 2.8% effective January 1, 1994. General rate
increases initially affect approximately 50% of the Company's customers. The
remaining customers' rates are determined by contracts and guarantees and are
negotiated throughout the year.
. The Company's average length of haul increased 3.1% in 1994 as a result of the
Company's expanded service territory.
. The percentage of the Company's total revenue that was truckload (shipments
greater than 10,000 pounds) declined to 8.1% in 1994 compared to 8.8% in 1993.
[graph appears here]
Shareholder's Equity (in millions)
Year Amount
1984 $0.80
1985 $1.71
1986 $2.50
1987 $4.28
1988 $7.75
1989 $28.30
1990 $35.94
1991 $74.64
1992 $89.71
1993 $109.46
1994 $177.18
1995 $195.43
5
Operating expenses as a percentage of operating revenue improved to 89.3% in
1994 from 90.6% in 1993. This overall improvement was primarily attributable
to:
. Rents and purchased transportation as a percentage of operating revenue
decreased to 9.8% in 1994 from 12.9% in 1993. This decrease was due to the
Company's philosophy of utilizing Company-operated terminals in expansions of
service territory, along with the conversion of four contractor-operated
terminals to Company-operated terminals during 1994. At December 31, 1994, of
the Company's 144 terminals, 10 were contractor-operated. The increased
utilization of Company-operated terminals was one of two primary reasons
salaries, wages and benefits as a percentage of operating revenue increased to
53.1% in 1994 from 51.4% in 1993. The other reason for the increase in
salaries, wages and benefits as a percentage of operating revenue was the
Company's ongoing philosophy of sharing its success with associates through
increased wages and enhanced benefit packages. On March 6, 1994, the Company
increased the wages of its drivers, dockmen and clerical associates by
approximately 5.5%.
. Depreciation and amortization as a percentage of operating revenue decreased
to 6.0% in 1994 from 6.5% in 1993. This improvement was primarily due to
three factors. The first factor was the increased tonnage handled by the
existing fixed cost structure of the Company. The second factor was the one-
time surge in tonnage related to the Teamster strike in April 1994 (where
there was not a comparable surge in equipment in use). The third factor was
the extension of the useful lives of a portion of the Company's revenue
equipment by two years, effective July 1, 1994. Based on the historical
experience of the Company, management expects the extended lives to better
match the economic benefits received from the equipment.
[graph appears here]
Gross Tonnage Hauled (in thousands)
Year Amount
1984 218
1985 289
1986 334
1987 432
1988 586
1989 711
1990 937
1991 1,238
1992 1,615
1993 2,051
1994 2,759
1995 3,380
These improvements in operating expenses as a percentage of operating revenue
were partially offset by increases in the following areas:
. Insurance as a percentage of operating revenue increased to 3.3% in 1994 from
2.4% in 1993. This increase was primarily a result of the Company's increased
experience of accidents and cargo claims, particularly in the areas of cargo
care and liability
6
insurance. Accidents and cargo claims returned to historical levels during
1994, after being somewhat lower in the prior two years.
. Operating taxes and licenses as a percentage of operating revenue increased to
4.1% in 1994 from 3.8% in 1993. The primary cause for this increase was an
increase in federal fuel taxes in October 1993.
[graph appears here]
Total Number of Tractors
Year Amount
1984 233
1985 270
1986 382
1987 516
1988 714
1989 968
1990 1,195
1991 1,634
1992 1,955
1993 2,453
1994 3,344
1995 4,521
LIQUIDITY AND CAPITAL RESOURCES
Significant capital resources were required by the Company during 1995,
primarily due to the expansion of service territory during 1995 and the startup
costs associated with the expansion of service territory initiated on January 1,
1996. Capital resources were also required to support the continued growth in
tonnage handled by the Company in service territory that existed prior to
January 1, 1995.
