UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 —

For the quarterly period ended March 31, 2006

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 —

For the transition period from

ALLIED HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

GEORGIA		58-0360550
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Suite 200, 160 Clairemont Avenue, Decatur, Georgia 30030
(Address of principal executive offices)

(404) 373-4285

www.alliedholdings.com
(Web Page)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act of 1934).

Large Accelerated Filer o       Accelerated Filer o       Non-Accelerated Filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No

Outstanding common stock, no par value at August 8, 2006			8,980,329

 

 

ALLIED HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		PAGE
PART I — FINANCIAL INFORMATION
ITEM 1 — Financial Statements
Consolidated Balance Sheets — March 31, 2006 and December 31, 2005 (unaudited)			1
Consolidated Statements of Operations — Three Months Ended March 31, 2006 and 2005 (unaudited)			2
Consolidated Statements of Cash Flows — Three Months Ended March 31, 2006 and 2005 (unaudited)			3
Notes to the Consolidated Financial Statements (unaudited)			4
ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk			37
ITEM 4 — Controls and Procedures			37
PART II — OTHER INFORMATION
ITEM 1 — Legal Proceedings			38
ITEM 1A — Risk Factors			38
ITEM 6 — Exhibits			44
Signatures			45
EX-4.3(J) CONSENT AND FIFTH AMENDMENT DATED 6-30-06
EX-31.1 CERTIFICATION OF HUGH E. SAWYER
EX-31.2 CERTIFICATION OF THOMAS H. KING
EX-32.1 SECTION 1350 CERTIFICATION OF HUGH E. SAWYER
EX-32.2 SECTION 1350 CERTIFICATION OF THOMAS H. KING

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

		March 31,				December 31,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	2,882			$	4,117
Restricted cash, cash equivalents and other time deposits			32,827				32,830
Receivables, net of allowances of $2,225 and $2,218 as of March 31, 2006 and December 31, 2005, respectively			59,402				61,427
Inventories			5,149				5,132
Deferred income taxes			202				128
Prepayments and other current assets			49,027				59,434
Total current assets			149,489				163,068
Property and equipment, net of accumulated depreciation			122,762				123,904
Goodwill, net			3,545				3,545
Other assets:
Restricted cash, cash equivalents and other time deposits			69,758				69,764
Other noncurrent assets			24,533				22,835
Total other assets			94,291				92,599
Total assets		$	370,087			$	383,116
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities not subject to compromise:
Debtor-in-possession credit facility		$	150,496			$	151,997
Accounts and notes payable			49,763				57,196
Accrued liabilities			89,604				83,317
Total current liabilities			289,863				292,510
Long-term liabilities not subject to compromise:
Postretirement benefits other than pensions			4,309				4,412
Deferred income taxes			218				143
Other long-term liabilities			71,957				74,096
Total long-term liabilities			76,484				78,651
Liabilities subject to compromise			199,246				199,322
Commitments and contingencies			—				—
Stockholders’ deficit:
Preferred stock, no par value. Authorized 5,000 shares; none outstanding			—				—
Common stock, no par value. Authorized 20,000 shares; 8,980 shares outstanding at March 31, 2006 and December 31, 2005			—				—
Additional paid-in capital			48,638				48,545
Treasury stock, 139 shares at cost			(707	)			(707	)
Accumulated deficit			(222,919	)			(214,631	)
Accumulated other comprehensive loss, net of tax			(20,518	)			(20,574	)
Total stockholders’ deficit			(195,506	)			(187,367	)
Total liabilities and stockholders’ deficit		$	370,087			$	383,116

See accompanying notes to these consolidated financial statements.

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

		Three Months Ended March 31,
		2006				2005
Revenues		$	240,828			$	220,950
Operating expenses:
Salaries, wages, and fringe benefits			125,613				121,228
Operating supplies and expenses			48,662				41,509
Purchased transportation			30,908				28,861
Insurance and claims			10,933				8,883
Operating taxes and licenses			7,698				7,774
Depreciation and amortization			7,216				8,192
Rents			1,753				1,849
Communications and utilities			1,937				1,911
Other operating expenses			2,065				2,580
(Gain) loss on disposal of operating assets, net			(54	)			44
Total operating expenses			236,731				222,831
Operating income (loss)			4,097				(1,881	)
Other income (expense):
Interest expense (excludes contractual interest of $3,234 in 2006)			(9,541	)			(8,212	)
Investment income			1,036				438
Foreign exchange losses, net			(170	)			(199	)
Total other income (expense)			(8,675	)			(7,973	)
Loss before reorganization items and income taxes			(4,578	)			(9,854	)
Reorganization items			(3,583	)			—
Loss before income taxes			(8,161	)			(9,854	)
Income tax expense			(127	)			(204	)
Net loss		$	(8,288	)		$	(10,058	)
Basic and diluted loss per common share:
Net loss:
Basic and diluted		$	(0.92	)		$	(1.13	)
Weighted average common shares outstanding:
Basic and diluted			8,980				8,940

See accompanying notes to these consolidated financial statements.

