Wabash National Annual Report 1999

1================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-10883 WABASH NATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 52-1375208 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1000 SAGAMORE PARKWAY SOUTH 47905 LAFAYETTE, INDIANA (ZIP CODE)(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (765) 771-5300 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, $.01 Par Value New York Stock Exchange Series A Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. X Yes. No. Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates ofthe registrant as of March 24, 2000 was $403,677,329, based upon the closingprice of the Company's common stock as quoted on the New York Stock Exchangecomposite tape on such date. The number of shares outstanding of the registrant's Common Stock andSeries A Preferred Share Purchase Rights as of March 24, 2000 was 22,985,186. The Proxy Statement for Annual Meeting of Stockholders to be held May9, 2000 is incorporated into this Form 10-K Part III by reference.================================================================================ 2 TABLE OF CONTENTS WABASH NATIONAL CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 PAGES ----- PART I.Item 1. Business............................................................................. 1Item 2. Properties........................................................................... 8Item 3. Legal Proceedings.................................................................... 9Item 4. Submission of Matters to Vote of Security Holders.................................... 9PART II.Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............. 9Item 6. Selected Financial Data.............................................................. 10Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... 11Item 7A. Quantitative and Qualitative Disclosures about Market Risks.......................... 18Item 8. Financial Statements and Supplementary Data.......................................... 19Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................... 41PART III.Item 10. Directors and Executive Officers of the Registrant................................... 42Item 11. Executive Compensation............................................................... 43Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 43Item 13. Certain Relationships and Related Transactions....................................... 44PART IV.Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 44SIGNATURES ...................................................................................... 46 3PART IITEM 1--BUSINESS Wabash National Corporation (Wabash or the Company) was founded in 1985by its current President, Donald J. Ehrlich, and sixteen other associates. TheCompany's founders utilized their years of experience in the truck trailermanufacturing business to design and build a state-of-the-art manufacturingfacility and to create a corporate culture which emphasizes design and newproduct development capabilities and stresses the integration of engineering,manufacturing and marketing. The Company's business strategy is to follow an integrated approach toengineering, manufacturing and marketing which emphasizes flexibility in productdesign and operations while preserving a low cost structure. Wabash seeks toidentify and produce proprietary products in the trucking and bimodal industrieswhich offer added value to customers and, therefore, generate higher profitmargins than those associated with standard trailers. The Company has developedits leasing and finance business and expects to continue such development. TheCompany has also expanded and intends to further expand its factory-owned retaildistribution network in order to more effectively distribute its products. Theretail sale of new and used trailers, aftermarket parts and maintenance servicegenerally provides the opportunity for higher gross margins. The Companybelieves that its RoadRailer(R) bimodal technology provides the opportunity tomaintain a reputation for design and new product development leadership and tocontinue to develop an international presence. The important elements of theCompany's strategies are: - Assessment of Customer Needs. The Company's engineering, manufacturing, and marketing departments work with customers to assess customer needs and to develop cost-effective engineering and manufacturing solutions. This process results in many highly customized products incorporating unique design features. The Company seeks to acquire products, services and technologies that address customer needs and provide the Company with the opportunity for enhanced profit margins. The Company emphasizes long-term customer relationships at all levels in the Company, built on Wabash's reputation for flexibility and customization. - Engineering, Manufacturing and Purchasing. The Company's integrated approach emphasizes low-cost and flexible production on existing assembly lines without the need for extensive capital investment or re-tooling. The Company uses computer-aided design (CAD) and computer-aided manufacturing (CAM) techniques throughout the production process. The Company also utilizes just-in-time techniques for many aspects of the production process including delivery of components immediately prior to the time needed for assembly. These techniques have substantially reduced the capital investment and set-up time associated with introducing product innovations and have also reduced product waste and unnecessary product handling time. - Product Differentiation. Wabash has developed or acquired several proprietary products and processes, which it believes, are recognized as high in quality and distinctive in design. While the Company is a competitive producer of standardized products, it emphasizes the development and manufacture of distinctive and more customized products and believes that it has the engineering and manufacturing capability to produce these products efficiently. The Company expects to continue a program of aggressive product development and selective acquisitions of quality proprietary products that distinguish the Company from its competitors and provide opportunities for enhanced profit margins. - Corporate Culture. Since the Company's founding, management has fostered a corporate culture that emphasizes design and new product development capabilities as well as extensive employee involvement. All employees participate in extensive classroom training covering all aspects of the Company's business, including team building and problem solving, statistical process control, economics and finance. Wabash also employs a compensation program that rewards most hourly employees through the distribution of a percentage of the Company's after-tax profits. Wabash's safety program has been developed with employee participation and has been cited for each of the last eleven years (1988-1998) by the Truck Trailer Manufacturing Association for achieving the best safety record among large plants in the industry. The Company believes that its corporate culture has produced a 1 4 highly trained and motivated workforce that understands the Company's business strategy and that is keenly interested in and rewarded by the success of the Company. Wabash was incorporated in Delaware in 1991 and is the successor bymerger to a Maryland corporation organized in 1985 and operates in threesegments, manufacturing; retail and distribution; and leasing and finance.Manufacturing Wabash designs, manufactures and markets standard and customized trucktrailers, including dry freight vans, refrigerated trailers and bimodalvehicles. The Company believes that it is the largest United States manufacturerof truck trailers and the leading manufacturer of composite trailers. Inaddition, the Company is the exclusive manufacturer of RoadRailer trailers, apatented bimodal technology owned by the Company that consists of trailers anddetachable rail bogies that permit a vehicle to run both over the highway anddirectly on railroad lines. Wabash markets its products directly and through dealers to truckloadand less-than-truckload (LTL) common carriers, private fleet operators, leasingcompanies, package carriers and intermodal carriers including railroads. TheCompany has established significant relationships as a supplier to many largecustomers in the transportation industry, none of which accounted for more thanten percent of the Company's net sales in 1999 and 1998 and only a few of whichaccounted for over ten percent of the Company's net sales in previous years,including those set forth below: - Truckload Carriers: Schneider National, Inc.; Werner Enterprises, Inc.; Swift Transportation Co., Inc.; Dart Transit; Heartland Express, Inc.; Crete Carrier Corporation; Knight Transportation, Inc.; U.S. Xpress Enterprises, Inc.; Frozen Food Express Industries (FFE); J.B. Hunt Transport Services, Inc.; KLLM, Inc.; Interstate Distributor Co. - Leasing Companies: Transport International Pool (TIP); Penske Truck Leasing; National Semi Trailer Corp. - Private Fleets: Safeway; DaimlerChrysler; The Kroger Company; Foster Farms - Less-Than-Truckload Carriers: Roadway Express, Inc.; Old Dominion Freight Line, Inc.; USF Holland; GLS Leasco; Yellow Services, Inc. - Package Carriers: Federal Express Corporation - Domestic Intermodal Carriers: Triple Crown Services; National Rail Passenger Corp. (Amtrak); GATX Capital (in conjunction with Burlington Northern Santa Fe and Mark VII Transportation) - International Intermodal Carriers: Bayerische Trailerzug Gesellschaft (BTZ); Compagnie Nouvelle De Conteneurs (CNC); Canadian National Railroad In addition, on July 14, 1998, the Company acquired Cloud Corporationof Harrison, Arkansas and Cloud Oak Flooring Co., Inc. of Sheridan, Arkansas,manufacturers of laminated hardwood floors for the truck body and trailerindustry. The Company believes it is the nation's largest consumer of trailerflooring and utilizes 100% of the production capacity of the acquired companies.The acquisition gives the Company the opportunity to enhance margins and ensurean adequate supply of a material that has experienced volatile pricing andlimited supply. It also allows the Company to leverage its current research anddevelopment activity in high strength, lightweight reinforced hardwood toproduce a proprietary flooring product. Through investment in additionalassembly lines and drying capacity, the Company expects to increase the capacityof the manufacturing plants located in Sheridan and Harrison, Arkansas. 2 5Retail and Distribution On April 16, 1997, the Company purchased certain assets of FruehaufTrailer Corporation (Fruehauf). The assets purchased included the Fruehauf(R)and ProPar(R) brand names, certain patents and trademarks, retail outlets in 31major metropolitan markets, an aftermarket parts distribution business based inGrove City, Ohio, a specialty trailer manufacturing plant in Huntsville,Tennessee and a trailer manufacturing plant in Ft. Madison, Iowa. As a result,the Company believes it has the largest company-owned distribution system in theindustry selling new and used trailers, aftermarket parts and maintenanceservice. In addition, the Company rents used trailers, primarily on a short-termbasis, through this distribution system. The retail sale of new and usedtrailers, aftermarket parts and maintenance service produces higher grossmargins and tend to be more stable in demand. As a result, the Company intendsto continue to place emphasis on this revenue source and continues to addadditional retail outlets to its existing network either through acquisition orgreenfield start-up. In addition, the Company recently combined its aftermarketparts distribution facilities into a newly acquired facility in Lafayette,Indiana to accommodate anticipated growth in its parts distribution business asa result of its retail expansion.Leasing and Finance The Company's wholly owned subsidiary, Wabash National FinanceCorporation (the Finance Company) provides leasing and finance programs to itscustomers for new and used trailers. This business tends to be more stable andpredictable while at the same time provides the Company an additional channel ofdistribution for used trailers taken in trade on the sale of new trailers.THE TRUCK TRAILER INDUSTRY The United States market for truck trailers and related products hashistorically been cyclical and has been affected by overall economic conditionsin the transportation industry as well as regulatory changes. Managementbelieves that customers historically have replaced trailers in cycles that runfrom approximately six to ten years. Both state and federal regulation of thesize, safety features and configuration of truck trailers have led to increaseddemand for trailers meeting new regulatory requirements from time to time.Currently, for instance, most states permit the use of 53-foot trailers and thisdevelopment has had a positive effect on trailer demand in the past few years. A large percentage of the new trailer market has historically beenserved by the ten largest truck trailer manufacturers, including the Company.Price, flexibility in design and engineering, product quality and durability,warranty, dealer service and parts availability are competitive factors in themarkets served. Historically, there has been manufacturing over-capacity in thetruck trailer industry. The following table sets forth domestic trailer shipments for theCompany, its nine largest competitors and for the United States trailer industryas a whole: 1999 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- -------WABASH .......... 69,772 61,061 48,346(1) 36,517 42,424 35,679Great Dane ...... 58,454 50,513 37,237 25,730 36,514 29,758Trailmobile ..... 31,329 23,918 18,239 11,094 21,239 16,671Utility ......... 30,989 26,862 23,084 19,731 25,068 19,501Stoughton ....... 14,673 11,750 11,700 8,300 14,770 13,000Strick .......... 11,000 10,959 10,488 8,141 18,427 15,599Dorsey .......... 9,013 8,375 7,939 8,595 12,276 12,010HPA Monon ....... 8,386 7,313 2,534 11,184 21,172 13,478Fontaine ........ 6,500 5,894 5,063 4,613 5,465 4,530Hyundai ......... 5,716 5,200 3,445 2,007 6,705 6,500Total Industry .. 317,388 278,821 222,550 197,519 284,268 236,016(1) Includes shipments of 1,467 units by Fruehauf in 1997 prior to theacquisition by Wabash of certain assets of Fruehauf. Sources: Southern MotorCargo Magazine (C) 1999 (1998-1994) and Trailer Body Builders Magazine (1999only), except foR 1999 Industry total, which is provided by America's CommercialTransportation (ACT) publications. 3 6REGULATION Truck trailer length, height, width, maximum weight capacity and otherspecifications are regulated by individual states. The Federal Government alsoregulates certain safety features incorporated in the design of truck trailers,including new regulations in 1998 which required anti-lock braking systems (ABS)on all trailers produced beginning in March 1998 and certain rear bumperstrength regulations effective at the beginning of 1998. Manufacturingoperations are subject to environmental laws enforced by federal, state andlocal agencies. (See "Environmental Matters")PRODUCT LINES Since the Company's inception in 1985, the Company has expanded itsproduct offerings from a single product into a broad line of transportationequipment and related products and services. As a result of its long-termrelationships with its customers, the Company has been able to work closely withits customers to create competitive advantages through development andproduction of productivity--enhancing transportation equipment. The Company'scurrent product lines include:Transportation Equipment - Plate trailers. The aluminum plate trailer was introduced into the Company's product line in 1985. Since these trailers utilize thicker and more durable sidewalls than standard sheet and post or fiberglass reinforced plywood ("FRP") construction and avoid the use of interior liners, the life of the trailer is extended and maintenance costs are significantly reduced. In addition, the post used in constructing the sidewalls of the plate trailer is much thinner and therefore provides greater interior volume than a standard sheet and post trailer. Plate trailers are used primarily by truckload carriers. In late 1995, the Company introduced its composite plate trailer. Features of the new composite plate trailer include increased durability and greater strength than the aluminum plate trailer. The composite material is a high-density vinyl core with a steel skin. The Company holds a number of patents regarding its composite trailer and believes this proprietary trailer will continue to become a greater source of business. The Company believes that it is the largest producer of plate trailers in the United States. - RoadRailer trailers. In 1987, the Company began manufacturing RoadRailer trailers. RoadRailer trailers represent a patented bimodal technology consisting of a truck trailer and detachable rail "bogie" permitting a trailer to run both over the highway and directly on railroad lines. The Company believes that the RoadRailer system can be operated more efficiently than alternative intermodal systems such as "piggyback" or "stack" railcars which require terminal operators to transfer vehicles or containers to railcars. In 1991, the Company acquired the exclusive rights to market and exploit RoadRailer technology. By offering the bimodal technology in a number of variations, the Company believes it can increase its penetration of the intermodal market and enlarge its pool of potential customers. The current models are the ReeferRailer(R) trailer, the ChassisRailer(R)trailer, the PupRailer(R)trailer, the AutoRailer(R)trailer and the 19.5 RoadRaileR trailer. Management believes that RoadRailer trailers provide the opportunity for the Company to maintain a reputation for technological leadership in the transportation industry. - Refrigerated trailers. Refrigerated trailers were introduced into the product line in 1990. The Company's proprietary process for building these trailers involves injecting insulating foam in the sidewalls and roof in a single process prior to assembly, which improves both the insulation capabilities and the durability of the trailers. These trailers are used primarily by private fleets in the transportation of perishable food products. During 1995, the Company opened its new refrigerated trailer manufacturing facility in Lafayette, Indiana. - Aluminum vans and doubles. Aluminum vans and doubles, also known as sheet and post trailers, were introduced into the product line in 1986 and are the standard trailer product purchased by customers in most segments of the trucking industry and represent the most common trailer sold throughout the Company's retail distribution network. 