Capital requirements during 1995 consisted primarily of $136,923,000 of
investing activities. The Company invested $137,952,000 in capital expenditures
during 1995 comprised of $81,062,000 in additional revenue equipment,
$30,072,000 in new terminal facilities or the expansion of existing terminal
facilities and $26,818,000 in other equipment. Planned expansions of service
territory during 1996 are less aggressive than those expansions initiated during
1995. Therefore, management does not expect a similar amount of capital
expenditures will be required in 1996. However, the amount of capital
expenditures required in 1996 will be dependent on the growth rate of the
Company and the timing and size of any future geographical expansions. At
December 31, 1995, the Company had commitments for land, terminals, revenue and
other equipment of approximately $33,462,000. These commitments were for the
completion of projects in process at December 31, 1995, and for the purchase of
additional revenue equipment in anticipation of increased revenue levels during
1996.
The Company provided for its capital resource requirements in 1995 with cash
from operations and financing activities. Cash from operations totaled
$45,676,000 in 1995
7
compared to $65,501,000 in 1994. This decrease was primarily attributable to the
increase in operating expenses, as they relate to operating revenue in 1995
compared to 1994. Financing activities augmented cash flow by $89,890,000 in
1995, utilizing two primary sources of 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 provided by NationsBank of Texas, N.A., Texas Commerce Bank, N.A. and
Wachovia Bank of Georgia, N.A. Effective May 31, 1995, the limit of this line
of credit facility was increased to $125,000,000 from $75,000,000. During
1995, the Company utilized this facility to provide $57,000,000 of net
financing, bringing outstanding borrowings under the facility to $94,000,000
and leaving $31,000,000 available for borrowing. The Company also maintains a
short-term, unsecured revolving line of credit with NationsBank of Texas, N.A.
Effective May 9, 1995, the limit of this short-term facility was increased to
$7,500,000 from $5,000,000. At December 31, 1995, $7,500,000 was available
for borrowing. In addition, the Company maintains a $10,000,000 line of
credit with NationsBank, N.A. to obtain letters of credit required for its
self-insurance program. At December 31, 1995, the Company had obtained
letters of credit totaling $5,870,000 for this purpose.
[graph appears here]
Total Assets (in millions)
Year Amount
1984 $ 7.47
1985 $ 11.66
1986 $ 15.37
1987 $ 23.20
1988 $ 43.47
1989 $ 68.90
1990 $ 97.95
1991 $168.13
1992 $175.53
1993 $251.13
1994 $355.35
1995 $477.76
. 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 $90,000,000 in medium to long-term
unsecured notes at an interest rate calculated at issuance. During 1995, the
Company utilized this agreement to issue a $15,000,000 note at 8.85% with a
ten year maturity and a $20,000,000 note at 6.92% with a ten year maturity.
The proceeds of these notes were used primarily to repay borrowings from the
revolving line of credit or to fund capital expenditures. At December 31,
1995, $25,000,000 was available under this facility for borrowing.
8
Working capital at December 31, 1995, increased $14,830,000, compared to
December 31, 1994. This increase was primarily the result of a $14,301,000
increase in trade receivables, less allowance for doubtful accounts, at December
31, 1995, compared to December 31, 1994.
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, 1995, and to fund current operating and capital needs. However, if
additional financing is required, management believes it will be available.
The Company utilizes off-balance sheet financing in the form of operating
leases, when appropriate and suitable, to finance computer equipment, terminal
facilities and revenue equipment. At December 31, 1995, future rental
commitments on operating leases were $54,805,000.
ENVIRONMENTAL
At December 31, 1995, the Company had no outstanding inquiries with any state or
federal environmental agency.
INFLATION
During 1995, the effect of inflation on the operating results of the Company was
minimal. However, most of the Company's expenses are sensitive to inflation as
increases in inflation generally result in increased costs.
[graph appears here]
Average Length of Haul (miles)
Year Amount
1984 264
1985 290
1986 289
1987 274
1988 300
1989 360
1990 395
1991 454
1992 525
1993 550
1994 567
1995 588
SEASONALITY
In the trucking industry, results of operations generally 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.