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

		Three Months Ended March 31,
		2006				2005
Cash flows from operating activities:
Net loss		$	(8,288	)		$	(10,058	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of deferred financing costs			3,631				747
Depreciation and amortization			7,216				8,192
Reorganization items			3,583				—
(Gain) loss on disposal of assets			(54	)			44
Foreign exchange losses			170				199
Deferred income taxes			1				(104	)
Stock-based compensation expense			93				—
Change in operating assets and liabilities:
Receivables, net of allowances			2,011				959
Inventories			(19	)			(159	)
Prepayments and other assets			3,697				(5,895	)
Accounts and notes payable			(247	)			(1,298	)
Accrued liabilities			4,213				14,124
Net cash provided by operating activities before payment of reorganization items			16,007				6,751
Reorganization items paid			(2,936	)			—
Net cash provided by operating activities			13,071				6,751
Cash flows from investing activities:
Purchases of property and equipment			(6,216	)			(4,825	)
Proceeds from sales of property and equipment			149				252
Decrease (increase) in restricted cash, cash equivalents and other time deposits			9				(10,353	)
Funds deposited with insurance carriers			(574	)			(7,357	)
Funds returned from insurance carriers			1,908				1,609
Net cash used in investing activities			(4,724	)			(20,674	)
Cash flows from financing activities:
Repayment of debtor-in-possession revolving credit facility, net			(1,501	)			—
Additions to pre-petition revolving credit facilities, net			—				13,843
Repayment of pre-petition debt			—				(4,165	)
Proceeds from insurance financing arrangements			178				8,031
Repayments of insurance financing arrangements			(8,182	)			(2,601	)
Proceeds from issuance of common stock			—				43
Net cash (used in) provided by financing activities			(9,505	)			15,151
Effect of exchange rate changes on cash and cash equivalents			(77	)			178
Net change in cash and cash equivalents			(1,235	)			1,406
Cash and cash equivalents at beginning of period			4,117				2,516
Cash and cash equivalents at end of period		$	2,882			$	3,922
Supplemental cash flow information:
Cash paid during the period for:
Interest		$	5,223			$	4,401
Income taxes, net			150				80

See accompanying notes to these consolidated financial statements.

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

(Throughout this Quarterly Report on Form 10-Q, we will use the terms “we,” “our,” “us” and “Allied” to refer to Allied Holdings, Inc. (a Georgia corporation) and its subsidiaries on a consolidated basis and, as the context requires, to Allied Holdings, Inc. and its subsidiaries that filed for Chapter 11 pursuant to the U.S Bankruptcy Code.)

(1) Organization and Operations

Company Overview

We are a vehicle-hauling company providing a range of logistics and other support services to the automotive industry. Our principal operating divisions are Allied Automotive Group, Inc. (Allied Automotive Group) and Axis Group, Inc. (Axis Group). Allied Automotive Group, through its subsidiaries, is engaged in the business of transporting automobiles, light trucks, and sport utility vehicles (“SUVs”) from manufacturing plants, ports, auctions, and railway distribution points to automobile dealerships. Axis Group, through its subsidiaries, is engaged in the business of securing and managing vehicle distribution services, automobile inspections, auction and yard management services, vehicle tracking, vehicle accessorization, and dealer preparatory services for the automotive industry.

Chapter 11 Overview

On July 31, 2005 (“the Petition Date”), Allied Holdings, Inc. and substantially all of its subsidiaries (the “Debtors”) filed voluntary petitions seeking protection under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”). Our captive insurance company, Haul Insurance Limited, as well as our subsidiaries in Mexico and Bermuda (the “Non-debtors”) were not included in the Chapter 11 filings. Our Canadian subsidiaries obtained approval for creditor protection under the Companies Creditors’ Arrangement Act in Canada and are included among the subsidiaries that filed voluntary petitions seeking bankruptcy protection. Like Chapter 11, the Companies Creditors Arrangement Act in Canada allows for reorganization under the protection of the court system.

The Debtors are currently operating their business as debtors-in-possession under the jurisdiction of the U.S. Bankruptcy Court for the Northern District of Georgia (“Bankruptcy Court”) and cannot engage in transactions considered to be outside of the ordinary course of business without obtaining Bankruptcy Court approval. We currently have the exclusive right to file a plan of reorganization until November 1, 2006 and to solicit acceptance of the plan through January 2, 2007. The exclusively date can be extended at our request, if approved by the Bankruptcy Court. However, we can provide no assurance as to whether any request to extend the exclusivity date will be approved. Proceedings between the Petition Date and the date that the plan of reorganization is consummated will be referred to as the Chapter 11 Proceedings. See Note 3 for other disclosures required by entities in reorganization under the Bankruptcy Code.