4 7 - FRP vans and doubles. The Company's initial product was FRP trailers, which have been purchased primarily by LTL carriers utilizing doubles or triples. Motor carriers utilizing standard double or triple trailers frequently reach the maximum legal weight limits before they fill the capacity of the trailers. Since FRP trailers are lighter in weight than these double trailers, they enable LTL carriers to attain higher productivity than could be achieved using other types of double trailers. - Other. The Company's other transportation equipment includes container chassis, flatbed trailers, rollerbed trailers, soft-sided trailers, dumps and converter dollies.Aftermarket Parts and Service The Company also offers replacement parts and accessories and providesmaintenance service both for its own and competitors' trailers and relatedequipment. The aftermarket parts business is less cyclical than trailer salesand represents a stable business, which can produce high gross profit margins.The Company markets its aftermarket parts and services through its division,Wabash National Parts and through its wholly owned subsidiary, Fruehauf TrailerServices, Inc. Management expects that the manufacture and sale of aftermarketparts and maintenance service will be a growing part of its product mix as thenumber and age of its manufactured trailers in service increases and as theCompany expands the number of factory-owned branches. Sales of these productsand services represented 8.0%, 8.1% and 10.9% of net sales during 1999, 1998 and1997, respectively.Rental, Leasing and Finance Through 1991, the Company leased trailers to customers on a verylimited basis, primarily involving used trailers taken in trade from othercustomers. In late 1991, the Company began to build its in-house capability toprovide leasing programs to its customers through the Finance Company. Inaddition, in late 1998 the Company began offering a rental program for usedtrailers, primarily on a short-term basis, through its retail branch network. AtDecember 31, 1999, the Company had approximately $50.4 million in equipmentleased to others, net and $80.3 million invested in finance contracts. Theseleasing assets have been financed through term debt and equity. Leasing revenuesof the Company represented 1.7%, 1.8% and 3.2% of net sales during 1999, 1998and 1997, respectively.Used Trailers The Company is also involved in the sale of used trailers, which areprimarily trade-ins from its customers for new trailers. The Company generallysells its used trailers both directly through its factory-owned branchdistribution system or through the Finance Company. Used trailer sales promotenew sales by permitting trade-in allowances and have represented a stable sourceof revenue for the Company. The sale of used trailers represented 6.2%, 5.8% and5.2% of net sales during 1999, 1998 and 1997, respectively.CUSTOMERS The Company's customer base includes many of the nation's largesttruckload common carriers, leasing companies, LTL common carriers, private fleetcarriers, package carriers and domestic and international intermodal carriersincluding railroads. The Company believes it is the sole supplier of dry vans,refrigerated trailers and platform trailers to approximately 14 customers. Salesto these customers accounted for approximately 32.6%, 28.9% and 28.9% of theCompany's new trailer sales in 1999, 1998 and 1997, respectively. The Company'sinternational sales accounted for approximately 2.0% of net sales during 1999and 1998 and 1.2% of net sales during 1997. No customer represented more than 10% of the Company's net sales in1999, 1998 and 1997. The Company's net sales in the aggregate to its fivelargest customers were 22.2%, 18.3%, and 20.9% of its sales in 1999, 1998 and1997, respectively. Truckload common carriers include large national lines as well asregional carriers. The large national truckload carriers, who continue to gainmarket share at the expense of both regional carriers and private fleets,typically purchase trailers in large quantities with highly individualizedspecifications. Trailers purchased by 5 8truckload common carriers including Schneider National, Inc., WernerEnterprises, Swift Transportation Co., Heartland Express, Inc., Dart Transit,Crete Carrier Corporation, Knight Transportation, Inc., U.S. Xpress Enterprises,Inc., FFE, J.B. Hunt Transport Services, Inc., KLLM, Inc. and InterstateDistributor Co. represented 54.3%, 44.7% and 42.2% of the Company's new trailersales in 1999, 1998 and 1997, respectively. Leasing companies include large national companies as well as regionaland local companies. Among leasing companies, the Company's customers includeTransport International Pool (TIP), National Semi Trailer Corp. and Penske TruckLeasing. New trailer sales to leasing companies represented 6.0%, 10.0%, and16.7% of new trailer sales in 1999, 1998 and 1997, respectively. Private fleet carriers represent the largest segment of the trucktrailer industry in terms of total units, but are dominated by small fleets of 1to 100 trailers. Among the larger private fleets, such as those of the largeretail chain stores, automotive manufacturers and paper products, truck trailersare often ordered with customized features designed to transport specializedcommodities or goods. Among private fleets, the Company's customers includeDaimlerChrysler, Safeway, Foster Farms and The Kroger Company. New trailer salesto private fleets represented 6.4%, 7.5% and 6.7% of new trailer sales in 1999,1998 and 1997, respectively. LTL carriers have experienced consolidation in recent years and theindustry is increasingly dominated by a few large national and several regionalcarriers. Since the Highway Reauthorization Act of 1983 mandated that all statespermit the use of 28-foot double trailers, there has been a conversion of nearlyall LTL carriers to doubles operations. Order sizes for LTL carriers tend to bein high volume and with standard specifications. LTL carriers who have purchasedCompany products include Roadway Express, Inc., Old Dominion Freight Line, Inc.,USF Holland, GLS Leasco and Yellow Services, Inc. New trailer sales to LTLcarriers accounted for 9.1%, 11.9% and 14.1% of new trailer sales in 1999, 1998and 1997, respectively. In the United States, Federal Express Corporation (FedEx) is one of twoprimary carriers dominating the package carrier industry. Package carriers havedeveloped rigid specifications for their highly specialized trailers and havehistorically purchased trailers from a small number of suppliers, includingWabash. New trailer sales to package carriers represented 0.8%, 1.1% and 1.0% ofnew trailer sales in 1999, 1998 and 1997, respectively. Customers for the Company's proprietary RoadRailer products includeU.S. and foreign intermodal carriers such as Triple Crown Services, Amtrak,Swift Transportation Co. Inc., GATX Capital (in conjunction with BurlingtonNorthern Santa Fe and Mark VII Transportation), Bayerische TrailerzugGesellschaft, Compagnie Nouvelle De Conteneurs and Canadian National Railroad.New trailer sales of RoadRailer products to these customers represented 2.8%,4.7% and 4.5% of new trailer sales in 1999, 1998 and 1997, respectively. TheCompany believes that the RoadRailer technology has enabled it to develop aninternational presence. Anticipated sources of future revenue in the RoadRailerbusiness also include license fees from the license of RoadRailer technology tooverseas manufacturers. Retail sales of new trailers to independent operators through theCompany's factory-owned distribution network provides the Company with access tosmaller unit volume sales which typically generate higher gross margins. Retailsales of new trailers represented 8.9%, 9.2% and 8.0% of total new trailer salesin 1999, 1998 and 1997, respectively. The balance of new trailer sales in 1999, 1998 and 1997 were made todealers and household moving carriers. 6 9MARKETING AND DISTRIBUTION The Company markets and distributes its products directly through itsfactory-owned distribution network and through independent dealerships. Certaintypes of customers purchase directly from the factory. The factory directaccounts include the larger full truckload, LTL, package and household movingcarriers and certain private fleets and leasing companies and are high volumepurchasers. In the past, the Company has focused its resources on the factorydirect market, where customers are generally aware of the Company's managementand its reputation in the trailer manufacturing industry. The larger LTL andprivate fleets, as well as the national fleets which increasingly dominate thetruckload segment, buy factory direct with a great deal of customization. Theselarger carriers generally will purchase the largest trailer allowable by law inthe areas they intend to operate, with maximum interior space. These carriersare the largest customers of the plate trailers manufactured by the Company. TheCompany's factory direct sales are based on specific customer orders. As a result of the acquisition of certain assets of Fruehauf, theCompany's distribution network affords the Company the ability to generateretail sales of trailers to smaller independent operators. In addition, thisbranch system enables the Company to provide maintenance and other services tocustomers on a nationwide basis and to take trade-ins, which are common with newtrailer deals with fleet customers. In addition to the 31 factory-owned branchesand 4 used trailer centers, the Company also sells its products through anationwide network of over 100 full-line and over 150 parts only independentdealerships, which generally serve the trucking and transport industry. Thedealers primarily serve intermediate and smaller sized carriers and privatefleets in the geographic region where the dealer is located and on occasion maysell to large fleets. The dealers may also perform service work for many oftheir customers. The Company also provides rental, leasing and finance programs to itscustomers.RAW MATERIALS The Company utilizes a variety of raw materials and componentsincluding steel, aluminum, lumber, tires and suspensions, which it purchasesfrom a large number of suppliers. Significant price fluctuations or shortages inraw materials or finished components may adversely affect the Company's resultsof operations. In 1999 and for the foreseeable future, the raw material used inthe greatest quantity will be composite plate material used on the Company'sproprietary DuraPlate(TM) trailer. The composite material is comprised of aninner and outer lining made of high strengTH steel surrounding a vinyl core, ofwhich both components are in ready supply. In August 1997, the Company completedconstruction of its own composite material facility located in Lafayette,Indiana where the Company produces the composite plate material from steel andvinyl components. Due to the continued strong demand for the Company's DuraPlatetrailer, additional composite material manufacturing capacity will be added tothis facility in 2000. The Company believes the addition of these new facilitieswill provide adequate capacity to meet its composite material requirements.Also, as discussed more fully in Footnote 5 to the consolidated financialstatements, during 1998 the Company acquired Cloud Corporation and Cloud OakFlooring Company, Inc., manufacturers of laminated hardwood floors for the truckbody and trailer industry. The Company is in the process of increasingproduction capacity at these facilities in order to accommodate 100% of theCompany's trailer flooring needs and should be complete in 2000. In the interim,flooring needs in excess of Cloud's capacity are purchased externally. Thecentral U.S. location of the Company's plants gives Wabash a competitiveadvantage in the transportation cost of inbound raw materials as well as thecost of delivery of finished product. Customers often use trailers coming offthe assembly line to deliver freight outbound from the Midwest.BACKLOG The Company's backlog of orders was approximately $1.1 billion, $1.0billion and $0.8 billion at December 31, 1999, 1998 and 1997, respectively. TheCompany expects to fill a majority of its existing backlog of orders by the endof 2000. 7 10PATENTS The Company holds or has applied for approximately 70 patents in theUnited States on various components and techniques utilized in its manufactureof truck trailers. In addition, the Company holds or has applied for 84 patentsin 14 foreign countries and the European patent community.RESEARCH AND DEVELOPMENT The Company has a reputation in the industry for its innovation inproduct design and low cost manufacturing. The Company's policy is to expenseall research and development costs as incurred. Research and development costswere $1.5 million, $1.8 million and $2.1 million in 1999, 1998 and 1997,respectively. Research and development efforts include the development ofproprietary, highly automated manufacturing equipment and tooling, much of whichwas developed by the employees who operate the equipment. The Company promotes aculture that encourages innovation by all employees, particularly those workingon the factory floor.ENVIRONMENTAL MATTERS The Company's operations are subject to various federal, state andlocal environmental laws and regulations related to air and water quality,underground storage tanks (USTs) and waste handling and disposal. The substancesand compounds generated and handled in the Company's operations that fall withinthese laws and regulations result from the Company's painting, insulating,undercoating, branch service operations and recently acquired flooringoperations. As a result, the Company incurs ongoing costs to comply withenvironmental laws and regulations as well as recognizes liabilities fortreatment and remediation costs associated with known environmental issues. See Footnote 14 to the consolidated financial statements for additionalenvironmental information and the Company's accounting for such costs.EMPLOYEES As of December 31, 1999, the Company had approximately 5,600 employees.Approximately 7.8% of the Company's employees are represented by labor unions.Since the acquisition of certain assets of Fruehauf Trailer Corporation, theCompany has not entered into any collective bargaining agreements. The Companyplaces a heavy emphasis on employee relations through educational programs andquality control teams. The Company believes its employee relations are good.ITEM 2--PROPERTIES The Company's corporate headquarters are located in Lafayette, Indiana.The Company and its subsidiaries have facilities located in various geographiclocations. The Company's leased and owned facilities approximate the following:MANUFACTURING FACILITIES The Company's main facility of 1.1 million sq. ft. in Lafayette,Indiana, consists of truck trailer and composite material production, tool anddie operations, research laboratories, management offices and headquarters. TheCompany owns three other trailer manufacturing facilities, in Lafayette, Indiana(528,000 sq. ft.), in Ft. Madison, Iowa (255,000 sq. ft.) and Huntsville,Tennessee (178,000 sq. ft.). There are three leased manufacturing facilities inLafayette, Indiana (121,000 sq. ft.). In addition, the Company owns two trailerflooring manufacturing facilities, in Harrison, Arkansas (449,000 sq. ft.) andin Sheridan, Arkansas (117,000 sq. ft.). The Company emphasizes efficient manufacturing processes and believesit utilizes a large percentage of the Company's productive capacity duringnormal operations. 8 11RETAIL AND DISTRIBUTION FACILITIES The Company leases a facility in St. Louis, Missouri (4,600 sq. ft.)that serves as headquarters for the retail and distribution segment. Thislocation oversees the operation of 31 sales and service branches (4 of which areleased) and 4 used trailer centers (3 of which are leased). All of thesefacilities are located throughout the United States. The branch facilitiesconsist of an office, warehouse and service space and generally range in sizefrom 20,000 to 35,000 square feet per facility. In addition, the Company ownsits aftermarket parts distribution center in Lafayette, Indiana (300,000 sq.ft.) and leases two other parts centers, in Montebello, California (44,000 sq.ft.) and Chicago, Illinois (15,000 sq. ft.).LEASING AND FINANCE FACILITIES The Company leases a facility in Arlington Heights, Illinois (700 sq.ft.), that serves as headquarters for the Finance Company.ITEM 3--LEGAL PROCEEDINGS There are certain lawsuits and claims pending against the Company thatarose in the normal course of business. None of these claims are expected tohave a material adverse effect on the Company's financial position or its annualresults of operations. See Footnote 14 to the consolidated financial statements for additionalinformation related to certain class action lawsuits filed against the Companyand certain of its officers and directors.ITEM 4--SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS None to report.PART IIITEM 5--MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchangeunder the symbol "WNC." The following table sets forth, for the periodindicated, the high and low sale prices per share of the Common Stock asreported on the New York Stock Exchange Composite Tape and the dividendsdeclared per common share. DIVIDENDS DECLARED PER HIGH LOW COMMON SHARE ------ ----- ------------ 1999 ---------------------------------------- Fourth Quarter..................... $20.50 $13.06 $0.04 Third Quarter...................... $22.50 $19.13 $0.0375 Second Quarter..................... $19.94 $10.94 $0.0375 First Quarter...................... $13.63 $11.63 $0.0375 1998 ---------------------------------------- Fourth Quarter..................... $22.06 $10.25 $0.0375 Third Quarter...................... $26.69 $13.31 $0.035 Second Quarter..................... $31.75 $21.50 $0.035 First Quarter...................... $31.00 $24.25 $0.035As of March 23, 2000, the Common Stock was held by 1,156 holders of record. 9 12ITEM 6--SELECTED FINANCIAL DATA The following selected consolidated financial data with respect to theCompany, for the five years in the period ended December 31, 1999, have beenderived from the Company's consolidated financial statements, which have beenaudited by Arthur Andersen LLP, independent public accountants, as indicated intheir reports. The following information should be read in conjunction with"Management's Discussion and Analysis of Financial Condition and Results ofOperations" and the consolidated financial statements and notes thereto includedelsewhere herein. YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales .................................. $ 1,454,570 $ 1,292,259 $ 846,082 $ 631,492 $ 734,299 Cost of sales .............................. 1,322,852 1,192,968 778,620 602,629 677,503 ----------- ----------- ----------- ----------- ----------- Gross profit ............................ 131,718 99,291 67,462 28,863 56,796 Selling, general and administrative expenses 50,796 38,626 26,307 13,359 11,111 ----------- ----------- ----------- ----------- ----------- Income from operations .................. 80,922 60,665 41,155 15,504 45,685 Interest expense ........................... (12,695) (14,843) (16,100) (10,257) (6,251) Accounts receivable securitization costs ... (5,804) (3,966) -- -- -- Equity in losses of unconsolidated affiliate (4,000) (3,100) (400) -- -- Other, net ................................. 6,310 (259) 1,135 788 875 ----------- ----------- ----------- ----------- ----------- Income before income taxes .............. 64,733 38,497 25,790 6,035 40,309 Provision for income taxes ................. 25,891 15,226 10,576 2,397 14,902 ----------- ----------- ----------- ----------- ----------- Net income .............................. $ 38,842 $ 23,271 $ 15,214 $ 3,638 $ 25,407 =========== =========== =========== =========== =========== Basic earnings per common share ............ $ 1.60 $ 1.00 $ 0.74 $ 0.19 $ 1.34 =========== =========== =========== =========== =========== Diluted earnings per common share .......... $ 1.59 $ 0.99 $ 0.74 $ 0.19 $ 1.33 =========== =========== =========== =========== =========== Cash dividends declared per common share ... $ 0.1525 $ 0.1425 $ 0.13 $ 0.12 $ 0.105 =========== =========== =========== =========== =========== YEARS ENDED DECEMBER 31, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- ------- -------- -------- (DOLLAR AMOUNTS IN THOUSANDS) BALANCE SHEET DATA (at end of period): Working capital ......................... $228,751 $271,256 $280,212 $148,712 $113,198 Total lease portfolio ................... 