9
[graph appears here]
Total Number of Shipments (in thousands)
Year Amount
1984 227
1985 313
1986 437
1987 613
1988 949
1989 1,252
1990 1,693
1991 2,179
1992 2,654
1993 3,237
1994 4,267
1995 5,486
OTHER MATTERS
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, Accounting for Stock-Based Compensation, which will be effective for 1996.
The Company has elected to continue following the existing accounting rules (the
intrinsic value method) and has disclosed such in the 1995 financial statements.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. Although this Statement will also be applicable for
1996, the Company does not expect it to have a significant impact on the
Company's financial position or results of operations.
RECENT EVENTS
On January 1, 1996, the Company opened twelve new terminals and extended its
all-points coverage to the states of Delaware, Maryland, Virginia and West
Virginia.
On January 1, 1996, the Company effected a general rate increase of
approximately 5.75%. This rate increase initially affected approximately 44% of
its customers. Rates for other customers are covered by contracts and
guarantees and are negotiated throughout the year.
Effective January 1, 1996, the Company expanded its coverage to include 92% of
Canada's population through an exclusive partnership with Day & Ross, Inc., one
of Canada's leading less-than-truckload carriers. Day & Ross, Inc. is part of
the Day & Ross Transportation Group, Canada's largest truck transportation
conglomerate and is a wholly-owned subsidiary of the Canadian-based McCain Food
Company. Day & Ross, Inc. corporate offices are located in Hartland, New
Brunswick, Canada.
10
[graph appears here]
Total Number of People
Year Amount
1984 288
1985 340
1986 385
1987 745
1988 1,156
1989 1,516
1990 2,209
1991 3,058
1992 3,655
1993 4,964
1994 6,506
1995 8,867
11
American Freightways Corporation and Subsidiary
Consolidated Balance Sheets
(thousands, except per share data)
DECEMBER 31
1995 1994
--------------------------
ASSETS
Current assets:
Cash and cash equivalents (Note 9) $ 2,642 $ 3,999
Trade receivables, less allowance for doubtful accounts
(1995--$845; 1994--$639) 54,119 39,818
Operating supplies and inventories 2,136 1,519
Prepaid expenses 5,504 4,247
Deferred income taxes (Note 4) 8,444 4,664
Income taxes receivable 4,368 -
--------------------------
Total current assets 77,213 54,247
Property and equipment (Notes 3 and 6):
Land and structures 97,303 83,244
Revenue equipment 322,748 230,732
Service, office and other equipment 66,012 49,324
Leasehold improvements 1,650 1,439
Construction in progress 42,876 31,855
Allowances for depreciation and amortization
(deduction) (132,887) (98,701)
--------------------------
397,702 297,893
Other assets:
Bond funds (Notes 3 and 9) 901 888
Other 1,946 2,320
--------------------------
2,847 3,208
--------------------------
$ 477,762 $ 355,348
==========================
12
DECEMBER 31
1995 1994
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 10,532 $ 13,358
Accrued expenses (Note 2) 33,590 24,449
Federal and state income taxes - 233
Current portion of long-term debt 8,392 6,338
--------------------------
Total current liabilities 52,514 44,378
Long-term debt, less current portion (Notes 3 and 9) 189,239 104,843
Deferred income taxes (Note 4) 40,575 28,947
Shareholders' equity (Notes 3, 5 and 7):
Common stock, par value $.01 per share; authorized
250,000 shares; issued and outstanding 30,931 shares
in 1995 and 30,496 in 1994 309 305
Additional paid-in capital 98,514 93,347
Retained earnings 96,611 83,528
--------------------------
195,434 177,180
Commitments (Note 6)
--------------------------
$ 477,762 $ 355,348
==========================
See accompanying notes.