(2) Accounting and Reporting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and are based on the instructions to Form 10-Q and Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. However, except as disclosed in this report, there have been no material changes in the information that we disclosed in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. These interim financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2005. As a result of our Chapter 11 filing, we have applied the guidance in the American Institute of Certified Public Accountants’ Statement of Position 90-7 (“SOP 90-7”), Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The accompanying unaudited consolidated financial statements have been prepared on the going concern basis, which assumes that we will continue in operation for the foreseeable future and will realize our assets and discharge our post-petition liabilities in the ordinary course of business. However, continuation as a going concern is predicated upon, among other things, the confirmation of a plan of reorganization, compliance with the provisions of the debtor-in-possession facility (See Note 11), our ability to reach an agreement with the International Brotherhood of Teamsters (“IBT” or “Teamsters”) on a new collective bargaining agreement, our ability to generate sufficient cash from operations, our ability to obtain financing sufficient to satisfy our future obligations and our ability to comply with the terms of the ultimate plan of reorganization. The accompanying unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern, nor do they include any adjustments to the carrying values of assets and liabilities that might be required as a result of the plan of reorganization. A plan of reorganization could substantially change the amounts currently recorded in the accompanying unaudited consolidated financial statements. Asset and liability carrying amounts do not purport to represent the realizable or settlement values that will be reflected in the plan of reorganization and it is not possible to estimate the impact of the Chapter 11 Proceedings on our financial statements. As a result of the Chapter 11 Proceedings, we may take, or be required to take, actions that may cause assets to be realized or liabilities to be settled for amounts other than those reflected in the financial statements.

Certain reclassifications have been made to the prior period financial statements in order to conform to the current period presentation.

Use of Estimates and Seasonality

The preparation of financial statements in accordance with GAAP requires that management make a number of estimates and assumptions relating to the reported amount of assets and liabilities and disclosures about contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the period. Significant items subject to estimates and assumptions include the carrying amounts of property and equipment and goodwill; valuation allowances for receivables and deferred income tax assets; self-insurance reserves, assets and obligations related to employee benefits; liabilities subject to compromise; and reorganization items. Actual results could differ from those estimates.

Our revenues are seasonal, with the second and fourth quarters generally experiencing higher revenues than the first and third quarters. The volume of vehicles shipped during the second and fourth quarters is generally higher due to the introduction of new customer models which are shipped to dealers during those periods as well as to the higher spring and early summer sales of automobiles, light trucks and SUVs. During the first and third quarters, vehicle shipments typically decline due to lower sales volume during those periods and scheduled original equipment manufacturer (“OEM”) plant shutdowns, which generally occur in the third quarter. As a result of these and other factors, our operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

(3) Accounting for Reorganization

As a result of our Chapter 11 filing, we have applied the guidance in SOP 90-7 in the preparation of the accompanying unaudited consolidated financial statements. SOP 90-7 does not change the application of GAAP in the preparation of financial statements. However, SOP 90-7 does require that financial statements, for periods including and subsequent to the filing of a Chapter 11 petition, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business and also that liabilities subject to compromise be segregated from those not subject to compromise. In accordance with SOP 90-7 we have:

	•		separated liabilities that are subject to compromise from liabilities that are not subject to compromise;
	•		distinguished transactions and events that are directly associated with the reorganization from the ongoing operations of the business; and
	•		ceased accruing interest on the 85/8 % senior notes (“Senior Notes”).

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Liabilities Subject to Compromise

Liabilities subject to compromise include certain known liabilities incurred by the Debtors prior to the Petition Date. Liabilities subject to compromise exclude pre-petition claims for which the Debtors have received the Bankruptcy Court’s approval to pay, such as claims related to active employees and retirees, maintenance of insurance programs, cargo damage claims and claims related to certain critical service vendors. Liabilities subject to compromise are included at amounts expected to be allowed by the Bankruptcy Court and are subject to future adjustments that may result from negotiations, actions by the Bankruptcy Court, developments with respect to disputed claims or matters arising out of the proof of claims process whereby a creditor may prove that the amount of a claim differs from the amount that we have recorded.

The bar date set by the Bankruptcy Court for the submission of claims by creditors was February 17, 2006. A number of proofs of claim were filed against the Debtors by various creditors and security holders and we have not reconciled these claims to our records. As part of the claims reconciliation process, the Debtors will review these claims for validity. As claims are reconciled, the Debtors may need to record additional liabilities subject to compromise. Adjustments arising out of the claims reconciliation process could have a material effect on the financial statements.

We ceased the recording of interest on liabilities subject to compromise, primarily the Senior Notes, as of the Petition Date. Contractual interest on the Senior Notes in excess of reported interest was approximately $3.2 million for the three months ended March 31, 2006 and $8.6 million since the Petition Date, excluding any potential compound or default interest arising from events of default related to the Chapter 11 Proceedings.