130,626 117,038 103,222 113,811 76,464 Total assets ............................ 791,291 704,486 629,870 440,071 384,134 Long-term debt, net of current maturities 164,367(1) 165,215(1) 231,880(1) 151,307(1) 73,726(1) Stockholders' equity .................... 379,365 345,776 226,516 178,368 177,631 (1) Long-term debt, net of current maturities, includes $59.6 million, $67.9 million, $54.9 million, $80.9 and $31.0 million in 1999, 1998, 1997, 1996 and 1995, respectively, incurred by the Finance Company in connection with its leasing and finance operations. 10 13ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of Wabash National Corporation's (Wabash orthe Company) historical results of operations and of its liquidity and capitalresources should be read in conjunction with the consolidated financialstatements and related notes thereto. This document contains forward-looking statements. These statementsshould be viewed in connection with the risk factors disclosed in the Company'sRegistration Statement on Form S-3 (SEC File No. 333-48589). Wabash designs, manufactures and markets standard and customized trucktrailers under the Wabash National and Fruehauf trademarks. The Company believesthat it is the leading U.S. manufacturer of composite trailers and bimodalvehicles through its RoadRailer products. The Company produces and sellsaftermarket parts through its division, Wabash National Parts and its whollyowned subsidiary, Fruehauf Trailer Services, Inc. (FTSI). In addition to itsaftermarket parts sales and service revenues, FTSI sells new and used trailersas well as rents used trailers through its retail network. The Company's othersignificant wholly owned subsidiaries include Wabash National FinanceCorporation (the Finance Company) and Cloud Corporation and Cloud Oak Flooring(Cloud Companies). The Finance Company provides leasing and finance programs toits customers for new and used trailers. The Cloud Companies manufacturehardwood flooring for the Company's manufacturing segment. The Company continues to pursue opportunities in international markets,primarily through the Company's proprietary RoadRailer technology. In late 1997,the Company acquired a minority interest in a European RoadRailer operatingcompany in which exclusively RoadRailer equipment is used to transport goodsbetween Italy and Germany. In addition, the Company formed an affiliation withtrailer manufacturer Bernard Krone Fahrzeugwerke GmbH of Wertle, Germany for themarketing of dry vans and refrigerated trailers throughout Europe. The Companybelieves these opportunities provide the foundation for future growthinternationally. Under the provisions of Financial Accounting Standards (SFAS) No. 131,Disclosure About Segments of an Enterprise and Related Information, the Companydetermined it has three reportable business segments. These segments are themanufacturing segment, the retail and distribution segment and the leasing andfinance segment. The manufacturing segment includes the Company's trailermanufacturing facilities located in Lafayette, Indiana, Ft. Madison, Iowa andHuntsville, Tennessee as well as the trailer flooring operations (CloudCompanies) located in Harrison and Sheridan, Arkansas. The retail anddistribution segment includes the sale of new and used trailers, aftermarketparts and service along with the rental of used trailers through its retailbranch network. In addition, the retail and distribution segment includes thesale of aftermarket parts through Wabash National Parts. The leasing and financesegment includes the leasing and finance operations of the Finance Company.OVERVIEW In 1999, the U.S. truck trailer industry experienced one of the bestyears in the industry's history with approximately 317,000 units shipped, anincrease of approximately 13.8% over 1998. The Company's market share in theU.S. trailer industry was approximately 22.0% in 1999. The demand for theCompany's products continues to be strong as the Company began 2000 withapproximately $1.1 billion in backlog, a majority of which is expected to bedelivered in 2000. 11 14 The following table sets forth certain operating data as a percentageof net sales for the periods indicated: PERCENTAGE OF NET SALES YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ Net sales .............................................................. 100.0% 100.0% 100.0% Cost of sales .......................................................... 90.9 92.3 92.0 ------ ------ ------ Gross profit .................................................... 9.1 7.7 8.0 General and administrative expense ..................................... 2.1 2.0 2.1 Selling expense ........................................................ 1.4 1.0 1.0 ------ ------ ------ Income from operations .......................................... 5.6 4.7 4.9 Interest expense ....................................................... (0.9) (1.1) (1.9) Accounts receivable securitization costs................................ (0.4) (0.3) -- Equity in losses of unconsolidated affiliate ........................... (0.3) (0.3) -- Other, net ............................................................. 0.4 -- -- ------ ------ ------ Income before taxes ............................................. 4.4 3.0 3.0 Provision for taxes .................................................... 1.8 1.2 1.2 ------ ------ ------ Net income ...................................................... 2.6% 1.8% 1.8% ====== ====== ====== 1999 COMPARED TO 1998 During 1999, the Company achieved net sales of $1.5 billion, which were13% higher than 1998 net sales of $1.3 billion. Net income for 1999 rose 67% to$38.8 million as compared to $23.3 million in 1998.RESULTS OF OPERATIONS Net Sales YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 % CHANGE -------- --------- --------Net External Sales by Segment: (DOLLAR AMOUNTS IN MILLIONS) Manufacturing $1,113.9 $ 988.1 12.7% Retail and Distribution 301.7 280.5 7.6% Leasing and Finance 39.0 23.7 64.6% -------- --------- -----Total Net Sales $1,454.6 $ 1,292.3 12.6% ======== ========= ===== The manufacturing segment's external net sales rose 12.7% or $125.8million in 1999 compared to 1998 driven primarily by a 12.3% increase in unitssold, from approximately 57,000 units in 1998 to approximately 64,000 units in1999. The average selling price per new trailer sold increased 1.2%, fromapproximately $17,000 in 1998 to approximately $17,200 in 1999. The increase innew trailer sales reflects the continued strong demand for the Company'sDuraPlate trailer, which accounted for approximately 57% of new trailerproduction in 1999. The Company continues to pursue its manufacturing strategyof increasing the proportion of revenues derived from proprietary products suchas the DuraPlate trailer and RoadRailer bimodal products. Demand for theCompany's products continues to be very strong as evidenced by the Company's$1.1 billion backlog at the beginning of 2000, over $0.6 billion of which isrelated to the DuraPlate trailer. The retail and distribution segment's external net sales rose 7.6% or$21.2 million in 1999 compared to 1998 driven primarily by an increase in newand used trailer sales. The number of new trailers sold increased 8.0%, fromapproximately 5,000 units in 1998 to approximately 5,400 units in 1999 and thenumber of used trailers sold increased 27.2% in 1999 compared to 1998. Inaddition, the average price per new trailer sold increased 3.7%, fromapproximately $19,000 in 1998 to approximately $19,700 in 1999. The increases innew and used trailer sales were offset somewhat by a 5.9% net decrease inaftermarket parts, service revenues and rental revenues. The net decrease inaftermarket parts, service revenues and rentals revenues was driven primarily bylower sales from the Company's parts distribution center, which during 1999continued to focus on consolidating its operations with the distribution centeracquired as part of the Fruehauf asset acquisition in 1997 and the impact of theconversion and 12 15implementation of new operating software within the Company's retail anddistribution network. The Company continues to pursue its branch expansionstrategy, which includes the replacement of certain existing sites within thesame market as well as additional retail outlets in new markets, either throughacquisition or greenfield start-up. The leasing and finance segment's external net sales increased in 1999compared to 1998 primarily as a result of increased sales of leased equipmentoffset by slightly lower leasing revenues in 1999 compared to 1998. Gross Profit YEARS ENDED DECEMBER 31, ----------------------------------- 1999 1998 % CHANGE -------- ------- --------Gross Profit by Segment: ............... (DOLLAR AMOUNTS IN MILLIONS) Manufacturing ..................... $ 99.6 $ 68.0 46.5% Retail and Distribution ........... 27.5 27.3 0.7% Leasing and Finance ............... 6.8 6.9 (1.4%) Eliminations ...................... (2.2) (2.9) 24.1% -------- ------- ------Total Gross Profit ..................... $ 131.7 99.3 32.6% ======== ======= ====== The Company finished 1999 with gross profit as a percent of sales of9.1% on a consolidated basis, the highest gross profit margin since 1993. Thisfavorable increase in gross profits was primarily driven by the manufacturingsegment, as discussed below. The manufacturing segment's gross profit increased 46.5% primarily as aresult of a 12.7% increase in net sales, higher margins from an improved productmix toward more proprietary products, reduced hardwood flooring costs resultingfrom the acquisition of the Cloud Companies in July 1998 and a generalimprovement in production efficiencies throughout the year. The Company'sstrategy of increasing the proportion of revenues attributable to proprietaryproducts, such as the DuraPlate trailer, has been successful in generatinghigher gross profits than has historically been possible with a moretraditional, commodity-type production mix. The 0.7% increase in the retail and distribution segment's gross profitwas primarily due to the 7.6% increase in net sales offset by lower marginsresulting from higher levels of sales of used trailers which were at lower grossprofit percentages than the segment as a whole. In addition, gross profits atthe Company's parts distribution center were down in 1999 compared to 1998 dueto the margin impact of the Company's consolidation of its two aftermarket partsoperations and the conversion of its operating systems. The leasing and finance segment's gross profit decreased 1.4% during1999 as a result of lower leasing revenues and additional depreciation costs onequipment held for lease, offset somewhat by gross profits associated with thehigher sales of new and used leased equipment. Income from Operations YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 % CHANGE ------- ------- -------Operating Income by Segment: ............ (DOLLAR AMOUNTS IN MILLIONS) Manufacturing ...................... $ 72.0 $ 48.7 47.8% Retail and Distribution ............ 5.3 8.7 (39.1%) Leasing and Finance ................ 5.8 6.2 (6.5%) Eliminations ....................... (2.2) (2.9) 24.1% ------- ------- -------Total Operating Income .................. $ 80.9 $ 60.7 33.3% ======= ======= ====== Income from operations (income before interest, taxes, and other items)for the manufacturing segment increased 47.8% primarily because of the increasein gross profit previously discussed. Selling, general and administrativeexpenses increased primarily as a result of normal operating costs generatedfrom the continued growth in this segment. Income from operations for the retail and distribution segment and theleasing and finance segment were impacted by the changes in the gross profitpreviously discussed. 13 16 Other Income (Expense) Interest expense totaled $12.7 million and $14.8 million for the yearsended December 31, 1999 and 1998, respectively. The decrease in interest expenseprimarily reflects lower borrowings on the Company's revolving credit facilityand higher usage of the Company's accounts receivable securitization facility in1999 compared to 1998. Accounts receivable securitization costs related to theCompany's receivable sale and servicing agreement totaled $5.8 million and $4.0million for the years ended December 31, 1999 and 1998, respectively. Theincrease in securitization costs is due to the full-year impact of this newfacility in 1999 compared to 9 months in 1998 and an increase in the amountoutstanding under this facility during late 1998 from $83 million to $105million. Equity in losses of unconsolidated affiliate consists of the Company'sinterest in the losses of ETZ, a non-operating, European holding company, at a25.1% share which represents the Company's interest acquired in November 1997.ETZ is the majority shareholder of BTZ, a European RoadRailer operating companybased in Munich, Germany, which began operations in 1996. BTZ has incurredstart-up losses since inception, however, the BTZ is currently in the process ofexpanding its RoadRailer fleet and service territory which the Company believeswill allow the operations to become profitable. In addition, the BTZ has securedequipment financing necessary to fund future fleet expansion for its plannedgrowth. Other, net totaled income of $6.3 million in 1999 compared to a loss of$0.3 million in 1998. On December 24, 1998, the Company received a notice fromthe Internal Revenue Service that it intended to assess additional federalexcise tax, primarily on the restoration of certain used trailers. Although theCompany strongly disagreed with the IRS, it recorded a $4.6 million accrualduring the fourth quarter of 1998 for this loss contingency. In December 1999,the Company favorably resolved the dispute at less than 25% of the accruedamount, or approximately $1.1 million, net of interest, of which less than $1million was related to the restoration of used trailers. As a result of thisfavorable resolution, the Company reversed in December of 1999 $3.5 million ofthe previously recorded accrual. Also included in Other, net in 1999 are gainsfrom the sale of property, plant and equipment of approximately $0.9 million andinterest income of approximately $0.8 million. Income Taxes The provision for federal and state income taxes represented 40.0% and39.6% of pre-tax income for 1999 and 1998, respectively and differed from theU.S. Federal Statutory rate of 35% due primarily to State taxes.1998 COMPARED TO 1997 During 1998, the Company achieved net sales of $1.3 billion, which were53% higher than 1997 net sales of $846.1 million. Net income for 1998 rose 53%to $23.3 million as compared to $15.2 million in 1997.RESULTS OF OPERATIONS Net Sales YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 % CHANGE ---------- -------- -------Net External Sales by Segment: ........... (DOLLAR AMOUNTS IN MILLIONS) Manufacturing ....................... $ 988.1 $ 646.5 52.8% Retail and Distribution ............. 280.5 172.7 62.4% Leasing and Finance ................. 23.7 26.9 (11.9%) ---------- -------- -------Total Net Sales .......................... $ 1,292.3 $ 846.1 52.7% ========== ======== ======= The manufacturing segment's external net sales rose 52.8% or $341.6million in 1998 compared to 1997 driven primarily by a 39% increase in unitssold, from approximately 41,000 units in 1997 to approximately 57,000 units in1998. In addition, the average selling price per unit sold increased 10.5% in1998 over 1997, reflecting improved production mix particularly as a result ofthe strong demand for the Company's DuraPlate trailer. The retail and distribution segment's external net sales rose 62.4% or$107.8 million in 1998 compared to 1997 driven primarily by a 76% increase inthe number of new trailers sold, from approximately 2,900 units in 1997 toapproximately 5,100 units in 1998, a 107% increase in the number of usedtrailers sold and a 38% increase in 14 17aftermarket parts and service revenues. These increases are primarily the resultof a full year of operations of the retail distribution network acquired inApril 1997 and a higher level of used trailer sales year over year. The leasing and finance segment's external net sales decreased slightlyin 1998 compared to 1997 primarily as a result of lower sales of leasedequipment as leasing revenues remained level with 1997. Gross Profit YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 % CHANGE ------- ------- -------Gross Profit by Segment: ................ (DOLLAR AMOUNTS IN MILLIONS) Manufacturing ...................... $ 68.0 $ 44.0 54.5% Retail and Distribution ............ 27.3 17.9 52.5% Leasing and Finance ................ 6.9 7.9 (12.7%) Eliminations ....................... (2.9) (2.3) (26.1%) ------- ------- -------Total Gross Profit ...................... $ 99.3 $ 67.5 47.1% ======= ======= ======= The manufacturing segment's gross profit increased 54.5% primarily as aresult of the 52.8% increase in net sales. Gross profit as a percentage of netsales increased slightly as a result of an improved product mix toward moreproprietary products and reduced material costs as a result of the acquisitionof the Cloud Companies which reduced the Company's hardwood flooring costs sincethe acquisition in July 1998. The improvement in gross profit was offset to someextent by increased labor and overtime expenses associated with the 52.8%increase in the manufacturing segment's net sales. Gross profit was alsoimpacted by a favorable change of estimates in the Company's environmentalreserve requirements of approximately $2.8 million and an unfavorable change ofestimates in inventory reserves of approximately $2.9 million. The retail and distribution segment's gross profit increased 52.5%,primarily as a result of the 62.4% increase in net sales. Gross profit as apercentage of net sales declined slightly primarily as a result of the change inproduct mix with higher levels of sales of used trailers which were at a lowergross profit percentages than the segment as a whole, and due to the marginimpact of the Company's consolidation of its two aftermarket parts operationsduring 1998. The leasing and finance segment's gross profit declined during 1998 asa result of a decrease in net sales. Income from Operations YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 % CHANGE ------- ------- -------Operating Income by Segment: ............ (DOLLAR AMOUNTS IN MILLIONS) Manufacturing ...................... $ 48.7 $ 30.6 59.2% Retail and Distribution ............ 8.7 5.9 47.5% Leasing and Finance ................ 6.2 7.0 (11.4%) Eliminations ....................... (2.9) (2.3) (26.1%) ------- ------- -------Total Operating Income .................. $ 60.7 $ 41.2 47.3% ======= ======= ======= Income from operations (income before interest, taxes, and other items)for the manufacturing segment increased 59.2% primarily because of the increasein gross profit previously discussed offset by increased selling, general andadministrative expenses. Selling, general and administrative expenses increasedprimarily as a result of normal operating costs generated from the continuedgrowth in this segment. Income from operations for the retail and distribution segment wereimpacted by a full year of operations of the retail distribution networkacquired in April 1997 and changes in gross profit previously discussed. Income from operations for the leasing and finance segment wereimpacted by the changes in the gross profit previously discussed. 