13
American Freightways Corporation and Subsidiary
Consolidated Statements of Income
(thousands, except per share data)
YEAR ENDED DECEMBER 31
1995 1994 1993
----------------------------------
Operating revenue $572,100 $465,588 $328,464
Operating expenses and costs:
Salaries, wages and benefits 335,167 247,049 168,770
Operating supplies and expenses 38,667 30,710 22,099
Operating taxes and licenses 24,434 19,251 12,340
Insurance 21,595 15,360 7,891
Communications and utilities 11,040 9,117 6,907
Depreciation and amortization 37,560 27,888 21,519
Rents and purchased transportation 46,405 45,633 42,250
Other 26,469 20,880 15,782
----------------------------------
541,337 415,888 297,558
----------------------------------
Operating income 30,763 49,700 30,906
Other income (expense):
Interest expense (10,198) (6,832) (4,246)
Interest income 146 195 132
Gain on disposal of assets 329 292 1
Other, net 269 247 197
----------------------------------
(9,454) (6,098) (3,916)
----------------------------------
Income before income taxes and extraordinary
charge 21,309 43,602 26,990
Federal and state income taxes (Note 4):
Current (credit) (422) 7,071 4,189
Deferred 8,648 9,500 6,049
----------------------------------
8,226 16,571 10,238
----------------------------------
Income before extraordinary charge 13,083 27,031 16,752
Extraordinary charge for early retirement of debt,
net of tax benefit of $205 (Note 3) - (335) -
----------------------------------
Net income $ 13,083 $ 26,696 $ 16,752
==================================
Per share (Note 1):
Income before extraordinary charge $ 0.42 $ 0.89 $0.59
Extraordinary charge - (0.01) -
----------------------------------
Net income $ 0.42 $ 0.88 $0.59
==================================
Average shares outstanding (Note 1) 31,334 30,357 28,581
==================================
See accompanying notes.
14
American Freightways Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
COMMON STOCK
----------------- ADDITIONAL
PAR PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
---------------------------------------------------------
(thousands)
Balances at January 1, 1993 27,694 $ 277 $ 49,352 $ 40,080 $ 89,709
Stock option and purchase plans 329 3 2,996 - 2,999
Net income - - - 16,752 16,752
---------------------------------------------------------
Balances at December 31, 1993 28,023 280 52,348 56,832 109,460
Sale of stock (Note 7) 2,125 21 36,630 - 36,651
Stock option and purchase plans 348 4 4,369 - 4,373
Net income - - - 26,696 26,696
---------------------------------------------------------
Balances at December 31, 1994 30,496 305 93,347 83,528 177,180
Stock option and purchase plans 435 4 5,167 - 5,171
Net income - - - 13,083 13,083
---------------------------------------------------------
Balances at December 31, 1995 30,931 $ 309 $ 98,514 $ 96,611 $ 195,434
=========================================================
See accompanying notes.
15
American Freightways Corporation and Subsidiary
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1995 1994 1993
-------------------------------------
(thousands)
OPERATING ACTIVITIES
Cash received from customers $ 557,139 $ 454,308 $ 323,298
Cash paid to suppliers and employees (498,454) (377,424) (266,724)
Interest received 146 195 132
Interest paid (9,907) (7,152) (4,157)
Income taxes paid (3,248) (4,426) (5,729)
-------------------------------------
Net cash provided by operating activities 45,676 65,501 46,820
INVESTING ACTIVITIES
Proceeds from sales of equipment 1,029 945 1,162
Capital expenditures (137,952) (116,272) (95,085)
-------------------------------------
Net cash used by investing activities (136,923) (115,327) (93,923)
FINANCING ACTIVITIES
Proceeds from notes payable and long-term
borrowings 117,640 74,500 44,000
Principal payments on long-term debt (31,190) (60,856) (1,767)
Proceeds from issuance of common stock 3,440 39,938 2,172
-------------------------------------
Net cash provided by financing activities 89,890 53,582 44,405
-------------------------------------
Net increase (decrease) in cash and cash
equivalents (1,357) 3,756 (2,698)
Cash and cash equivalents at beginning of year 3,999 243 2,941
-------------------------------------
Cash and cash equivalents at end of year $ 2,642 $ 3,999 $ 243
=====================================
16
American Freightways Corporation and Subsidiary
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1995 1994 1993
-----------------------------------
(thousands)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 13,083 $ 26,696 $ 16,752
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 37,560 27,888 21,519
Provision for losses on accounts receivable 929 1,126 513
Current tax effect of exercise of stock
options 931 1,086 826
Gain on sale of equipment (329) (292) (1)
Deferred income taxes 8,648 9,500 6,049
Changes in operating assets and liabilities:
Trade accounts receivable (15,230) (11,521) (5,403)
Operating supplies and inventories (617) (664) (284)
Prepaid expenses (1,257) (986) (781)
Other assets 244 100 (262)
Trade accounts payable (2,826) 3,534 7,779
Accrued expenses 9,141 7,681 1,653
Federal and state income taxes (4,601) 1,353 (1,540)
-----------------------------------
Total adjustments 32,593 38,805 30,068
-----------------------------------
Net cash provided by operating activities $ 45,676 $ 65,501 $ 46,820
===================================
See accompanying notes.