Liabilities subject to compromise are as follows at March 31, 2006 and December 31, 2005 (in thousands):

		March 31,				December 31,
		2006				2005
Accounts payable		$	24,843			$	24,922
Senior Notes			150,000				150,000
Accrued interest on Senior Notes			4,313				4,313
Multiemployer pension withdrawal liabilities			15,847				15,847
Accrued claims and insurance reserves			3,112				3,109
Other accrued liabilities			1,131				1,131
		$	199,246			$	199,322

Reorganization Items

Reorganization items are presented separately in the accompanying unaudited consolidated statements of operations and represent expenses that we have identified as directly relating to the Chapter 11 Proceedings. These items for the three months ended March 31, 2006 are summarized as follows (in thousands):

Legal and professional fees		$	2,678
Employee retention plan			817
Other reorganization items			88
		$	3,583

Condensed Financial Statement Information of the Debtors and Non-debtors

As disclosed above, our captive insurance company, Haul Insurance Limited, as well as our subsidiaries in Mexico and Bermuda (the “Non-debtors”) were not among the subsidiaries that filed for Chapter 11. Presented below are unaudited condensed consolidating financial statement information of the subsidiaries that filed for Chapter 11 (identified in the tables as “the Debtors”) and the Non-debtors:

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidating Balance Sheet Information
March 31, 2006
(In thousands)

		Debtors				Non-Debtors				Eliminations				Consolidated
Current assets		$	110,082			$	39,371			$	36			$	149,489
Intercompany receivables (payables)			15,035				(15,035	)			—				—
Property and equipment, net			119,168				3,594				—				122,762
Goodwill, net			3,545				—				—				3,545
Investment in related party			22,355				6,223				(28,578	)			—
Other assets			24,103				70,188				—				94,291
Total assets		$	294,288			$	104,341			$	(28,542	)		$	370,087
Liabilities not subject to compromise:
Current liabilities		$	264,638			$	25,423			$	(198	)		$	289,863
Other noncurrent liabilities			24,970				51,514				—				76,484
Liabilities subject to compromise			199,246				—				—				199,246
Stockholders’ (deficit) equity			(194,566	)			27,404				(28,344	)			(195,506	)
Total liabilities and stockholders’ (deficit) equity		$	294,288			$	104,341			$	(28,542	)		$	370,087

Condensed Consolidating Balance Sheet Information
December 31, 2005
(In thousands)

		Debtors				Non-Debtors				Eliminations				Consolidated
Current assets		$	121,807			$	41,261			$	—			$	163,068
Intercompany receivables (payables)			14,744				(14,744	)			—				—
Property and equipment, net			120,212				3,692				—				123,904
Goodwill, net			3,545				—				—				3,545
Investment in related party			21,169				6,223				(27,392	)			—
Other assets			22,366				70,233				—				92,599
Total assets		$	303,843			$	106,665			$	(27,392	)		$	383,116
Liabilities not subject to compromise:
Current liabilities		$	264,265			$	28,245			$	—			$	292,510
Other noncurrent liabilities			26,684				51,967				—				78,651
Liabilities subject to compromise			199,322				—				—				199,322
Stockholders’ (deficit) equity			(186,428	)			26,453				(27,392	)			(187,367	)
Total liabilities and stockholders’ (deficit) equity		$	303,843			$	106,665			$	(27,392	)		$	383,116

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidating Statement of Operations Information
For the Three Months Ended March 31, 2006
(In thousands)

		Debtors				Non-Debtors				Eliminations				Consolidated
Revenues		$	239,770			$	2,420			$	(1,362	)		$	240,828
Operating expenses			236,007				2,086				(1,362	)			236,731
Operating income			3,763				334				—				4,097
Other (expense) income, net			(8,449	)			960				(1,186	)			(8,675	)
(Loss) income before reorganization items and income taxes			(4,686	)			1,294				(1,186	)			(4,578	)
Reorganization items			(3,583	)			—				—				(3,583	)
(Loss) income before income taxes			(8,269	)			1,294				(1,186	)			(8,161	)
Income tax (expense) benefit			(19	)			(342	)			234				(127	)
Net (loss) income		$	(8,288	)		$	952			$	(952	)		$	(8,288	)

Condensed Consolidating Statement of Cash Flows Information
For the Three Months Ended March 31, 2006
(In thousands)

		Debtors				Non-Debtors				Eliminations				Consolidated
Net cash provided by (used in):
Operating activities		$	13,895			$	(824	)		$	—			$	13,071
Investing activities			(4,710	)			(14	)			—				(4,724	)
Financing activities			(9,505	)			—				—				(9,505	)
Effect of exchange rate changes on cash and cash equivalents			(77	)			—				—				(77	)
Net change in cash and cash equivalents			(397	)			(838	)			—				(1,235	)
Cash and cash equivalents at beginning of period			730				3,387				—				4,117
Cash and cash equivalents at end of period		$	333			$	2,549			$	—			$	2,882