15 18 Other Income (Expense) Interest expense totaled $14.8 million and $16.1 million for the yearsended December 31, 1998 and 1997, respectively. The decrease in interest expenseprimarily reflects lower borrowings on the Company's revolving credit facilityduring the last nine months of 1998 as a result of the cash generated from theCompany's accounts receivable securitization facility established in March 1998,and the Company's April 1998 common stock offering. Other Income (Expense) also includes the Company's interest in thelosses of ETZ, a European RoadRailer operating company, a 25.1% share of whichthe Company acquired in November 1997. Other, net totaled a loss of $0.3 million in 1998 compared to income of$1.1 million in 1997. On December 24, 1998, the Company received notice from theInternal Revenue Service that it intended to assess additional federal excisetax, primarily on the restoration of certain used trailers. Although the Companystrongly disagreed with the IRS, it recorded a $4.6 million accrual during thefourth quarter of 1998 for this loss contingency, which is reflected in Other,net in the accompanying Consolidated Statement of Income. Also included inOther, net in 1998 are gains from the sale of property, plant and equipment ofapproximately $2.1 million and interest income of approximately $1.0 million. Income Taxes The provision for federal and state income taxes represented 39.6% and41.0% of pre-tax income for 1998 and 1997, respectively and differed from theU.S. Federal Statutory rate of 35% due primarily to State taxes.LIQUIDITY AND CAPITAL RESOURCES As presented in the Consolidated Statements of Cash Flows, theCompany's liquidity position decreased $44.6 million during 1999 from $67.1million in cash and cash equivalents at December 31, 1998 to $22.5 million atDecember 31, 1999. This decrease was due to net cash provided by operatingactivities of $63.5 million offset by net cash used in investing and financingactivities of $108.1 million. Operating Activities: Net cash provided by operating activities of $63.5 million in 1999 isprimarily the result of net income and the add-back of non-cash charges fordepreciation and amortization. Changes in other working capital items, whichoffset to an immaterial amount, include an increase in inventories (excludingthe effect of the Apex Acquisition, see Footnote 5 to the consolidated financialstatements) offset by an increase in accounts payable and a decrease in prepaidexpenses. The Company anticipates future increases in working capital as aresult of its branch expansion strategy to be partially offset by improvementsin working capital at its manufacturing locations. On March 31, 1998, the Company replaced its existing $40 millionreceivable sale and servicing agreement with a new three-year trade receivablesecuritization facility. The new facility allows the Company to sell, withoutrecourse on an ongoing basis, all of its accounts receivable to Wabash FundingCorporation (Funding Corp.), a wholly owned unconsolidated subsidiary of theCompany. Simultaneously, the Funding Corp. has sold and, subject to certainconditions, may from time to time sell an undivided interest in thosereceivables to a large financial institution. As of December 31, 1999, $105million of proceeds were received by the Company related to this facility.Proceeds from the sale in 1998 were used to reduce outstanding borrowings underthe Company's Revolving Credit Agreement and are reflected as operating cashflows in the accompanying Consolidated Statements of Cash Flows. Investing Activities: Net cash used in investing activities of $94.3 million in 1999 isprimarily due to capital expenditures during the year of $68.1 million, theexpansion of the Company's leasing and finance operations, which consumed a netcash outflow of $17.4 million, and the Apex Acquisition in November 1999 of$12.4 million. Partially offsetting this investing activity are two sale andleaseback transactions totaling $5.3 million involving certain of the Company'smanufacturing equipment. 16 19 Investing activities during the period were associated with thefollowing:- Increasing productivity within the Company's manufacturing operations in Lafayette, Indiana- Development of a new state of the art painting and coating system and plant expansion at its trailer manufacturing facility in Huntsville, Tennessee - Increasing capacity and manufacturing productivity at its hardwood flooring operations in Arkansas- The acquisition of property related to the Company's branch expansion strategy, including the Apex Acquisition in November 1999- The development of a new computer system in the Company's retail and distribution network- Other operating purposes The Company continues to pursue its branch expansion strategy, whichincludes the replacement of several existing sites within the same market aswell as additional retail outlets in new markets, either through acquisition orgreenfield start-up. The Company is in various stages of completing several ofthese transactions although no significant purchase commitments were inexistence at year-end. The Company anticipates future capital expendituresrelated to its branch expansion strategy, the development of new computersystems, the continuation of the capital projects previously discussed and otheractivities to be $40 to $60 million over the next 12 to 24 months. In addition,the Company has future residual guarantees or purchase options of approximately$50.4 million and $150.7 million, respectively, related to certain new and usedtrailer transactions. The majority of these do not come due until 2002 or after.The Company anticipates purchasing these trailers at the expiration of thecontracts and subsequently re-marketing them through the branch network or theFinance Company. Financing Activities: Net cash used in financing activities of $13.8 million in 1999 isprimarily due to the pay-down of long-term debt of $10.7 million and the paymentof common stock dividends and preferred stock dividends of $5.5 million in theaggregate. In connection with the aforementioned activity, the Company's totaldebt remained relatively flat at $167.9 million at December 31, 1999 compared to$168.3 million at December 31, 1998. Of the $167.9 million of consolidated debtoutstanding at December 31, 1999, the Finance Company had $59.6 million inoutstanding borrowings as a result of its leasing activities compared to $67.9million at December 31, 1998. The Company maintains a $125 million unsecuredrevolving line of credit facility, of which approximately $105.5 million remainsavailable at yearend. On April 28, 1998, the Company sold 3 million shares of its commonstock in a registered public offering at a public-offering price of $30.75 pershare, for net proceeds to the Company of $87.3 million. Proceeds of theoffering were used to finance the investments mentioned herein and to repaydebt. Other sources of funds for capital expenditures, continued expansion ofbusinesses, dividends, principal repayments on debt, stock repurchase andworking capital requirements are expected to be cash from operations, additionalborrowings under the credit facilities and term borrowings and equity offerings.The Company believes these funding sources will be adequate for its anticipatedrequirements. 17 20INFLATION The Company has been generally able to offset the impact of risingcosts through productivity improvements as well as selective price increases. Asa result, inflation is not expected to have a significant impact on theCompany's business.NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issuedSFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Thispronouncement requires that all derivative instruments be recorded on thebalance sheet at their fair value. As amended by SFAS No. 137, Accounting forDerivative Instruments and Hedging Activities-Deferral of the Effective Date ofFASB Statement No. 133, this pronouncement is effective for the Company'sfinancial statements beginning January 1, 2001, with early adoption permitted.The Company is currently evaluating the impact of adopting this pronouncementand does not anticipate that its adoption will have a material effect on theCompany's results of operations or its financial position. The Company adopted Statement of Position No. 98-1, Accounting for theCosts of Computer Software Developed or Obtained for Internal Use, during 1999.This pronouncement specifies the appropriate accounting for costs incurred todevelop or obtain computer software for internal use. The new pronouncementprovides guidance on which costs should be capitalized, when and over whatperiod such costs should be amortized and what disclosures should be maderegarding such costs. The adoption of this pronouncement did not have a materialeffect on the Company's results of operations or financial position.YEAR 2000 COMPLIANCE Over the past few years, the Company has taken an active role inidentifying and correcting problems arising from the inability of informationtechnology hardware and software systems and non-information systems to processdates after December 31, 1999. Accordingly, the Company has taken theappropriate action to implement contingency plans and to modify or replace itsexisting critical computer systems. Through December 31, 1999, the Company spentapproximately $7.6 million, including internal labor costs, related to thesesystem initiatives. No further expenditures of a material nature areanticipated. As of the date of this filing, the Company has not experienced anysignificant internal problems related to Year 2000 compliance issues, nor hasthe Company experienced any significant disturbances or interruption in itsability to transact business with its suppliers or customers.MARKET RISKS The Company has limited exposure to financial risk resulting fromvolatility in interest rates and foreign exchange rates. As of December 31,1999, the Company had approximately $8 million of London Interbank Rate (LIBOR)based debt outstanding under its Revolving Credit Facility and $105 million ofproceeds from its accounts receivable securitization facility, which alsorequires LIBOR based interest payments. A hypothetical 100 basis-point increasein the floating interest rate from the current level would correspond to a $1.1million increase in interest expense over a one-year period. This sensitivityanalysis does not account for the change in the Company's competitiveenvironment indirectly related to the change in interest rates and the potentialmanagerial action taken in response to these changes. The Company enters into foreign currency forward contracts (principallyagainst the German Deutschemark and French Franc) to hedge the netreceivable/payable position arising from trade sales (including lease revenues)and purchases primarily with regard to the Company's European RoadRaileroperations. The Company does not hold or issue derivative financial instrumentsfor speculative purposes. A hypothetical 10% adverse change in foreign currencyexchange rates would have an immaterial effect on the Company's financialposition and results of operations. Additional disclosure related to theCompany's risk management policies are discussed in Note 2 to the consolidatedfinancial statements. 18 21 ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE ---- Report of Independent Public Accountants....................................................... 20Consolidated Balance Sheets as of December 31, 1999 and 1998................................... 21Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997...................................................................................... 22Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997............................................................................. 23Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997...................................................................................... 24Notes to Consolidated Financial Statements..................................................... 25 19 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTSTo the Stockholders of Wabash National Corporation: We have audited the accompanying consolidated balance sheets of WABASHNATIONAL CORPORATION (a Delaware corporation) and subsidiaries as of December31, 1999 and 1998, and the related consolidated statements of income,stockholders' equity and cash flows for each of the three years in the periodended December 31, 1999. These financial statements are the responsibility ofthe Company's management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion. In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of WabashNational Corporation and subsidiaries as of December 31, 1999 and 1998, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 1999, in conformity with accounting principlesgenerally accepted in the United States. ARTHUR ANDERSEN LLPIndianapolis, Indiana,February 2, 2000. 20 23 WABASH NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) DECEMBER 31, ---------------------- ASSETS 1999 1998 ------ --------- --------- CURRENT ASSETS: Cash and cash equivalents ...................................................... $ 22,484 $ 67,122 Accounts receivable, net ....................................................... 111,567 92,872 Current portion of finance contracts ........................................... 8,423 7,603 Inventories .................................................................... 269,581 225,385 Prepaid expenses and other ..................................................... 16,962 19,833 --------- --------- Total current assets .................................................... 429,017 412,815 --------- ---------PROPERTY, PLANT AND EQUIPMENT, net .................................................... 186,430 136,001 --------- ---------EQUIPMENT LEASED TO OTHERS, net ....................................................... 50,364 43,066 --------- ---------FINANCE CONTRACTS, net of current portion ............................................. 71,839 66,369 --------- ---------INTANGIBLE ASSETS, net ................................................................ 32,669 32,637 --------- ---------OTHER ASSETS .......................................................................... 20,972 13,598 --------- --------- $ 791,291 $ 704,486 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES: Current maturities of long-term debt ........................................... $ 3,514 $ 3,089 Account payable ................................................................ 145,568 108,963 Accrued liabilities ............................................................ 51,184 29,507 --------- --------- Total current liabilities ............................................... 200,266 141,559 --------- ---------LONG-TERM DEBT, net of current maturities ............................................. 164,367 165,215 --------- ---------DEFERRED INCOME TAXES ................................................................. 30,640 31,849 --------- ---------OTHER NONCURRENT LIABILITIES AND CONTINGENCIES ........................................ 16,653 20,087 --------- ---------STOCKHOLDERS' EQUITY: Preferred stock, aggregate liquidation value of $30,600 and $30,600, respectively .................................................... 5 5 Common stock, 22,985,186 and 22,965,090 shares issued and outstanding, respectively ................................................ 230 230 Additional paid-in capital ..................................................... 236,474 236,127 Retained earnings .............................................................. 143,935 110,693 Treasury stock at cost, 59,600 common shares ................................... (1,279) (1,279) --------- --------- Total stockholders' equity .............................................. 379,365 345,776 --------- --------- $ 791,291 $ 704,486 ========= ========= The accompanying notes are an integral part of these Consolidated Statements. 21 24 WABASH NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31, ----------------------------------- 1999 1998 1997 ----------- ----------- ---------- NET SALES .......................................................... $ 1,454,570 $ 1,292,259 $ 846,082COST OF SALES........................................................ 1,322,852 1,192,968 778,620 ----------- ----------- ---------- Gross profit.............................................. 131,718 99,291 67,462GENERAL AND ADMINISTRATIVE EXPENSES.................................. 30,396 25,780 17,806SELLING EXPENSES..................................................... 20,400 12,846 8,501 ----------- ----------- ---------- Income from operations.................................... 80,922 60,665 41,155OTHER INCOME (EXPENSE): Interest expense.............................................. (12,695) (14,843) (16,100) Accounts receivable securitization costs...................... (5,804) (3,966) --- Equity in losses of unconsolidated affiliate.................. (4,000) (3,100) (400) Other, net.................................................... 6,310 (259) 1,135 ----------- ------------ ---------- Income before income taxes................................ 64,733 38,497 25,790PROVISION FOR INCOME TAXES........................................... 25,891 15,226 10,576 ----------- ----------- ---------- Net income................................................ $ 38,842 $ 23,271 $ 15,214PREFERRED STOCK DIVIDENDS............................................ 2,098 1,391 742 ----------- ----------- ----------NET INCOME AVAILABLE TO COMMON STOCKHOLDERS.................................................. $ 36,744 $ 21,880 $ 14,472 =========== =========== ==========EARNINGS PER SHARE: Basic......................................................... $ 1.60 $ 1.00 $ 0.74 =========== =========== ========== Diluted....................................................... $ 1.59 $ 0.99 $ 0.74 =========== =========== ========== The accompanying notes are an integral part of these Consolidated Statements. 22 25 WABASH NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS) ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN RETAINED TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL ----------------- -------------- ----------- -------- -------- -------- BALANCES, December 31, 1996......... --- $-- 18,910,923 $189 $ 99,388 $80,070 $ (1,279) $ 178,368 Net income for the year........ --- --- --- --- --- 15,214 --- 15,214 Cash dividends ($0.13 per share) --- --- --- --- --- (2,562) --- (2,562) Preferred stock dividends...... --- --- --- --- --- (742) --- (742) Issuance of common stock under: employee stock purchase plan. --- --- 3,551 --- 97 --- --- 97 employee stock bonus plan.... --- --- 11,300 --- 272 --- --- 272 Stock issued for acquisition: Common stock................. --- --- 1,000,000 10 17,740 --- --- 17,750 Preferred stock.............. 352,000 4 --- --- 17,596 --- --- 17,600 Exercise of stock options...... --- --- 29,100 1 518 --- --- 519 -----------------------------------------------------------------------------BALANCES, December 31, 1997......... 352,000 $ 4 19,954,874 $200 $135,611 $91,980 $(1,279) $226,516 Net income for the year........ --- --- --- --- --- 23,271 --- 23,271 Cash dividends ($0.1425 per share) --- --- --- --- --- (3,167) --- (3,167) Preferred stock dividends...... --- --- --- --- --- (1,391) --- (1,391) Issuance of common stock, net of expenses.............. --- --- 3,000,000 30 87,256 --- --- 87,286 Issuance of common stock under: employee stock purchase plan. --- --- 4,896 --- 110 --- --- 110 employee stock bonus plan.... --- --- 3,900 --- 120 --- --- 120 Preferred stock issued for acquisition 130,041 1 --- --- 13,003 --- --- 13,004 Exercise of stock options...... --- --- 1,420 --- 27 --- --- 27 -----------------------------------------------------------------------------BALANCES, December 31, 1998......... 