17
American Freightways Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of American
Freightways Corporation and its subsidiary (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated.
BUSINESS
The Company primarily operates as an interregional, scheduled, for hire, less-
than-truckload motor carrier, serving all points in 21 contiguous states from a
network of 186 terminals. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Historically, credit losses
have not been significant.
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.
Effective for periods beginning July 1, 1994, the Company changed the service
lives and salvage values for certain revenue equipment. These changes in
estimates were made to more accurately reflect the Company's experience as to
service lives of the equipment. These changes increased 1994 net income by
approximately $565,000, or $.02 per common share.
Effective for periods beginning October 1, 1995, the Company changed the service
lives for certain structures and improvements, ancillary and computer equipment
and furniture and fixtures. These changes in estimates were made to more
accurately reflect future service lives of the assets. These changes increased
1995 net income by approximately $453,000, or $.01 per common share.
18
American Freightways Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INSURANCE
As of December 31, 1995, the Company was self-insured up to specified limits for
the following types of claims:
Workers' compensation:
All states of operation (with the exception of Colorado,
Florida, Indiana, Iowa, Minnesota, Nebraska, Ohio, Texas
and Wisconsin) $ 500,000
State of Wisconsin FULLY INSURED
In the states of Colorado, Florida, Indiana, Iowa, Minnesota, Nebraska and
Texas, workers' compensation claims are insured under a $500,000 deductible
plan. In the state of Ohio, workers' compensation claims are insured under the
mandatory State Plan as private plans are not permitted. Wisconsin law does not
allow deductible plans and those claims are fully insured.
All other types of claims are self-insured with a retention limit of $500,000
per occurrence.
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
Earnings per share 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 and retroactively adjusted for the effect
of a 2-for-1 stock split declared April 22, 1993.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
19
American Freightways Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPENSATION TO EMPLOYEES
Stock based compensation to employees is accounted for based on the intrinsic
value method under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board issued Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. This statement will be adopted in the first quarter of 1996. The
Company does not expect Statement No. 121 to have a significant impact on the
Company's financial position or results of operations.
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.
2. ACCRUED EXPENSES
1995 1994
---------------------------
(thousands)
Accrued salaries, wages and benefits $ 13,796 $ 10,518
Taxes other than income 2,363 2,575
Loss, injury, damage, health and
workers' compensation claims reserves 16,320 10,536
Other 1,111 820
---------------------------
$ 33,590 $ 24,449
===========================
20
American Freightways Corpration and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT
1995 1994
-------------------------
(thousands)
Bonds payable /(1)/ $ 7,310 $ 7,580
Revolving credit agreements /(2)/ 94,000 37,000
Mortgage notes /(3)/ 1,107 419
Capitalized lease obligations /(4)/ 214 1,182
Unsecured senior notes /(5)/ 95,000 65,000
-------------------------
197,631 111,181
Less current portion (8,392) (6,338)
-------------------------
$ 189,239 $ 104,843
=========================
(1) Represents the Company's liability under a loan agreement with Arkansas
Development Finance Authority, issuer of economic development revenue bonds
to construct terminals 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 $1,320,000 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 $8,268,000 at December 31, 1995. The
loan agreement requires that certain bond service funds be maintained. As of
December 31, 1995, there was $901,000 in a debt service reserve fund.