(4) Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step is measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of the benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized. FIN 48 requires the evaluation of tax positions to be completed prior to assessing the need for a valuation allowance for deferred tax assets. Additional disclosure requirements of the Interpretation include a rollforward of unrecognized tax benefits, information regarding the uncertainty of unrecognized tax benefits, a description of all open tax years by jurisdiction and the accounting policy on the income

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

statement classification of interest and penalties and amounts of each recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. A change in net assets as a result of applying the provisions of this Interpretation will be considered a change in accounting principle with the cumulative effect of the change treated as an offsetting adjustment to the opening balance of accumulated deficit in the period of transition. We have not determined the effect on our financial position or results of operations of adopting FIN 48.

In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Changes in Interim Financial Statements.” SFAS No. 154 changes the accounting for, and reporting of, a change in accounting principle. SFAS No. 154 requires retrospective application to prior-period financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS No. 154 was effective for accounting changes and corrections of errors during fiscal years beginning after December 15, 2005. SFAS No. 154 was effective for us in January 2006 and did not impact our financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 are no longer an alternative to financial statement recognition. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No.107, which provides interpretive guidance regarding the interaction of SFAS No. 123(R) and certain SEC rules and regulations related to share-based payment transactions with nonemployees, valuation methods, classification of compensation expense, non-GAAP measures, accounting for income tax effects, modification of employee share options prior to adoption and disclosures in Management’s Discussion and Analysis. The FASB has also issued various implementation guidance in relation to SFAS No. 123(R).

SFAS No. 123(R) was effective for us on January 1, 2006. We adopted the use of the modified prospective method and hence have not restated prior–period results. Under the modified prospective method, awards granted, modified or settled after the adoption date are measured and accounted for in accordance with SFAS No. 123(R). Unvested equity awards granted prior to the effective date continue to be measured under SFAS No. 123 except that the related compensation expense is now recognized in the income statement. At the date of adoption, our unrecognized compensation expense associated with unvested stock options was approximately $594,000, which, subject to any modifications that may occur in future years, will be recognized at $372,000, $197,000 and $25,000 during the years ending December 31, 2006, 2007 and 2008, respectively. During the three months ended March 31, 2006, we recognized compensation expense associated with stock options that were unvested at the date of adoption of SFAS No. 123(R) of approximately $93,000. We granted no stock options during the three months ended March 31, 2006 and, we do not expect to grant any stock options during the Chapter 11 Proceedings. See Note 15 for additional disclosures required by SFAS No. 123(R).

(5) Prepayments and Other Current Assets

Prepayments and other current assets as of March 31, 2006 and December 31, 2005 are presented below (in thousands):

		March 31,				December 31,
		2006				2005
Prepaid insurance		$	37,562			$	50,185
Prepaid licenses			4,286				1,532
Tires on tractors and trailers			2,245				2,245
Short-term deposits with pre-petition lenders			2,679				2,679
Other			2,255				2,793
		$	49,027			$	59,434

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

(6) Property and Equipment

Property and equipment and the related accumulated depreciation and amortization are presented below as of March 31, 2006 and December 31, 2005 (in thousands):

		March 31,				December 31,
		2006				2005
Cost		$	523,243			$	528,206
Accumulated depreciation and amortization			(400,481	)			(404,302	)
		$	122,762			$	123,904

We utilize primarily one company to remanufacture and supply certain parts needed to maintain a significant portion of our fleet of specialized tractors and trailers (together called “Rigs”), which we include in property and equipment. While we believe that a limited number of other companies could provide comparable remanufacturing services and parts, a change in this service provider could cause a delay in and increase the cost of the remanufacturing process and the maintenance of our Rigs. Such delays and additional costs could adversely affect our operating results as well as our Rig remanufacturing and maintenance programs and customer relationships. In addition, we purchase our tractors primarily through one manufacturing company. We have not yet determined whether another manufacturer could provide us with the number of specialized tractors that we need to operate our fleet of Rigs and if so, we cannot determine the cost.

(7) Other Noncurrent Assets

Other noncurrent assets as of March 31, 2006 and December 31, 2005 are presented below (in thousands):

		March 31,				December 31,
		2006				2005
Insurance and bond deposits		$	10,181			$	4,961
Interest in split-dollar life insurance policies			6,138				6,181
Deposits			2,833				2,599
Deferred financing costs			1,964				5,595
Other			3,417				3,499
		$	24,533			$	22,835

The deferred financing costs and the related accumulated amortization as of March 31, 2006 and December 31, 2005 are presented below (in thousands):

		March 31,				December 31,
		2006				2005
Cost		$	7,646			$	7,646
Accumulated amortization			(5,682	)			(2,051	)
		$	1,964			$	5,595

The deferred financing costs at March 31, 2006 and December 31, 2005 represent costs related to the debtor-in-possession financing discussed in Note 11, which are being amortized as interest expense. As previously disclosed, during the three months ended March 31, 2006 we obtained forbearance from our lenders as a remedy to certain covenant violations. The forbearance period was scheduled to end on May 18, 2006. Accordingly, we reduced the amortization period of the deferred financing costs so that the amortization period ended on May 18, 2006.