482,041 $ 5 22,965,090 $230 $236,127 $110,693 $(1,279) $345,776 Net income for the year........ --- --- --- --- --- 38,842 --- 38,842 Cash dividends ($0.1525 per share) --- --- --- --- --- (3,502) --- (3,502) Preferred stock dividends...... --- --- --- --- --- (2,098) --- (2,098) Issuance of common stock under: employee stock purchase plan. --- --- 10,556 --- 177 --- --- 177 employee stock bonus plan.... --- --- 4,400 --- 79 --- --- 79 Exercise of stock options...... --- --- 5,140 --- 91 --- --- 91 -----------------------------------------------------------------------------BALANCES, December 31, 1999......... 482,041 $ 5 22,985,186 $230 $236,474 $143,935 $(1,279) $379,365 ============================================================================= The accompanying notes are an integral part of these Consolidated Statements. 23 26 WABASH NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................ $38,842 $23,271 $15,214 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization...................................... 21,773 18,405 16,623 Net gain on the sale of property, plant and equipment.............. (864) (2,077) --- Provision for losses on accounts receivable........................ 2,829 772 193 Deferred income taxes.............................................. (6,947) 6,388 5,463 Equity in losses of unconsolidated affiliate....................... 4,000 3,100 400 Change in operating assets and liabilities, excluding effects of the acquisitions Accounts receivable............................................. (18,810) 72,557 (76,321) Inventories..................................................... (37,573) 2,379 (51,181) Prepaid expenses and other...................................... 8,607 (5,842) 2,293 Accounts payable and accrued liabilities........................ 55,537 6,041 31,146 Other, net...................................................... (3,924) (1,911) 4,357 ------- ------- ------- Net cash provided by (used in) operating activities......... 63,470 123,083 (51,813) ------- ------- -------CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.................................................. (68,119) (31,006) (20,168) Net additions to equipment leased to others........................... (11,828) (15,288) (37,867) Net additions to finance contracts.................................... (28,762) (30,056) (25,550) Investment in unconsolidated affiliate................................ (3,580) (2,866) (6,230) Payments for RoadRailer technology.................................... --- --- (1,464) Proceeds from sale of leased equipment and finance contracts.......... 12,927 12,357 73,243 Proceeds from the sale of property, plant, and equipment.............. 7,237 3,985 10,052 Principal payments on finance contracts............................... 10,246 7,920 5,403 Acquisitions, net of cash acquired (Footnotes 5 and 7)................ (12,413) (9,515) (15,129) Other, net............................................................ (1) 99 121 ------- ------- ------- Net cash used in investing activities.............................. (94,293) (64,370) (17,589) ------- ------- -------CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from: Long-term debt..................................................... --- --- 35,635 Long-term revolver................................................. 244,200 276,600 418,599 Common stock, net of expenses...................................... 347 87,543 888 Payments: Long-term debt..................................................... (10,651) (29,420) (14,855) Long-term revolver................................................. (242,200) (336,600) (358,600) Common stock dividends............................................. (3,446) (3,004) (2,431) Preferred dividends................................................ (2,065) (1,357) (701) ------- ------- ------- Net cash (used in) provided by financing activities............. (13,815) (6,238) 78,535 ------- -------- -------NET (DECREASE) INCREASE IN CASH........................................... (44,638) 52,475 9,133CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD.................. 67,122 14,647 5,514 ------- ------- -------CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD........................ $22,484 $67,122 $14,647 ======= ======= ======= The accompanying notes are an integral part of these Consolidated Statements. 24 27 WABASH NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. DESCRIPTION OF THE BUSINESS Wabash National Corporation (the Company) designs, manufactures andmarkets standard and customized truck trailers under the Wabash National andFruehauf trademarks. The Company produces and sells aftermarket parts throughits division, Wabash National Parts, and its wholly owned subsidiary, FruehaufTrailer Services, Inc. (FTSI). In addition to its aftermarket parts sales andservice revenues, FTSI sells new and used trailers as well as rents usedtrailers, primarily on a short term basis, through its retail network. TheCompany's other significant wholly owned subsidiaries include Wabash NationalFinance Corporation (the Finance Company) and Cloud Corporation and Cloud OakFlooring (Cloud Companies), which were acquired on July 14, 1998. The FinanceCompany provides leasing and finance programs to its customers for new and usedtrailers. The Cloud Companies manufacture hardwood flooring primarily for theCompany's manufacturing segment.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Consolidation The consolidated financial statements reflect the accounts of theCompany and its subsidiaries. All significant intercompany accounts andtransactions have been eliminated. Investment in an unconsolidated affiliate inwhich the Company exercises significant influence but not control is accountedfor by the equity method and the Company's share of net income or loss of itsaffiliate is included in the Consolidated Statements of Income. b. Significant Estimates The preparation of consolidated financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the amount reported in its consolidated financialstatements and accompanying notes. Actual results could differ from theseestimates. c. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments, which arereadily convertible into cash and have maturities of three months or less. d. Allowance for Doubtful Accounts Accounts receivable as shown in the accompanying Consolidated BalanceSheets are net of allowance for doubtful accounts of $2.9 million, $2.3 millionand $1.7 million at December 31, 1999, 1998 and 1997, respectively. The activityin the allowance for doubtful accounts includes (i) provision for losses onaccounts receivable of $2.9 million, $0.8 million and $0.2 million; (ii) netaccounts written-off of $2.6 million, $0.2 million, and $0.6 million; and (iii)reserves recorded in connection with the acquisition of the Apex Group andcertain assets of Fruehauf Trailer Corporation (See Footnote 5) of $0.3 million,$0, and $1.0 million during 1999, 1998 and 1997, respectively. 25 28 e. Inventories Inventories are primarily priced at the lower of first-in, first-out(FIFO) cost or market. Inventory costs include raw material, labor and overheadcosts for manufactured inventories. Used trailers are carried at the lower oftheir estimated net realizable value or cost. Inventories consist of thefollowing (in thousands): DECEMBER 31, -------------------------- 1999 1998 --------- --------Raw materials and components.................... $ 105,476 $104,174Work in progress................................ 11,215 12,159Finished goods.................................. 49,906 44,743Aftermarket parts............................... 37,894 28,733Used trailers................................... 65,090 35,576 --------- -------- $ 269,581 $225,385 ========= ======== f. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation isrecorded using the straight-line method over the estimated useful lives of thedepreciable assets. Estimated useful lives are 33-1/3 years for buildings andbuilding improvements and range from 3 to 10 years for machinery and equipment.Maintenance and repairs are charged to expense as incurred. Property, plant andequipment consist of the following (in thousands): DECEMBER 31, -------------------------- 1999 1998 --------- ----------Land............................................ $ 28,190 $ 23,281Buildings and improvements...................... 81,585 65,605Machinery and equipment......................... 93,861 78,886Construction in progress........................ 31,477 7,433 --------- ---------- 235,113 175,205Less--Accumulated depreciation.................. (48,683) (39,204) --------- ---------- $ 186,430 $ 136,001 ========= ========== g. Long-Lived Assets Long-lived assets, identifiable intangibles and goodwill related tothose assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of such assets may not berecoverable. h. Intangible Assets Intangible assets, net of accumulated amortization of $9.7 million and$8.5 million at December 31, 1999 and December 31, 1998, respectively, relateprimarily to goodwill and other intangible assets associated with recentacquisitions (See Footnote 5 for further discussion) and RoadRailer acquisitioncosts. These amounts are being amortized on a straight-line basis over periodsranging from five to forty years. i. Fair Values of Financial Instruments Statement of Financial Accounting Standards (SFAS) No. 107, DisclosuresAbout Fair Value of Financial Instruments, requires disclosure of fair valueinformation for certain financial instruments. The differences between thecarrying amounts and the estimated fair values, using the methods andassumptions listed below, of the Company's financial instruments at December 31,1999 and 1998 were immaterial. 26 29 Cash and Cash Equivalents, Trade Receivables and Trade Payables. The carrying amounts reported in the Consolidated Balance Sheets approximate fair value. Long-Term Debt. The fair value of long-term debt, including current portion, is estimated based on quoted market prices for similar issues or on the current rates offered to the Company for debt of the same maturities. The interest rates on the Company's bank borrowings under its long-term revolving credit agreement are adjusted regularly to reflect current market rates. The carrying values of the Company's long-term borrowings approximate fair value. Forward Contracts. The Company enters into foreign currency forward contracts (principally against the German Deutschemark and the French Franc) to hedge the net receivable/payable position arising from trade sales (including lease revenues) and purchases primarily with regard to the Company's European RoadRailer operations. Gains and losses related to qualifying hedges are deferred and included in the measurement of the related transaction, when the hedged transaction occurs. The Company had deferred net gains of approximately $1.2 million and $0.2 million as of December 31, 1999 and 1998, respectively. The Company does not hold or issue derivative financial instruments for speculative purposes. The fair values of foreign currency contracts (used for hedging purposes) are estimated by obtaining quotes from brokers. Foreign currency contracts to receive approximately $4.4 million and $11.7 million at December 31, 1999, and 1998, respectively, approximate fair value at those dates. j. Revenue Recognition The Company recognizes revenue from the sale of trailers andaftermarket parts when risk of ownership is transferred to the customer, whichis generally upon shipment or customer pickup. Certain customers are invoicedfor trailers prior to taking physical possession when the customer has made acommitment to purchase; the trailers have been completed and are available forpickup or delivery and the customer has requested the Company to hold thetrailers until the customer determines the most economical means of takingpossession. In such cases, the trailers which have been produced to the customerspecifications, are invoiced under the Company's normal billing and credit termsand the Company generally holds the trailers for a short period of time as iscustomary in the industry. In addition, the Company recognizes revenue for direct finance leasesbased upon a constant rate of return while revenue is recognized for operatingleases on a straight-line basis in an amount equal to the invoiced rentals. For the years ended December 31, 1999, 1998 and 1997, no customerrepresented more than 10% of the Company's net sales. k. Income Taxes The Company recognizes income taxes under the liability method ofaccounting for income taxes. The liability method measures the expected taximpact of future taxable income or deductions resulting from differences in thetax and financial reporting bases of assets and liabilities reflected in theConsolidated Balance Sheets. l. Research and Development Research and development expenses are charged to earnings as incurredand approximated $1.5 million, $1.8 million and $2.1 million in 1999, 1998 and1997, respectively. m. Reclassifications Certain items previously reported in specific consolidated financialstatement captions have been reclassified to conform with the 1999 presentation. 27 30 n. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issuedSFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Thispronouncement requires that all derivative instruments be recorded on thebalance sheet at their fair value. As amended by SFAS No. 137, Accounting forDerivative Instruments and Hedging Activities-Deferral of the Effective Date ofFASB Statement No. 133, this pronouncement is effective for the Company'sfinancial statements beginning January 1, 2001, with early adoption permitted.The Company is currently evaluating the impact of adopting this pronouncementand does not anticipate that its adoption will have a material effect on theCompany's results of operations or its financial position. The Company adopted, Statement of Position No. 98-1, Accounting for theCosts of Computer Software Developed or Obtained for Internal Use, during 1999.This pronouncement specifies the appropriate accounting for costs incurred todevelop or obtain computer software for internal use. The new pronouncementprovides guidance on which costs should be capitalized, when and over whatperiod such costs should be amortized and what disclosures should be maderegarding such costs. The adoption of this pronouncement did not have a materialeffect on the Company's results of operations or financial position. o. Business and Credit Concentrations On November 4, 1997, the Company purchased a 25.1% equity interest inEuropaische Trailerzug Beteiligungsgessellschaft mbH (ETZ). ETZ is the majorityshareholder of Bayersriche Trailerzug Gesellschaft fur Bimodalen GuterverkehrmbH (BTZ), a European RoadRailer operation based in Munich, Germany, which beganoperations in 1996 and has incurred operating losses since inception. TheCompany paid approximately $6.2 million for its ownership interest in ETZ during1997 and made additional capital contributions of $3.6 million and $2.9 millionduring 1999 and 1998, respectively. All premiums associated with this purchaseare being amortized over a ten-year period. During 1999, 1998 and 1997, theCompany recorded approximately $4.0 million, $3.1 million and $0.4 million,respectively, for its share of ETZ losses and the amortization of the premiums.Such amounts are recorded as Equity in losses of unconsolidated affiliate on theaccompanying Consolidated Statements of Income. As of December 31, 1999, the Company had approximately $11.1 millionrecorded as Equipment Leased to Others consisting of RoadRailer equipmentspecifically related to current operating lease arrangements with BTZ andcommitments to supply approximately $4.5 million in additional RoadRailerequipment under existing operating lease arrangements. In addition, as ofDecember 31, 1999, the Company is contingently liable for up to three years as aguarantor of certain commitments to two separate entities related to 1996RoadRailer equipment sales to BTZ. These commitments consist of standby lettersof credit totaling approximately $8.3 million.3. SEGMENTS Under the provisions of SFAS No. 131, the Company has three reportablesegments: manufacturing, retail and distribution and leasing and financeoperations. The manufacturing segment produces trailers and sells new trailersto customers who purchase trailers direct or through independent dealers andalso produces trailers for the retail and distribution segment. The retail anddistribution segment sells new and used trailers, aftermarket parts, andperforms service repair on used trailers through its retail branch network. Inaddition, the retail and distribution segment rents used trailers, primarily ona short-term basis. The leasing and finance segment provides leasing and financeprograms to its customers for new and used trailers. The accounting policies of the segments are the same as those describedin the summary of significant accounting policies except that the Companyevaluates performance based on income from operations. The Company has notallocated certain corporate related charges such as administrative costs,interest expense and income taxes from the manufacturing segment to theCompany's other reportable segments. The Company accounts for intersegment salesand transfers at cost plus a specified mark-up. Reportable segment informationis as follows (in thousands): 28 31 RETAIL AND LEASING COMBINED CONSOLIDATED MANUFACTURING DISTRIBUTION AND FINANCE SEGMENTS ELIMINATIONS TOTALS ------------- ------------ ----------- -------- ------------ ------------ 1999 -------------------------------- Revenues External customers $1,113,872 $ 301,737 $ 38,961 $1,454,570 $ --- $1,454,570 Intersegment sales 92,537 954 10,618 104,109 (104,109) --- ---------- ---------- ---------- ---------- ---------- ---------- Total Revenues $1,206,409 $ 302,691 $ 49,579 $1,558,679 $ (104,109) $1,454,570 ========== ========== ========== ========== ========== ========== Depreciation & amortization 13,332 2,514 5,927 21,773 --- 21,773 Income from operations 71,976 5,306 5,823 83,105 (2,183) 80,922 Interest income 820 --- --- 820 --- 820 Interest expense 9,674 --- 3,021 12,695 --- 12,695 Equity in losses of unconsolidated affiliate 4,000 --- --- 4,000 --- 4,000 Income tax expense 25,891 --- --- 25,891 --- 25,891 Investments in unconsolidated affiliate 5,176 --- --- 5,176 --- 5,176 Capital additions 54,945 13,174 --- 68,119 --- 68,119 Assets 768,017 241,301 114,589 1,123,907 (332,616) 791,291 1998 -------------------------------- Revenues External customers $ 988,128 $ 280,480 $ 23,651 $1,292,259 $ --- $1,292,259 Intersegment sales 97,986 4,580 2,582 105,148 (105,148) --- ---------- ---------- ---------- ---------- ---------- ---------- Total Revenues $1,086,114 $ 285,060 $ 26,233 $1,397,407 $ (105,148) $1,292,259 ========== ========== ========== ========== ========== ========== Depreciation & amortization 11,324 925 6,156 18,405 --- 18,405 Income from operations 48,731 8,660 6,186 63,577 (2,912) 60,665 Interest income 981 --- --- 981 --- 981 Interest expense 11,446 --- 3,397 14,843 --- 14,843 Equity in losses of unconsolidated affiliate 3,100 --- --- 3,100 --- 3,100 Income tax expense 15,226 --- --- 15,226 --- 15,226 Investments in unconsolidated affiliate 5,595 --- --- 5,595 --- 5,595 Capital additions 23,435 7,564 7 31,006 --- 31,006 Assets 682,822 152,465 117,947 953,234 (248,748) 704,486 1997 -------------------------------- Revenues External customers $ 646,524 $ 172,687 $ 26,871 $ 846,082 $ --- $ 846,082 Intersegment sales 104,570 --- 359 104,929 (104,929) --- ---------- ---------- ---------- ---------- ---------- ---------- Total Revenues $ 751,094 $ 172,687 $ 27,230 $ 951,011 $ (104,929) $ 846,082 ========== ========== ========== ========== ========== ========== Depreciation & amortization 7,714 507 8,402 16,623 --- 16,623 Income from operations 30,576 5,855 7,014 43,445 (2,290) 41,155 Interest income 293 --- --- 293 --- 293 Interest expense 9,949 --- 6,151 16,100 --- 16,100 Equity in losses of unconsolidated affiliate 400 --- --- 400 --- 400 Income tax expense 10,576 --- --- 10,576 --- 10,576 Investments in unconsolidated affiliate 6,230 --- --- 6,230 --- 6,230 Capital additions 19,885 283 --- 20,168 --- 20,168 Assets 582,540 106,528 107,300 796,368 (166,498) 629,870 The Company's international sales accounted for approximately 2.0% ofconsolidated net sales during 1999 and 1998 and 1.2% of net sales during 1997.In addition, assets attributable to international operations accounted for lessthan 5% of consolidated assets during 1999, 1998 and 1997, respectively. 