Mandatory annual sinking fund redemption payments began in 1995.
(2) The revolving credit agreements at December 31, 1995, include an unsecured
revolving credit agreement which provides for available borrowings of
$125,000,000. Borrowings under this revolving credit agreement at December
31, 1995 totaled $94,000,000. The term of this agreement extends to April 1,
2000 (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, 1995 was 6.5%. 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 of .20% of the unused commitment. As of
December 31, 1995, the amount available for additional borrowing under this
line of credit was $31,000,000.
21
American Freightways Corpration and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
The Company also has $7,500,000 of available borrowings at December 31,
1995, under a separate unsecured revolving credit agreement. The terms of
this agreement provide for borrowings up to $7,500,000 at the prime rate of
interest or at a rate of interest agreed upon at the time of any borrowings.
No borrowings were outstanding at December 31, 1995 under this agreement.
This agreement matures May 31, 1996, unless terminated or renewed.
In addition, the Company maintains a $10,000,000 line of credit to fund
letters of credit. At December 31, 1995, the Company had utilized this line
of credit to obtain letters of credit totaling $5,870,000.
(3) Mortgage notes are due monthly or quarterly to November 2003 at an average
interest rate of 8.44%. The notes are collateralized by land and structures
with a net book value of $1,618,000 at December 31, 1995.
(4) Capitalized lease obligations consist primarily of installment obligations
for revenue equipment purchases; payable in various monthly installments
through April 1996, at a weighted average interest rate of 9.33% and
collateralized by revenue equipment with a net book value of approximately
$2,417,000 at December 31, 1995.
(5) Includes an unsecured senior note for $30,000,000 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 five notes totaling $65,000,000; all issued under an unsecured
and uncommitted $90,000,000 Master Shelf Agreement with the following
characteristics:
OUTSTANDING INTEREST
PRINCIPAL MATURITY DATE RATE
-------------------------------------------------------------
$ 10,000,000 August 2000 6.25%
10,000,000 October 2000 6.00
10,000,000 April 2001 7.55
15,000,000 January 2005 8.85
20,000,000 June 2005 6.92
22
American Freightways Corporation and Subsidiary
Notes to Consoliated Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
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.
Annual maturities on long-term debt, excluding capitalized lease obligations,
are $8,178,000 in 1996, $11,463,000 in 1997, $11,495,000 in 1998, $11,539,000 in
1999, $106,835,000 in 2000 and $47,907,000 thereafter.
Interest costs of $1,478,000, $1,002,000 and $1,568,000 in 1995, 1994, and 1993,
respectively, were capitalized as part of the acquisition cost of certain
property and equipment.
In 1994, the Company paid a note prior to its maturity date and incurred a
prepayment charge of $540,000 which has been classified as an extraordinary
charge in the 1994 statement of income, net of the related income tax benefit of
$205,000.