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The amortization of deferred financing costs was $3.6 million and $0.7 million for the three months ended March 31, 2006 and 2005, respectively.

(8) Accounts and Notes Payable and Accrued Liabilities

We enter into notes payable with third parties for insurance financing arrangements. Outstanding notes payable for insurance financing arrangements as of March 31, 2006 and December 31, 2005 were $25.4 million and $33.4 million, respectively, and are included in accounts and notes payable in the accompanying unaudited consolidated balance sheets. These amounts bear interest at rates ranging between 5.75% and 7.96% and are due in monthly installments, generally over a period of less than a year. The weighted average interest rate on amounts outstanding at March 31, 2006 was 7.54%.

Accrued liabilities as of March 31, 2006 and December 31, 2005 are presented below (in thousands):

		March 31,				December 31,
		2006				2005
Claims and insurance reserves		$	39,224			$	39,602
Wages and benefits			34,339				30,748
Accrued taxes			6,613				4,017
Accrued interest			4,447				3,761
Purchased transportation			3,745				3,563
Other			1,236				1,626
		$	89,604			$	83,317

(9) Claims and Insurance Reserves

We retain losses for certain risks within certain limits through high deductibles or self-insured retentions. For certain risks, coverage for losses is provided by primary and reinsurance companies unrelated to our company. Haul Insurance Limited, our captive insurance subsidiary, provides reinsurance coverage to certain of our licensed insurance carriers for certain types of losses for certain years within our insurance program, primarily insured workers’ compensation, automobile and general liability risks. Haul Insurance Limited was not included in the companies that filed for Chapter 11. In states where we are insured for workers’ compensation claims, the majority of our risk in 2006 is covered by a fully insured program with no deductible.

The parties to our insurance arrangements have agreed that certain contractual documentation needs to be corrected within the automobile policy and we intend to file a motion with the Bankruptcy Court to obtain approval for the amendments agreed to by the parties.

Claims and insurance reserves are adjusted periodically, as claims develop, to reflect changes in actuarial estimates based on actual experience. During the three months ended March 31, 2005, the estimated ultimate amount of claims from prior years increased approximately $0.5 million or $0.06 per share.

The amounts recognized in the accompanying unaudited consolidated balance sheets as of March 31, 2006 and December 31, 2005 represent the undiscounted estimated ultimate amount of claims. These amounts are presented below (in thousands):

		March 31,				December 31,
		2006				2005
Accrued liabilities — current		$	39,224			$	39,602
Other long-term liabilities — noncurrent			67,903				70,040
			107,127				109,642
Liabilities subject to compromise			3,112				3,109
Total liability included in the consolidated balance sheets		$	110,239			$	112,751

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The majority of our pre-petition liabilities related to insurance and claims are not classified as liabilities subject to compromise since we have received the Bankruptcy Court’s approval to maintain our existing insurance programs. Pre-petition liabilities classified as subject to compromise represent reserves for product liability claims.

We believe that adequate provision has been made for all incurred claims including those not reported. However, favorable or unfavorable developments subsequent to the date of our estimates could have a material impact on the consolidated financial statements.

(10) Employee Benefit Plans

(a) Pension and Postretirement Benefit Plans

The following tables present the components of our net periodic benefit cost for the pension and postretirement benefit plans for the three months ended March 31, 2006 and 2005 (in thousands):

		Defined Benefit								Postretirement Benefit
		Pension Plans								Plans
		Three Months Ended March 31,
		2006				2005				2006				2005
Service cost		$	23			$	21			$	14			$	13
Interest cost			762				743				164				177
Expected return on plan assets			(1,014	)			(1,062	)			—				—
Amortization of:
Unrecognized net actuarial loss			524				482				169				161
Prior service cost			12				12				(82	)			(82	)
Net periodic benefit cost		$	307			$	196			$	265			$	269

A substantial number of our employees are covered by union-sponsored, collectively bargained, multiemployer pension plans. In the event we withdraw our participation in any of these plans, we could incur a withdrawal liability for a portion of the unfunded benefit obligation of the plan, if any. If a withdrawal were to occur, the liability would be actuarially determined based on factors at the time of withdrawal.

A number of proofs of claim related to pre-petition liabilities under the multiemployer pension plans to which we contribute were filed on or before the bar date established by the Bankruptcy Court. The majority of the claims were filed on a contingent basis, which means that no plan withdrawal liability was asserted, but should a withdrawal occur, we would have an obligation related to the withdrawal. Currently, we have no intention of withdrawing our participation in these plans.