29 324. EARNINGS PER SHARE Earnings per share (EPS) are computed in accordance with SFAS No. 128,Earnings per Share. A reconciliation of the numerators and denominators of thebasic and diluted EPS computations, as required by SFAS No. 128, is presentedbelow. The convertible preferred stock was not included in the computation ofdiluted EPS for 1998 and 1997 since it would have resulted in an antidilutiveeffect (in thousands except per share amounts): Net Income Weighted Available to Average Earnings Common Shares Per Share--------------------------------------------------------------------------------1999Basic $36,744 22,973 $1.60Options --- 30Series B Preferred Stock 1,151 823--------------------------------------------------------------------------------Diluted $37,895 23,826 $1.59================================================================================1998Basic $21,880 21,990 $1.00Options --- 85--------------------------------------------------------------------------------Diluted $21,880 22,075 $0.99================================================================================1997Basic $14,472 19,586 $0.74Options --- 77--------------------------------------------------------------------------------Diluted $14,472 19,663 $0.74================================================================================5. ACQUISITIONS On December 1, 1999, the Company acquired Apex Trailer Service, Inc.,Apex Trailer and Truck Equipment Sales, Inc. and Apex Rentals, Inc. (the ApexGroup) in a stock purchase agreement (the Apex Acquisition). For financialstatement purposes, the Apex Acquisition was accounted for as a purchase, andaccordingly, the Apex Group's assets and liabilities were recorded at fair valueand the operating results are included in the consolidated financial statementssince the date of acquisition. The Apex Group has four branch locations. Thesebranches sell new and used trailers, aftermarket parts and provide service work.The aggregate consideration for this transaction included approximately $12.4million in cash and the assumption of $11.3 million in liabilities. Included inthe $11.3 million of assumed liabilities was $8.2 million of debt, which theCompany paid $6.8 million off immediately following the acquisition using cashfrom operations. The excess of the purchase price over the underlying assetsacquired was approximately $1.8 million. On July 14, 1998, the Company acquired Cloud Corporation and Cloud OakFlooring Company, Inc. (the Cloud Acquisition) in a merger and stock purchase,respectively, manufacturers of laminated hardwood floors for the truck body andtrailer industry. For financial statement purposes, the Cloud Acquisition wasaccounted for as a purchase, and accordingly, Cloud's assets and liabilitieswere recorded at fair value and the operating results are included in theconsolidated financial statements since the date of acquisition. The aggregateconsideration for this transaction included approximately $9.5 million in cash,$13.0 million in convertible preferred stock and the assumption of $33.8 millionin liabilities. Included in the $33.8 million of assumed liabilities was $18.8million of debt, which the Company paid off immediately following theacquisition using cash from operations. The excess of the purchase price overthe underlying assets acquired was approximately $20.3 million. 30 33 On April 16,1997, the Company acquired certain assets of FruehaufTrailer Corporation (Fruehauf), a manufacturer of truck trailers and relatedparts. Assuming this acquisition had occurred on January 1, 1997, 1997'sconsolidated unaudited pro forma net sales, net income and net income per commonshare would have been $875.8 million, $14.7 million and $0.69 per common share,respectively. In management's opinion, the unaudited pro forma combined resultsof operations are not indicative of what the actual results might have been ifthe acquisition had been effective at the beginning of 1997.6. RENTAL, LEASING AND FINANCE OPERATIONS a. Equipment Leased to Others The Finance Company and FTSI have leased equipment to others underoperating leases, whereby revenue is recognized as lease payments are due fromthe customers and the related costs are amortized over the equipment life.Equipment leased to others is depreciated over the estimated useful life of theequipment, not to exceed 13 years and no residual value, or in some cases, adepreciable life equal to the term of the lease and a residual value equal tothe estimated market value at lease termination. Depreciation expense onequipment leased to others was $7.5 million, $6.4 million and $8.4 millionduring 1999, 1998 and 1997, respectively. Accumulated depreciation of equipmentleased to others is $9.3 million and $13.6 million at December 31, 1999 and1998, respectively. Future minimum lease payments to be received from thesenoncancellable operating leases at December 31, 1999 are as follows (inthousands): Amounts ------- 2000....................................$ 5,056 2001.................................... 4,518 2002.................................... 2,824 2003.................................... 983 2004.................................... 676 Thereafter.............................. 1,200 ------- $15,257 ======= Additionally, the Company has equipment available for short-termcancelable operating leases. The net amount included in equipment leased toothers under this type of arrangement totaled $16.2 million and $6.0 million atDecember 31, 1999 and 1998, respectively. b. Finance Contracts The Finance Company provides finance contracts for the sale of trailerequipment to certain of its customers. The financing is principally structuredin the form of finance leases, typically for a five-year term. The FinanceCompany also participates in the contracts and leases of a major financecompany. This participation consists of the purchase of 20% of the initial valueof these contracts and leases by the Finance Company along with some level ofend of term residual value guarantee. End of term residual guarantees related tothese participations totaled $0.3 million and $0.4 million as of December 31,1999 and 1998, respectively. Finance contracts, as shown on the accompanying consolidated financialstatements, consists of the following: DECEMBER 31, ---------------------- 1999 1998 -------- -------- Lease payments receivable............ $ 72,004 $ 61,028 Estimated residual value............. 16,622 16,370 -------- -------- 88,626 77,398 Unearned finance charges............. (17,218) (13,582) ------- -------- 71,408 63,816 Other, net........................... 8,854 10,156 -------- -------- $ 80,262 $ 73,972 ======== ======== 31 34 Other, net. Other, net includes equipment subject to capital lease thatis awaiting customer pick-up. The net amounts under such arrangements totaled$2.9 million and $1.9 million at December 31, 1999 and 1998, respectively. Inaddition, Other, net also includes the sale of certain finance contracts withfull recourse provisions. As a result of the recourse provision, the FinanceCompany has reflected an asset and offsetting liability totaling $6.0 millionand $8.3 million at December 31, 1999 and December 31, 1998, respectively, inthe Company's Consolidated Balance Sheets as a Finance Contract and OtherNon-Current Liabilities and Contingencies. The future minimum lease payments to be received as of December 31,1999 are as follows (in thousands): Amounts ------- 2000.................................. $18,396 2001.................................. 15,587 2002.................................. 13,573 2003.................................. 9,990 2004.................................. 5,305 Thereafter............................ 9,153 ------- $72,004 ======= c. Off-Balance Sheet Financing In certain situations, the Finance Company has sold equipment leased toothers to independent financial institutions and simultaneously leased theequipment back under operating leases containing end of term residual valueguarantees. These end-of-term residual guarantees totaled $19.4 million and$20.5 million as of December 31, 1999 and 1998, respectively. Rental paymentsmade by the Finance Company under these types of transactions totaled $9.1million, $8.8 million and $4.9 million during 1999, 1998 and 1997, respectively. The future minimum lease payments to be paid by the Finance Companyunder these lease transactions as of December 31, 1999 are as follows (inthousands): Amounts ------- 2000.................................. $ 9,126 2001.................................. 9,126 2002.................................. 5,718 2003.................................. 5,718 2004.................................. 4,690 Thereafter............................ 1,152 ------- $35,530 ======= The future minimum lease payments to be received by the Finance Companyunder these sublease arrangements are $8.9 million in 2000, $5.8 million peryear in the years 2001 through 2003, $4.3 million in 2004 and $3.0 millionthereafter.7. SUPPLEMENTAL CASH FLOW INFORMATION DECEMBER 31, ---------------------------------------(In thousands) 1999 1998 1997----------------------------------------------------------------------------------------------- Cash paid during the period for: Interest, net of amounts capitalized $ 13,954 $ 12,168 $ 15,313 Income taxes 20,319 17,018 6,136-----------------------------------------------------------------------------------------------Acquisitions, net of cash acquired: Fair value of assets acquired 23,698 56,300 63,459 Liabilities assumed (11,285) (33,781) (12,980) Preferred stock issued --- (13,004) (17,600) Common stock issued --- --- (17,750)-----------------------------------------------------------------------------------------------Net cash used in acquisitions $ (12,413) $ (9,515) $ (15,129)=============================================================================================== 32 358. ACCOUNTS RECEIVABLE SECURITIZATION On March 31, 1998, the Company replaced its existing $40.0 millionreceivable sale and servicing agreement with a new three-year trade receivablesecuritization facility. The new facility allows the Company to sell, withoutrecourse on an ongoing basis, all of their accounts receivable to Wabash FundingCorporation (Funding Corp.), a wholly owned unconsolidated subsidiary of theCompany. Simultaneously, the Funding Corp. has sold and, subject to certainconditions, may from time to time sell an undivided interest in thosereceivables to a large financial institution. The Funding Corp. is a qualifyingspecial purpose entity under the provisions of SFAS No. 125, Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities.As of December 31, 1999 and 1998, $105.0 million of proceeds have been receivedunder the facility. Amounts reflected as Accounts Receivable in the accompanyingConsolidated Balance Sheets as of December 31, 1999 and 1998 representreceivables sold to the Funding Corp. in excess of proceeds received. Proceeds from the sale in 1998 were used to reduce outstandingborrowings under the Company's Revolving Bank Line of Credit and are reflectedas operating cash flows in the accompanying Consolidated Statements of CashFlows. In order to operate this facility on an on-going basis, the FundingCorp. is required to meet certain covenants primarily related to the performanceof the accounts receivable portfolio. Servicing responsibility for thesereceivables resides with the Company.9. LONG-TERM DEBT Long-term debt consists of the following (in thousands): DECEMBER 31, ---------------------- 1999 1998 --------- --------- Revolving Bank Line of Credit.............................................. $ 7,999 $ 5,999Mortgage and Other Notes Payable, 3.0% - 10.0%, Due 2000-2006 Secured by general business assets................................ 9,882 12,305Series A Senior Notes, 6.41%, Due January 2003............................. 50,000 50,000Series B-H Senior Notes, 6.99% - 7.55%, Due 2001-2008...................... 100,000 100,000 --------- --------- 167,881 168,304 Less: Current maturities.......................................... (3,514) (3,089) --------- --------- $ 164,367 $ 165,215 ========= ========= Revolving Bank Line of Credit. The Company has an unsecured revolvingbank line of credit which permits the Company to borrow up to $125 million.Under this facility, the Company has a right to borrow until September 30, 2002,at which time the principal amount then outstanding will be due and payable.Interest payable on such borrowings is variable based upon the London InterbankRate (LIBOR) plus 25 to 55 basis points, as defined, or a prime rate ofinterest, as defined. The Company pays a commitment fee on the unused portion ofthis facility at rates of 8.5 to 17.5 basis points per annum, as defined. AtDecember 31, 1999, the Company had Deutschemark - denominated borrowingsoutstanding in the amount of approximately $6.0 million at an interest rate of3.85% in connection with its international operations. At December 31, 1999, theCompany also had an additional $2.0 million borrowing under this facility, at aninterest rate of 5.36%. The Company had available credit under the revolvingcredit facility of approximately $105.5 million after letters of credit andborrowings. Senior Notes. As of December 31, 1999 and 1998, $56.0 million and $61.0million, respectively, of the Company's Senior Notes were due from the FinanceCompany as a result of its leasing and finance operations. Covenants. Under various loan agreements, the Company is required tomeet certain financial covenants. These covenants require the Company tomaintain certain levels of net worth as well as comply with certain limitationson indebtedness, investments and sales of assets. The Company was in compliancewith these covenants at December 31, 1999. 33 36Maturities of long-term debt at December 31, 1999, are as follows (inthousands): Amounts -------- 2000................................... $ 3,514 2001................................... 11,229 2002................................... 32,108 2003................................... 50,312 2004................................... 9,291 Thereafter............................. 61,427 -------- $167,881 ========10. STOCKHOLDERS' EQUITY a. Capital Stock DECEMBER 31, ---------------------(Dollars in thousands) 1999 1998----------------------------------------------------------------------------------------------------- Preferred Stock - $.01 par value, 25,000,000 shares authorized: Series A Junior Participating Preferred Stock - $0.01 par value, 300,000 shares authorized, 0 shares issued and outstanding $--- $---Series B 6% Cumulative Convertible Exchangeable Preferred Stock, 352,000 shares authorized, issued and outstanding at December 31, 1999 and December 31, 1998 ($17.6 million aggregate liquidation value) 4 4Series C 5.5% Cumulative Convertible Exchangeable Preferred Stock, 130,041 shares authorized, issued and outstanding at December 31, 1999 and December 31, 1998 ($13.0 million aggregate liquidation value) 1 1 ---- ---- Total Preferred Stock $ 5 $ 5 ==== ====Common Stock - $.01 par value, 75,000,000 shares authorized, 22,985,186 and 22,965,090 shares issued and outstanding at December 31, 1999 and December 31, 1998, respectively $230 $230 ==== ==== The Series B 6% Cumulative Convertible Exchangeable Preferred Stock isconvertible at the discretion of the holder, at a conversion price of $21.38 pershare, into up to approximately 823,200 shares of common stock. This conversionis subject to adjustment for dilutive issuances and changes in outstandingcapitalization by reason of a stock split, stock dividend or stock combination. The Series C 5.5% Cumulative Convertible Exchangeable Preferred Stockis convertible at the discretion of the holder, at a conversion price of $35.00per share, into up to approximately 371,500 shares of common stock, subject toadjustment. On April 28, 1998, the Company sold three million shares of its commonstock in a registered public offering at a public-offering price of $30.75 pershare, for net proceeds to the Company of $87.3 million. The Board of Directors has the authority to issue shares ofunclassified preferred stock and to fix dividends, voting and conversion rights,redemption provisions, liquidation preferences and other rights andrestrictions. 34 37 b. 1992 Stock Option Plan During 1992, the Company adopted its 1992 Non-Qualified Stock OptionPlan (the Plan) under which options may be granted to officers and other keyemployees of the Company and its subsidiaries. Under the terms of the Plan, upto an aggregate of 1,750,000 shares are reserved for issuance, subject toadjustment for stock dividends, recapitalizations and the like. Options grantedunder the Plan become exercisable in five annual installments and expire notmore than ten years after the date of grant, except for non-employee Directorsof the Company in which options are fully vested on date of grant and areexercisable six months thereafter. The Company has elected to follow APB No. 25, Accounting for StockIssued to Employees, in accounting for its stock options and, accordingly, nocompensation cost has been recognized for stock options in the consolidatedfinancial statements. Had compensation cost for these plans been determinedconsistent with SFAS No. 123, Accounting for Stock-Based Compensation, theCompany's net income available to common would have been reduced to $35.2million ($1.53 Basic and Diluted EPS) in 1999, $20.8 million ($0.95 Basic EPSand $0.94 Diluted EPS) in 1998 and $13.8 million ($0.71 Basic EPS and $0.70Diluted EPS) in 1997.Stock option activity during the periods indicated is as follows: Number of Weighted-AverageOptions Shares Exercise Price---------------------------------------------------------------------------------------------------- Outstanding at December 31, 1996 645,500 $23.25---------------------------------------------------------------------------------------------------- Granted................................................... 254,500 28.36 Exercised................................................. (29,100) 17.82 Cancelled................................................. (15,000) 17.58Outstanding at December 31, 1997 855,900 25.05---------------------------------------------------------------------------------------------------- Granted................................................... 368,500 15.31 Exercised................................................. (1,420) 18.82 Cancelled................................................. (24,720) 24.00Outstanding at December 31, 1998 1,198,260 21.57---------------------------------------------------------------------------------------------------- Granted................................................... 