4. FEDERAL AND STATE INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1995 and 1994, respectively, are as follows:
1995 1994
---------------------
(thousands)
Noncurrent deferred tax liabilities:
Tax over book depreciation $49,490 $31,361
Alternative minimum tax credit carryover (8,915) (2,414)
---------------------
Net noncurrent deferred tax liabilities $40,575 $28,947
=====================
Current deferred tax assets:
Accrued expenses not deductible until paid $ 8,802 $ 5,346
Allowance for doubtful accounts 224 154
Revenue recognition differences 88 241
---------------------
Total current deferred tax assets 9,114 5,741
Current deferred tax liabilities:
Prepaid expenses (670) (1,077)
---------------------
Net current deferred tax assets $ 8,444 $ 4,664
=====================
23
American Freightways Corporation and Subsidiary
Notes to Consoliated Financial Statements (continued)
4. FEDERAL AND STATE INCOME TAXES (CONTINUED)
The reconciliation between the effective income tax rate and the statutory
federal income tax rate is presented in the following table:
1995 1994 1993
---------------------------------
(thousands)
Income tax at the statutory federal rate of 35% $ 7,458 $ 15,261 $ 9,446
Federal income tax effects of:
Retroactive tax rate change effect on deferred taxes - - 270
State income taxes (336) (613) (334)
Nondeductible expenses 295 214 90
Lower rates on taxable income below $15,000,000 (150) (100) (80)
Other - 58 (108)
---------------------------------
Federal income taxes 7,267 14,820 9,284
State income taxes 959 1,751 954
---------------------------------
$ 8,226 $ 16,571 $ 10,238
=================================
Effective income tax rate 38.6% 38.0% 37.9%
=================================
The Company has alternative minimum tax credit carryovers of approximately
$8,915,000 which have reduced the deferred tax liability. These credits carry
over indefinitely.
Tax benefits of stock option and purchase plans recorded as paid-in capital and
which did not reduce income tax expense amounted to $1,731,000, $1,086,000 and
$826,000 in 1995, 1994 and 1993, 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 320,699 shares of common stock remain reserved for
issuance under this plan at December 31, 1995. An eligible employee can purchase
shares having a fair market value on the date of grant of up to a maximum of the
greater of $1,200 or the fair market value of 200 shares. 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.
24
American Freightways Corporation and Subsidiary
Notes to Consoliated Financial Statements (continued)
5. EMPLOYEE BENEFIT AND COMPENSATION PLANS (CONTINUED)
Shares have been issued during 1993, 1994 and 1995 as follows:
NUMBER OF PER SHARE
ISSUE DATE SHARES ISSUED EXERCISE PRICE
- ------------------------------------------------------------------------------
May 1, 1993 53,734 $ 9.56
November 1, 1993 63,328 9.46
April 30, 1994 91,199 12.75
October 31, 1994 55,795 16.58
April 30, 1995 59,093 16.15
October 31, 1995 74,014 10.84
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
During 1993, the Company adopted the 1993 Stock Option Plan (the "Employee
Plan"), the Chairman Stock Option Plan, and the Nonemployee Director Stock
Option Plan. The Employee Plan is a successor to a nonstatutory stock option
plan adopted in February 1989. The Employee 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 issued in 1993 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.
Collective activity within the plans is summarized as follows:
STOCK SHARES
APPRECIATION UNDER
RIGHTS OPTION PRICE RANGE
----------------------------------------------
Outstanding at January 1, 1993 - 1,273,350 $3.00 -$10.75
Granted 198,900 705,300 12.81 - 19.88
Exercised - (218,320) 3.00 - 10.75
Canceled (3,600) (50,470) 3.00 - 13.06
----------------------------------------------
Outstanding at December 31, 1993 195,300 1,709,860 3.00 - 19.88
Granted - 154,500 17.88 - 22.13
Exercised (10,690) (201,600) 3.00 - 13.06
Canceled (9,490) (29,020) 3.00 - 17.88
----------------------------------------------
Outstanding at December 31, 1994 175,120 1,633,740 3.00 - 22.13
Granted - 231,950 14.81 - 21.38
Exercised (21,800) (290,990) 3.00 - 17.88
Canceled (15,030) (76,920) 3.00 - 21.38
----------------------------------------------
Outstanding at December 31, 1995 138,290 1,497,780 $3.00 -$22.13
==============================================
25
American Freightways Corporation and Subsidiary
Notes to Consoliated Financial Statements (continued)
5. EMPLOYEE BENEFIT AND COMPENSATION PLANS (CONTINUED)
The number of shares of common stock reserved for granting future options under
these plans was 2,017,790, 2,172,820 and 2,644,090, at December 31, 1995, 1994,
and 1993, respectively. At December 31, 1995, options were exercisable to
purchase 551,590 shares.