Two such claims totaling $15.8 million assert general unsecured claims for withdrawal liability on a noncontingent basis. While the Debtors have not validated these claims, we have determined that it is probable that a withdrawal had occurred in each case prior to the Petition Date and that the claim amounts asserted are reasonable estimates of the withdrawal liability. Accordingly, the amount of $15.8 million is included in liabilities subject to compromise as of March 31, 2006 and December 31, 2005.

(b) Employee Retention Plan

The Allied Holdings, Inc. Amended Severance Pay and Retention and Emergence Bonus Plan for Key Employees was approved by the Bankruptcy Court on January 6, 2006. The Plan includes three components: a severance component, a stay bonus component and a discretionary bonus component. During the three months ended March 31, 2006, we recognized an expense of $817,000 as a reorganization item related to the stay and discretionary bonus components. No expense was recognized during the three months ended March 31,

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

2006 related to the severance portion of the employee retention plan. The liabilities related to the Plan were $458,000 and $173,000 at March 31, 2006 and December 31, 2005, respectively, and are included in “other accrued liabilities” in the accompanying unaudited consolidated balance sheets.

(11) Debt

Our debt at March 31, 2006 and December 31, 2005 consisted of the following (in thousands):

		March 31,				December 31,
		2006				2005
Current liabilities not subject to compromise:
DIP Facility — Revolver		$	50,496			$	51,997
DIP Facility — Term Loan A			20,000				20,000
DIP Facility — Term Loan B			80,000				80,000
		$	150,496			$	151,997
Liabilities subject to compromise:
Senior Notes		$	150,000			$	150,000

DIP Facility

In connection with the Chapter 11 Proceedings, on August 1, 2005, we entered into a financing agreement (the “DIP Facility”) for debtor-in-possession financing of up to $230 million. General Electric Capital Corporation and Morgan Stanley Senior Funding, Inc. currently serve as agents for the lenders. The DIP Facility provides for aggregate financing of up to $230 million comprised of (i) a $130 million revolving credit facility (“Revolver”), which includes a swing-line credit commitment of $10 million and up to $75 million in letters of credit, (ii) a $20 million term loan (“DIP Facility Term Loan A”) and (iii) an $80 million term loan (“DIP Facility Term Loan B”). The Revolver bears interest at an annual rate, at our option, of either an annual index rate (based on the greater of the base rate on corporate loans as published from time to time in The Wall Street Journal or the federal funds rate plus 0.50%) plus 2.00%, or LIBOR plus 3.00%. In addition, we are charged a letter of credit fee under the Revolver payable monthly at a rate per annum equal to 2.75% times the amount of all outstanding letters of credit under the Revolver. There is also a fee of 0.5% on the unused portion of the Revolver.

During 2006, we have continued to be impacted by liquidity constraints and violated various covenants included in the DIP Facility. As previously disclosed, these violations required us to enter into certain amendments to the DIP Facility and forbearance agreements. On June 30, 2006, we entered into a fifth amendment (the “Fifth Amendment”) to the DIP Facility to provide us with $30 million of additional availability through a new term loan (“Term Loan C”). Term Loan C will bear interest at an annual rate of LIBOR plus 9.5%, payable at our option in cash each month or in kind, with interest compounded on a monthly basis. The maturity date for Term Loan C is June 30, 2007. The Fifth Amendment also provides us with additional availability by allowing us to pay interest in kind on DIP Facility Term Loan B or pay such interest monthly in cash, and reduces the interest rate on DIP Facility Term Loan B from LIBOR plus 9.5% to LIBOR plus 8.5%. The interest rate on DIP Facility Term Loan A remained unchanged at an annual rate of LIBOR plus 5.5%. As of March 31, 2006, the interest rates on the Revolver, DIP Facility Term Loan A and DIP Facility Term Loan B were 9.75%, 10.17% and 14.17 % respectively.

The Fifth Amendment extends the maturity date of DIP Facility Term Loan B and Term Loan A from February 2, 2007 to June 30, 2007. The maturity date of the Revolver remains February 2, 2007. In addition, the Fifth Amendment revises the existing financial covenants set forth in the DIP Facility and waives all the defaults under the DIP Facility that we disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005. We believe that the additional availability obtained by the Fifth Amendment should provide us with the cash required to prevent the previously projected liquidity shortfalls and enable us to meet our working capital needs during the expected term of the Chapter 11 Proceedings. The Fifth Amendment has been approved by the Bankruptcy Court.

We will be obligated to repay the DIP Facility prior to maturity if the plan of reorganization is confirmed by the Bankruptcy Court and becomes effective prior to the expiration of the DIP Facility. The agreement covering the DIP Facility also requires mandatory prepayment from the net cash proceeds of any asset sales, extraordinary receipts, or any insurance proceeds that we receive. The DIP Facility, as amended, also includes customary

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

affirmative, negative, and financial covenants binding on our company, including implementation of a cash management system as set forth in the DIP Facility. The negative covenants limit our ability to, among other things, incur debt, incur liens, make investments, sell assets, or declare or pay any dividends on our capital stock. The financial covenants included in the DIP Facility also limit the amount of our capital expenditures, set forth a minimum fixed charge coverage ratio and a maximum leverage ratio, and require that we maintain minimum consolidated earnings before interest, taxes, depreciation and amortization as set forth in the DIP Facility.