537,375 21.52 Exercised................................................. (5,140) 17.76 Cancelled................................................. (11,590) 20.05Outstanding at December 31, 1999 1,718,905 $21.57====================================================================================================The following table summarizes information about stock options outstanding atDecember 31, 1999: Weighted Weighted Weighted Range of Average Average Number Average Exercise Number Remaining Exercise Exercisable Exercise Prices Outstanding Life Price at 12/31/99 Price----------------------------------------------------------------------------------------------------- $15.25 to $22.49 1,293,105 7.9 yrs. $18.97 405,910 $17.88 $22.50 to $33.50 425,800 6.5 yrs. $29.48 274,800 $29.72Using the Black-Scholes option valuation model, the estimated fair values ofoptions granted during 1999, 1998 and 1996 were $11.12, $8.07 and $14.67 peroption, respectively. Principal assumptions used in applying the Black-Scholesmodel were as follows:Black-Scholes Model Assumptions 1999 1998 1997----------------------------------------------------------------------------------------------------- Risk-free interest rate................................... 6.06% 4.88% 6.15%Expected volatility....................................... 43.95% 40.89% 40.13%Expected dividend yield................................... 0.74% 0.98% 0.40%Expected term............................................. 7 yrs. 7 yrs. 7 yrs. 35 38 c. 1993 Employee Stock Purchase Plan During 1993, the Company adopted its 1993 Employee Stock Purchase Plan(the "Purchase Plan"), which enables eligible employees of the Company topurchase shares of the Company's $.01 par value common stock. Eligible employeesmay contribute up to 15% of their eligible compensation toward the semi-annualpurchase of common stock. The employees' purchase price is based on the fairmarket value of the common stock on the date of purchase. No compensationexpense is recorded in connection with the Purchase Plan. During 1999, 10,556shares were issued to employees at a weighted average price of $16.77 per share.At December 31, 1999, there were approximately 269,697 shares available foroffering under this Purchase Plan. d. Stock Bonus Plan During 1997, the Company adopted its Stock Bonus Plan (the "BonusPlan"). Under the terms of the Bonus Plan, common stock may be granted toemployees under terms and conditions as determined by the Board of Directors.During 1999, 4,400 shares were issued to employees at a weighted average priceof $17.95. At December 31, 1999 there were approximately 480,400 sharesavailable for offering under this Bonus Plan.11. STOCKHOLDERS' RIGHTS PLAN On November 7, 1995, the Board of Directors adopted a StockholderRights Plan (the "Rights Plan"). The Rights Plan is designed to deter coerciveor unfair takeover tactics, to prevent a person or group from gaining control ofthe Company without offering fair value to all shareholders and to deter otherabusive takeover tactics, which are not in the best interest of stockholders. Under the terms of the Rights Plan, each share of common stock isaccompanied by one right; each right entitles the stockholder to purchase fromthe Company, one one-thousandth of a newly issued share of Series A PreferredStock at an exercise price of $120. The rights become exercisable ten days after a public announcement thatan acquiring person or group (as defined in the Plan) has acquired 20% or moreof the outstanding Common Stock of the Company (the Stock Acquisition Date) orten days after the commencement of a tender offer which would result in a personowning 20% or more of such shares. The Company can redeem the rights for $.01per right at any time until ten days following the Stock Acquisition Date (the10-day period can be shortened or lengthened by the Company). The rights willexpire in November 2005, unless redeemed earlier by the Company. If, subsequent to the rights becoming exercisable, the Company isacquired in a merger or other business combination at any time when there is a20% or more holder, the rights will then entitle a holder to buy shares of theAcquiring Company with a market value equal to twice the exercise price of eachright. Alternatively, if a 20% holder acquires the Company by means of a mergerin which the Company and its stock survives, or if any person acquires 20% ormore of the Company's Common Stock, each right not owned by a 20% or moreshareholder, would become exercisable for Common Stock of the Company (or, incertain circumstances, other consideration) having a market value equal to twicethe exercise price of the right.12. EMPLOYEE 401(K) SAVINGS PLAN Substantially all of the Company's employees are eligible toparticipate in the 401(k) Savings Plan, which provides for Company matchingunder various formulas. The Company's matching contribution and related expensefor the plan was approximately $1.4 million, $1.0 million and $1.0 million forthe years ended December 31, 1999, 1998 and 1997, respectively. 36 3913. INCOME TAXES a. Provisions for Income Taxes The consolidated income tax provision for 1999, 1998 and 1997 consists of the following components (in thousands): 1999 1998 1997 -------- -------- -------- Current: Federal...................... $ 28,769 $ 6,024 $ 3,862 State........................ 4,069 2,814 1,251 Deferred ......................... (6,947) 6,388 5,463 -------- -------- -------- Total consolidated provision...... $ 25,891 $ 15,226 $ 10,576 ======== ======== ======== The Company's effective tax rates were 40.0%, 39.6% and 41.0% ofpre-tax income for 1999, 1998 and 1997 respectively, and differed from the U.S.Federal Statutory rate of 35% due primarily to State taxes. b. Deferred Taxes Deferred income taxes are primarily due to temporary differencesbetween financial and income tax reporting for the depreciation of property,plant and equipment and equipment under lease, the recognition of payments madein connection with the acquisition of the RoadRailer technology (and theamortization thereof) and the recognition of income from assets under financeleases. The long-term deferred tax liabilities were $30.6 million and $31.9million and current prepaid income tax assets were $7.3 million, and $1.6million as of December 31, 1999 and 1998, respectively.The components of deferred tax assets and deferred tax liabilities as ofDecember 31, 1999 and 1998 were as follows (in thousands): 1999 1998 ------- ------- Deferred tax assets: Rentals on Finance Leases .................................... $15,545 $14,660 Leasing Difference ........................................... 6,060 3,953 Other ........................................................ 16,808 11,223 Deferred tax liabilites: Book-Tax Basis Differences - Property, Plant and Equipment ... 41,433 42,432 Earned Finance Charges on Finance Leases ..................... 9,273 6,944 RoadRailer Acquisition Payments/Amortization ................. 1,522 2,103 Other ........................................................ 9,532 8,651 ------- ------- Net deferred tax liability ........................................ $23,347 $30,294 ======= ======= 37 4014. COMMITMENTS AND CONTINGENCIES a. Litigation Various lawsuits, claims and proceedings have been or may be institutedor asserted against the Company arising in the ordinary course of business,including those pertaining to product liability, labor and health relatedmatters, successor liability and possible tax assessments. None of these claimsare expected to have a material adverse effect on the Company's financialposition or its annual results of operations. From January 22, 1999 through February 24, 1999, five purported classaction complaints were filed against the Company and certain of its officers inthe United States District Court for the Northern District of Indiana. Thecomplaints purported to be brought on behalf of a class of investors whopurchased the Company's common stock between April 20, 1998 and January 15,1999. The complaints alleged that the Company violated Section 10(b) of theSecurities Exchange Act of 1934 and Rule 10b-5 promulgated under the Act bydisseminating false and misleading financial statements and reports respectingthe first three quarters of the Company's fiscal year 1998. The complaintssought unspecified compensatory damages and attorney's fees, as well as otherrelief. In addition, on March 23, 1999, another purported class action lawsuitwas also filed in the United States District Court for the Northern District ofIndiana, naming the Company, its directors and the underwriters of the Company'sApril 1998 public offering. That complaint alleged that the Company and theindividual defendants violated Section 11 of the Securities Act of 1933, and theCompany, the individual defendants as "controlling persons" of the Company, andthe underwriters are liable under Section 12 of that Act, by making untruestatements of material fact in and omitting material facts from the prospectusused in that offering. The complaint sought unspecified compensatory damages andattorney's fees, as well as other relief. Both the Securities Exchange Actcomplaints and the Securities Act complaint arise out of the restatement of theCompany's financial statements for the first three quarters of 1998. At ahearing on May 10, 1999 and in an order entered on June 22, 1999, Judge AllenSharp consolidated the six pending cases under the caption In re Wabash NationalCorporation Securities Litigation, No. 4:99CV0003AS and established a schedulefor further proceedings. Pursuant to the order, selected lead plaintiffs filed aConsolidated Class Action Complaint on July 6, 1999. The consolidated complaintrepeats the claims made in the original complaints respecting the restatementand also alleges that the loss contingency for certain excise taxes, whichWabash disclosed on January 19, 1999, should have been recorded earlier. Underthe schedule established and modified by the Court, defendants filed motions todismiss the consolidated complaint on September 7, 1999, plaintiffs filed theiropposing briefs on October 4, 1999 and defendants filed their reply briefs onOctober 12, 1999. A hearing on those motions was held in December 1999. OnFebruary 29, 2000 the Court entered an order denying defendants' motions todismiss. The defendants requested that the Court permit an appeal to the UnitedStates Court of Appeals for the 7th Circuit regarding certain questions of lawraised in the Court's order. Answers to plaintiffs complaints were filed onMarch 15, 2000. The Company believes the allegations in the consolidated complaint arewithout merit, and intends to defend itself and its directors and officersvigorously. The Company believes the resolution of the lawsuit (as to which theCompany is self-insured), including any Company indemnification obligations toits officers and directors and to the underwriters of its April 1998 publicoffering, will not have a material adverse effect on its financial position orfuture results of operations; however, at this early stage of the proceedings,no assurance can be given as to the ultimate outcome of the case. b. Environmental The Company generates and handles certain material, wastes andemissions in the normal course of operations that are subject to various andevolving Federal, state and local environmental laws and regulations. The Company assesses its environmental liabilities on an on-going basisby evaluating currently available facts, existing technology, presently enactedlaws and regulations as well as experience in past treatment and remediationefforts. Based on these evaluations, the Company estimates a lower and upperrange for the treatment and remediation efforts and recognizes a liability forsuch probable costs based on the information available at the time. As ofDecember 31, 1999, the estimated potential exposure for such costs ranges fromapproximately $0.5 million to approximately $1.7 million, for which the Companyhas a reserve of approximately $1.0 million. As of December 31, 1998, theestimated potential exposure for such costs ranged from approximately $0.7million to approximately $2.7 million, for which the Company had a reserve ofapproximately $1.5 million. The reduction in the reserve during 1999 reflectspayments made during the period and a $0.3 million change in estimate during 38 411999, resulting from experience and the availability of additional information.These reserves were primarily recorded for exposures associated with the costsof environmental remediation projects to address soil and ground watercontamination as well as the costs of removing underground storage tanks at itsbranch service locations. The possible recovery of insurance proceeds has notbeen considered in the Company's estimated contingent environmental costs. The Company acquired two new manufacturing sites in July 1998 inconnection with the Cloud acquisition and voluntarily disclosed to the UnitedStates Environmental Protection Agency (EPA) and the Arkansas Department ofPollution Control and Ecology (ADPC&E) potential soil and groundwatercontamination. In association with both the EPA and the ADPC&E, the Company hassubmitted a sampling plan to ADPC&E for monitoring and any required remediation.This matter is at an early stage and it is not possible to predict the outcomewith certainty. The Company has recorded a reserve of $1.0 million related tothese issues based on current available information and does not believe theoutcome of this matter will be material to the consolidated results ofoperations or financial condition of the Company. The Company is indemnified bythe Sellers of the acquired companies and the Company believes that thesematters would be covered by the indemnification. Future information and developments will require the Company tocontinually reassess the expected impact of these environmental matters.However, the Company has evaluated its total environmental exposure based oncurrently available data and believes that compliance with all applicable lawsand regulations will not have a materially adverse effect on the consolidatedfinancial position of the Company. c. Tax Assessment On December 24, 1998, the Company received a notice from the InternalRevenue Service that it intended to assess federal excise tax on certain usedtrailers restored by the Company during 1996 and 1997. Although the Companystrongly disagreed with the IRS, it recorded a $4.6 million accrual in 1998 forthis loss contingency in Other, net in the accompanying Consolidated Statementsof Income. During 1999 the Company reached a settlement with the IRS ofapproximately $1.1 million, net of interest, of which less than $1.0 million wasrelated to the restoration of used trailers. Accordingly, during the fourthquarter 1999 the Company reflected a $3.5 million reversal in Other, net in theaccompanying Consolidated Statements of Income. The Company continued the restoration program with the same customerduring 1998 and 1999. The customer has indemnified the Company for any potentialexcise tax assessed by the IRS for years subsequent to 1997. As a result, theCompany has recorded a liability and a corresponding receivable of approximately$5.2 million and $2.4 million in the accompanying Consolidated Balance Sheets atDecember 31, 1999 and 1998, respectively. d. Letters of Credit As of December 31, 1999, the Company had standby letters of credittotaling $11.5 million issued in connection with certain foreign salestransactions and with the Company's worker's compensation self-insuranceprogram. e. Royalty Payments Beginning in the first quarter of 1998 and extending through 2007, theCompany is obligated to make quarterly royalty payments in accordance with alicensing agreement related to the development of the Company's composite platematerial used on its proprietary DuraPlate trailer. The amount of the paymentsvaries with the production volume of usable material, but requires minimumroyalties of $0.5 million annually through 2005. 39 42 f. Operating Leases The Company leases office space, manufacturing, warehouse and servicefacilities and equipment under operating leases expiring through 2006. Futureminimum lease payments required under operating leases as of December 31, 1999are as follows (in thousands): Amounts -------- 2000............................... $ 6,589 2001............................... 6,024 2002............................... 3,640 2003............................... 2,721 2004............................... 2,498 Thereafter......................... 6,151 -------- $ 27,623 ======== Total rental expense under operating leases was $5.4 million, $4.2million, and $2.6 million for the years ended December 31, 1999, 1998 and 1997,respectively. g. Used Trailer Residual Guarantees and Purchase Commitments In connection with certain new trailer sale transactions, the Companyhas entered into residual value guarantees and purchase option agreements withcustomers or financing institutions whereby the Company agrees to guarantee anend-of-term residual value or has an option to purchase the used equipment at apre-determined price. Future payments required under these transactions as ofDecember 31, 1999 and 1998 totaled approximately $30.7 million and $12.6million, respectively, the majority of which do not come due until after 2002. h. Year 2000 As of the date of this filing, the Company has not experienced anysignificant internal problems related to Year 2000 compliance issues, nor hasthe Company experienced any disturbances or interruption in its ability totransact business with its suppliers or customers. 40 4315. QUARTERLY FINANCIAL DATA (UNAUDITED) FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE) 1999---------------------------------------------------------- Net sales............................................ $ 341,624 $ 380,203 $ 374,708 $ 358,035 Gross profit......................................... 27,225 34,099 35,039 35,354 Net income........................................... 6,367 10,347 10,365 11,762 Basic earnings per share (a)......................... $ 0.26 $ 0.42 $ 0.43 $ 0.49 Diluted earnings per share (a)....................... $ 0.26 $ 0.42 $ 0.43 $ 0.491998---------------------------------------------------------- Net sales............................................ $ 293,612 $ 337,733 $ 334,113 $ 326,801 Gross profit......................................... 25,888 24,038 27,634 21,731 Net income........................................... 6,958 6,203 7,909 2,201 Basic earnings per share (a)......................... $ 0.34 $ 0.27 $ 0.33 $ 0.08 Diluted earnings per share (a)....................... $ 0.33 $ 0.27 $ 0.33 $ 0.081997---------------------------------------------------------- Net sales............................................ $ 135,087 $ 196,407 $ 246,403 $ 268,185 Gross profit......................................... 8,033 14,710 21,167 23,552 Net income........................................... 869 2,842 5,052 6,451 Basic earnings per share (a)......................... $ 0.05 $ 0.13 $ 0.24 $ 0.31 Diluted earnings per share (a)....................... $ 0.05 $ 0.13 $ 0.24 $ 0.31(a) The sum of quarterly earnings per share may differ from annual earnings per share primarily due to rounding.ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURENone. 41 44PART IIIITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following are the executive officers and key employees of theCompany: NAME AGE POSITION ---- --- -------- Donald J. Ehrlich (1)............................. 62 President, Chief Executive Officer and Chairman of the Board Dean A. Cervenka.................................. 