The Company recorded a benefit related to the change in value of stock
appreciation rights of $243,000 in 1995 and expense of $256,000 in 1994 and
$244,000 in 1993.
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, annual
employer contributions to a maximum (generally) of 6% of the participants'
compensation.
The Company's contributions to the plan totaled $6,436,000, $4,254,000 and
$2,979,000 for 1995, 1994 and 1993, respectively.
6. LEASES AND COMMITMENTS
Rent expense, exclusive of amounts related to purchased transportation, totaled
approximately $22,119,000 for 1995, $18,576,000 for 1994 and $11,296,000 for
1993.
The future minimum rental commitments under noncancelable operating leases
having initial or remaining terms in excess of one year as of December 31, 1995
are as follows:
REVENUE OTHER
TOTAL STRUCTURES EQUIPMENT EQUIPMENT
-------------------------------------------------
(thousands)
1996 $22,319 $3,890 $ 2,380 $16,049
1997 16,010 1,957 2,597 11,456
1998 5,723 1,159 2,597 1,967
1999 3,638 820 2,596 222
2000 3,005 409 2,596 -
Thereafter 4,110 1,075 3,035 -
-------------------------------------------------
$54,805 $9,310 $15,801 $29,694
=================================================
26
American Freightways Corporation and Subsidiary
Notes to Consoliated Financial Statements (continued)
6. LEASES AND COMMITMENTS (CONTINUED)
Certain leases have renewal options for periods from one to five years at the
fair rental value of the related property at renewal.
The future minimum lease payments under capitalized leases consist of the
following at December 31, 1995 (thousands):
1996 $ 217
Amount representing interest 3
---------
Present value of minimum lease payments included
in long-term debt (Note 3) $ 214
=========
Capitalized leases are included in property and equipment as follows:
1995 1994
--------------------
(thousands)
Revenue equipment $ 4,136 $ 4,136
Service, office and other equipment 23 23
Less accumulated amortization (1,742) (1,456)
--------------------
$ 2,417 $ 2,703
====================
Lease amortization is included in depreciation expense.
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, terminals and revenue equipment (including the cost to
complete construction in progress) aggregated approximately $33,462,000 at
December 31, 1995.
7. COMMON STOCK
In 1994, the Company completed a public offering of 2,125,000 shares (including
over-allotment option) of common stock at $18.25 per share. The net proceeds to
the Company were $36,651,000.
27
American Freightways Corporation and Subsidiary
Notes to Consoliated Financial Statements (continued)
8. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1995 and 1994:
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------
(thousands, except per share data)
1995
Operating revenue $ 132,533 $ 141,969 $ 149,392 $ 148,206
Operating expenses and costs 120,277 126,445 142,946 151,669
Net income (loss) 6,278 8,148 2,444 (3,787)
Net income (loss) per share $.20 $.26 $.08 $(.12)
Average shares outstanding 31,376 31,426 31,398 30,895
1994
Operating revenue $ 99,272 $ 123,656 $ 124,134 $ 118,525
Operating expenses and costs 91,677 106,576 110,256 107,378
Income before extraordinary
charge 3,933 9,486 7,774 5,838
Net income 3,933 9,486 7,439 5,838
Income per share before
extraordinary charge $.14 $.32 $.25 $.19
Net income per share $.14 $.32 $.24 $.19
Average shares outstanding 28,881 29,906 31,342 31,302
9. 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 balance sheet
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 balance sheet for bond funds
approximates fair value.
28
American Freightways Corporation and Subsidiary
Notes to Consoliated Financial Statements (continued)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 AMOUNT FAIR VALUE
-------------------------------
1995
Cash and cash equivalents $ 2,642 $ 2,642
Bond funds 901 901
Long-term debt 197,631 201,763
1994
Cash and cash equivalents $ 3,999 $ 3,999
Bond funds 888 888
Long-term debt 111,181 112,995
29
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 subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. 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 subsidiary at December 31, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
Ernst and Young LLP
Little Rock, Arkansas
January 18, 1996
30