42 Vice President--Sales Rick B. Davis..................................... 32 Corporate Controller Richard E. Dessimoz............................... 52 Vice President and Chief Executive Officer of Wabash National Finance Corporation and Director Charles R. Ehrlich................................ 55 Vice President--Manufacturing Rodney P. Ehrlich................................. 53 Vice President--Engineering Charles E. Fish................................... 45 Vice President--Human Relations Lawrence J. Gross................................. 45 Vice President--Marketing Mark R. Holden (1)................................ 40 Vice President-Chief Financial Officer and Director Karl D. Kintzele.................................. 49 Director of Internal Audit Connie L. Koleszar................................ 41 Director of Investor Relations Wilfred E. Lewallen............................... 55 Vice President--Industrial Engineering Derek L. Nagle.................................... 49 Vice President and President--Fruehauf Trailer Services, Inc. Geary D. Richard.................................. 47 Vice President--Information Systems Stanley E. Sutton................................. 50 Vice President--Purchasing(1) Member of the Executive Committee of the Board of Directors. Donald J. Ehrlich. Mr. Donald J. Ehrlich has been President, ChiefExecutive Officer and Director of the Company since its founding. In May 1995,Mr. Ehrlich was elected Chairman of the Board. He also serves as a director ofDanaher Corporation and Indiana Secondary Market Corporation. Dean A. Cervenka. Mr. Cervenka has been Vice President--Sales since January1997. Previously, Mr. Cervenka had been a Regional Sales Director for theCompany. Prior to his employment by the Company in April 1996, he was employedby Caterpillar, Inc. in various engineering and marketing positions. Rick B. Davis. Mr. Davis has been Corporate Controller of the Company sinceMay 1998. Previously, Mr. Davis was Controller of the Company since June 1995.Prior to his employment by the Company, he was employed by Cummins EngineCompany, Inc. since 1994 and Arthur Andersen LLP since 1989. Richard E. Dessimoz. Mr. Dessimoz has been Vice President and ChiefExecutive Officer of Wabash National Finance Corporation since its inception inDecember 1991 and a Director of the Corporation since December 1995. Mr.Dessimoz is also a director of APACHE Medical Systems, Inc., a producer ofsoftware and services for the medical industry. Charles R. Ehrlich. Mr. Charles Ehrlich has been VicePresident--Manufacturing of the Company and has been in charge of the Company'smanufacturing operations since the Company's founding. Rodney P. Ehrlich. Mr. Rodney Ehrlich has been Vice President--Engineeringof the Company and has been in charge of the Company's engineering operationssince the Company's founding. Charles E. Fish. Mr. Fish is Vice President--Human Relations of the Companyand has been in charge of the Company's human relations operations since theCompany's founding. 42 45 Lawrence J. Gross. Mr. Gross has been Vice President--Marketing of theCompany since December 1994. Previously he had been President of the Company'sRoadRailer division since joining the Company in July 1991. Prior to hisemployment by the Company, he was employed since 1985 by Chamberlain ofConnecticut, Inc., a licensor of bimodal technology, as VicePresident--Marketing until 1990 and as President until he began his employmentwith the Company. Mark R. Holden. Mr. Holden has been Vice President--Chief Financial Officerand Director of the Company since May 1995. Previously, Mr. Holden had been VicePresident Controller of the Company. Prior to his employment by the Company inDecember 1992, he was employed by Arthur Andersen LLP since 1981. Karl D. Kintzele. Mr. Kintzele has been Director of Internal Audit sincejoining the Company in September, 1999. Prior to his employment by the Company,he was employed by Teledyne, Inc. since 1979. Connie L. Koleszar. Ms. Koleszar has been Director of Investor Relationssince the Company's initial public offering in 1991 and has been employed by theCompany in various administrative capacities since its founding. Wilfred E. Lewallen. Mr. Lewallen is Vice President--Industrial Engineeringof the Company and has been in charge of the Company's industrial engineeringoperations since the Company's founding. Derek L. Nagle. Mr. Nagle has been Vice President and President of FruehaufTrailer Services, Inc. since the Company's acquisition of certain Fruehaufassets in April 1997. Prior to his employment by the Company, he was employedsince 1970 at Fruehauf Trailer Corporation, as Senior Vice President of NorthAmerican Sales & Distribution from 1993 through 1995, as Executive VicePresident of North American Operations until 1996. In September 1997, he wasappointed President of Fruehauf Trailer Corporation following the resignation ofthe previous CEO and CFO of Fruehauf. Fruehauf Trailer Corporation filedbankruptcy in October 1996. Geary D. Richard. Mr. Richard has been Vice President--Information Systemssince February 1999. Previously, Mr. Richard had been Director--InformationSystems of the Company. Prior to his employment by the Company in July 1989, hewas employed by Schwab Safe Company since 1975. Stanley E. Sutton. Mr. Sutton has been Vice President--Purchasing of theCompany since joining the Company in May 1992. Prior to his employment by theCompany, he was employed since 1973 by Pines Trailer Limited Partnership as VicePresident--Manufacturing Operations. Officers are elected for a term of one year and serve at the discretion ofthe Board of Directors. The Company hereby incorporates by reference the information containedunder the heading "Election of Directors" from its definitive Proxy Statement tobe delivered to stockholders of the Company in connection with the 2000 AnnualMeeting of Stockholders to be held May 9, 2000. Donald J. Ehrlich, President, Chief Executive Officer and Chairman, andCharles R. Ehrlich and Rodney P. Ehrlich, executive officers of the Company, arebrothers. Dean A. Cervenka and Connie L. Koleszar, executive officers of theCompany, are brother and sister.ITEM 11--EXECUTIVE COMPENSATION The Company hereby incorporates by reference the information containedunder the heading "Compensation" from its definitive Proxy Statement to bedelivered to the stockholders of the Company in connection with the 2000 AnnualMeeting of Stockholders to be held May 9, 2000.ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company hereby incorporates by reference the information containedunder the heading "Beneficial Ownership of Common Stock" from its definitiveProxy Statement to be delivered to the stockholders of the Company in connectionwith the 2000 Annual Meeting of Stockholders to be held on May 9, 2000. 43 46ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company hereby incorporates by reference the information containedunder the heading "Compensation Committee Interlocks and Insider Participant"from its definitive Proxy Statement to be delivered to the stockholders of theCompany in connection with the 2000 Annual Meeting of Stockholders to be held onMay 9, 2000.PART IVITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements: All required financial statements are included inItem 8 of this Form 10-K. Financial statement schedules are omitted as they arenot required or not applicable or the required information is included in theNotes to consolidated financial statements. (b) Reports on Form 8-K: None. (c) Exhibits: The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below:2.01 Purchase Agreement dated March 31, 1997, as amended (Incorporated by reference from Exhibit 2.01 to Registrant's Form 8-K filed in May 1, 1997)3.01 Certificate of Incorporation of the Company (1)3.02 Certificate of Designations of Series A Junior Participating Preferred Stock (1)3.03 By-laws of the Company (1)3.04 Certificate of Designations of Series B 6% Cumulative Convertible Exchangeable Preferred Stock (6)3.05 Certificate of Designations of Series C 5.5% Cumulative Convertible Exchangeable Preferred Stock (9)4.01 Specimen Stock Certificate (1)4.02 Rights Agreement between the Company and Harris Bank as Rights Agent (1)4.03 First Amendment to Shareholder Rights Agreement dated October 21, 1998 (10)4.04 Form of Indenture for the Company's 6% Convertible Subordinated Debentures due 200710.01 Loan Agreement, Mortgage, Security Agreement and Financing Statement between Wabash National Corporation and City of Lafayette dated as of August 15, 1989(1)10.02 1992 Stock Option Plan (1)10.03 Promissory Note in the principal amount of $2,882,392 by Wabash National Finance Corporation in favor of Corestates Bank, N.A. dated December 21, 1993 (2)10.04 Security Agreement of Wabash National Finance Corporation in favor of Corestates Bank, N.A. dated December 21, 1993 (2)10.05 Loan Agreement of Wabash National Finance Corporation in favor of Corestates Bank, N.A. dated December 21, 1993 (2)10.06 Real Estate Sale Agreement by and between Kraft General Foods, Inc. and Wabash National Corporation, dated June 1, 1994 (3)10.07 6.41% Series A Senior Note Purchase Agreement dated January 31, 1996, between certain Purchasers and Wabash National Corporation (4)10.08 Master Loan and Security Agreement in the amount of $10 million by Wabash National Finance Corporation in favor of Sanwa Business Credit Corporation dated December 27, 1995 (4)10.09 First Amendment to the 6.41% Series A Senior Note Purchase Agreement dated January 31, 1996 between certain Purchasers and Wabash National Corporation (5)10.10 Series B-H Senior Note Purchase Agreement dated December 18, 1996 between certain Purchasers and Wabash National Corporation (5)10.11 Revolving Credit Loan Agreement dated September 30, 1997, between NBD Bank, N.A. and Wabash National Corporation (7)10.12 Investment Agreement and Shareholders Agreement dated November 4, 1997, between ETZ (Europaische Trailerzug Beteiligungsgesellschaft mbH) and Wabash National Corporation (7) 44 4710.13 Receivable Sales Agreement between the Company and Wabash Funding Corporation and the Receivables Purchase Agreement between Wabash Funding Corporation and Falcon Asset Securitization Corporation (8)10.14 Indemnification Agreement between the Company and Roadway Express, Inc. (11)21.00 List of Significant Subsidiaries (11)23.01 Consent of Arthur Andersen LLP (11)27.00 Financial Data Schedule (11) (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 33-42810) or the Registrant's Registration Statement on Form 8-A filed December 6, 1995 (item 3.02 and 4.02). (2) Incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1993. (3) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 1994. (4) Incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1995 (5) Incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1996 (6) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 1997 (7) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1997 (8) Incorporated by reference to the Registrant's Form 8-K filed on April 14, 1998 (9) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1998 (10) Incorporated by reference to the Registrant's Form 8-K filed on October 21, 1998 (11) Filed herewithThe Registrant undertakes to provide to each shareholder requesting the same acopy of each Exhibit referred to herein upon payment of a reasonable fee limitedto the Registrant's reasonable expenses in furnishing such Exhibit. 45 48 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ONITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. WABASH NATIONAL CORPORATIONMarch 28, 2000 By: /s/ Rick B. Davis ------------------------------------ Rick B. Davis Corporate Controller (Principal Accounting Officer) and Duly Authorized Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THISREPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THEREGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED. DATE SIGNATURE AND TITLE ---- -------------------March 28, 2000 By: /s/ Donald J. Ehrlich ------------------------------------ Donald J. Ehrlich Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer)March 28, 2000 By: /s/ Mark R. Holden ------------------------------------ Mark R. Holden Vice President--Chief Financial Officer and DirectorMarch 28, 2000 By: /s/ Richard E. Dessimoz ------------------------------------ Richard E. Dessimoz Vice President and Chief Executive Officer-Wabash National Finance Corporation and DirectorMarch 28, 2000 By: /s/ John T. Hackett ------------------------------------ John T. Hackett DirectorMarch 28, 2000 By: /s/ E. Hunter Harrison ------------------------------------ E. Hunter Harrison DirectorMarch 28, 2000 By: /s/ Ludvik F. Koci ------------------------------------ Ludvik F. Koci Director 46 1 EXHIBIT 10.14 HOLD HARMLESS AND INDEMNITY AGREEMENT A hold harmless and indemnity agreement between Wabash NationalCorporation, a Delaware corporation, with its principal place of business at1000 Sagamore Parkway South, Lafayette, Indiana (hereafter "Wabash") and RoadwayExpress Inc., a Delaware corporation, with its principal place of business at1077 Gorge Boulevard, Akron, Ohio (hereafter "Roadway"). RECITALS 1. Wabash is a manufacturer of semi-trailers that also engages in therestoration of worn semi-trailer equipment. 2. Roadway is a user of semi-trailers that requires restoration of aportion of its 28' van semi-trailer fleet that is worn. 3. Roadway and Wabash believe that certain changes in federal excisetax law and related authority on semi-trailer equipment, bring into questionwhether federal excise taxes are due on Roadway's trailers restored by Wabash. 4. As both parties believe that federal excise taxes will not be due onthose trailers of Roadway restored by Wabash, the restoration price per unitdoes not include federal excise tax. 5. Roadway and Wabash are not sure what position the Internal RevenueService will take on whether or not federal excise taxes will be due on thosetrailers of Roadway restored by Wabash. 6. In order to induce Wabash to agree to perform such restoration work,Roadway enters into the following agreement and assurances with Wabash. AGREEMENT In consideration of Wabash agreeing with Roadway to a restoration priceper trailer in the Sales Confirmation that does not include federal excise tax,Roadway and Wabash agree as follows: A. Notwithstanding pre-printed provisions appearing on the back of orattached to the Sales Confirmation as to the Confirmation being the entireagreement between Roadway and Wabash, both Roadway and Wabash agree that thisHold Harmless and Indemnity Agreement shall supplement the Sales Confirmation.In the event that this Agreement conflicts with any terms appearing in the SalesConfirmation, then the provisions of this Agreement shall override theconflicting terms in the Sales Confirmation. B. In the event that the Internal Revenue Service, either formally orinformally, contests the failure of Wabash to pay federal excises with respectto any trailers sold and delivered to Roadway after January 1, 1998, or amountsclaimed to be due on that account, then page 1 2Roadway agrees to save Wabash harmless from and indemnify it as to any suchtaxes, together with interest, penalties, attorney fees, and out-of pocketexpenses, subject only to the following conditions: 1. Wabash will promptly give notice to Roadway of any claim, whether formally or informally asserted, by the Internal Revenue Service of a failure of Wabash to pay federal excises taxes; 2. Wabash will fully cooperate in defending against the assertion of deficiency in payment of federal excise taxes and shall retain attorneys designated by Roadway to represent Wabash; provided, however, that Roadway shall pay all statements of fees and expenses of such attorneys. 3. Roadway will be considered a joint client of attorneys retained to defend against the imposition of such taxes and shall be entitled to all of the legal confidences and communications relating to such taxes; 4. In the event that Roadway agrees to a settlement of the claimed taxes, penalties and interest, it shall pay Wabash the amount required therefor, which amount in turn shall be paid to the Internal Revenue Service; and 5. Upon notification of the entry of judgment against Wabash in respect of such taxes, which judgment becomes final without right of appeal or further appeal, Roadway shall promptly tender the amount required in discharge thereof in full including interest, if any, and costs. In addition, Roadway will: (1) provide any appeal bonds necessary to stay the payment of judgment pending appeal and (2) pay any tax, subject to repayment if a court so decides, if the parties determine that it would be advantageous to pay the tax and sue for a refund. C. This Agreement will be governed and construed according to Indiana law. D. The parties agree that should any dispute arise between them as to the terms of this Agreement or relating in any way to it, the matter shallbe resolved through arbitration before an arbitrator appointed by the Center forPublic Resources, New York, New York, and according to its rules of procedure.The place of arbitration shall be Chicago, Illinois.FOR ROADWAY EXPRESS, INC. FOR WABASH NATIONAL CORPORATIONBy: By: ------------------------------------- ----------------------------Name: J. Dawson Cunningham Name: Donald J. Ehrlich ----------------------------------- --------------------------Title: V.P. Finance/Administration Title: President and C.E.O. ---------------------------------- ------------------------- & Treasurer ----------------------------------Date: Date: ----------------------------------- -------------------------- page 2 1 Exhibit 21.00 SUBSIDIARIES OF THE COMPANY AND OWNERSHIP OF SUBSIDIARY STOCKNOTE: BELOW IS A LIST OF ALL OF THE COMPANY'S SUBSIDIARIES, IRRESPECTIVE OF THESIGNIFICANT SUBSIDIARY TEST. NAME OF STATE/COUNTRY OF % OF SHARES SUBSIDIARY INCORPORATION OWNED BY THE COMPANY (*) ---------- ------------- ------------------------ Wabash National Finance Corporation Indiana 100% Wabash International, Inc. (Foreign Sales Corp.) U.S. Virgin Islands 100% Wabash National GmbH Germany 100% Fruehauf Trailer Services, Inc. Delaware 100% WNC Cloud Merger Sub, Inc. Arkansas 100% Cloud Oak Flooring Company, Inc. Arkansas 100% Wabash Funding Corp. Missouri 100% Wabash National L.P. Delaware 100% Wabash National Services L.P. Delaware 100% WTSI Technology Corp. Delaware 100% Wabash Technology Corp. Delaware 100% RoadRailer Bimodal Ltd. United Kingdom 100% Wabash do Brazil Brazil 100% Shanghai RoadRailer International Trade Co., Ltd. China 81% National Trailer Funding LLC Delaware 100% Continental Transit Corp Indiana 100%* Includes both direct and indirect ownership by the parent, Wabash National Corporation 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTSAs independent public accountants, we hereby consent to the incorporation of ourreport included in this Form 10-K, into the Company's previously filedRegistration Statement File Nos. 33-49256, 33-65318 and 333-29309. ARTHUR ANDERSEN LLPIndianapolis, Indiana,March 28, 2000.

5THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THECONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME AND STATEMENT OF CASH FLOW ANDIS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 22,484 0 111,567 0 269,581 429,017 186,430 0 791,291 200,266 164,367 230 0 5 379,130 791,291 1,454,570 1,454,570 1,322,852 1,322,852 50,796 0 12,695 64,733 25,891 38,842 0 0 0 38,842 $1.60 $1.59

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Wabash National Annual Report 1999

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Wabash National
Annual Report 1999