In addition, the DIP Facility includes customary events of default including events of default related to (i) the failure to comply with the financial covenants set forth in the DIP Facility, (ii) the failure to establish and maintain the cash management system set forth in the DIP Facility, (iii) the conversion of the Chapter 11 Proceedings to a Chapter 7 case or the appointment of a Chapter 11 trustee with enlarged powers, (iv) the granting of certain other super-priority administrative expense claims or non-permitted liens or the invalidity of liens securing the DIP Facility, (v) the stay, amendment or reversal of the Bankruptcy Court orders approving the DIP Facility, (vi) the confirmation of a plan of reorganization or entry of an order by the court dismissing the Chapter 11 case which does not provide for payment in full of the DIP Facility or (vii) the granting of relief from the automatic stay to holders of security interests in our assets that would have a material adverse effect on our company.

Obligations under the DIP Facility are secured by 100% of the capital stock of our domestic and Canadian subsidiaries, 66% of the capital stock of our direct foreign subsidiaries other than those domiciled in Canada, and all of our current and after-acquired U.S. and Canadian personal and real property. The DIP Facility entitles the lenders to super-priority administrative expense claim status under the Bankruptcy Code and will generally permit the ordinary course payment of professionals and administrative expenses prior to the occurrence of an event of default under the DIP Facility or a default under the Bankruptcy Court orders approving the DIP Facility.

We have classified the Revolver as current since it is due on February 2, 2007. The amount available under the $130 million Revolver may be reduced based on the calculation of eligible Revolver collateral. As of March 31, 2006, $111.0 million of eligible Revolver collateral was available. As of March 31, 2006, approximately $38.5 million of the Revolver was committed under letters of credit primarily related to the settlement of insurance claims and $50.5 million in loans were outstanding under the Revolver. We had approximately $17.2 million and $10.2 million available under the Revolver as of March 31, 2006 and August 5, 2006, respectively.

Senior Notes

On September 30, 1997, we issued the $150 million 8⁵/8% Senior Notes through a private placement. The Senior Notes were subsequently registered with the Securities and Exchange Commission, are payable in semi-annual installments of interest only and mature on October 1, 2007.

Borrowings under the Senior Notes are general unsecured obligations of Allied Holdings, Inc. and are guaranteed by substantially all of our subsidiaries (the “Guarantor Subsidiaries”). The guarantees are full and unconditional and there are no restrictions on the ability of the Guarantor Subsidiaries to make distributions to our company. We own 100% of the Guarantor Subsidiaries. The following companies (the “Nonguarantor Subsidiaries”) do not guarantee the obligations under the Senior Notes:

	•		Haul Insurance Limited;
	•		Arrendadora de Equipo Para el Transporte de Automoviles, S. de R.L. de C.V. ;
	•		Axis Logistica, S. de R.L. de C.V. ;
	•		Axis Operadora Hermosillo;
	•		Ace Operations, LLC.

See Note 18 for combined balance sheet information, combined statement of operations information and combined statement of cash flows information for the Guarantor Subsidiaries and the Nonguarantor Subsidiaries.

The agreement governing the Senior Notes sets forth a number of negative covenants, which would limit our ability to, among other things, purchase or redeem stock, make dividend or other distributions, make investments, and incur or repay debt (with the exception of payment of interest or principal at stated maturity). One such covenant would

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

limit our ability to incur more than $230 million of additional indebtedness beyond the $150 million that existed on the date that the Senior Notes were issued. Although we are not presently in compliance with some of these covenants as a result of the filing for protection under Chapter 11 of the Bankruptcy Code, any action to be taken by the holders of the Senior Notes as a result of these violations has been stayed by the Bankruptcy Court.

The filing for protection under Chapter 11 on July 31, 2005 constituted an event of default under the Senior Notes. The indenture agreement governing the Senior Notes provides that as a result of this event of default, the outstanding amount of the Senior Notes became immediately due and payable without further action by any holder of the Senior Notes or the trustee under the indenture. However, payment of the Senior Notes, including the semi-annual interest payments, is automatically stayed as of the Petition Date, absent further order of the Bankruptcy Court. As a result of the Chapter 11 Proceedings, and pursuant to SOP 90-7, we have reclassified the outstanding balance on the Senior Notes along with the related interest accrued as of the Petition Date to liabilities subject to compromise.

(12) Income Taxes

For the three months ended March 31, 2006 and 2005, the income tax expense differed from the amounts computed by applying statutory rates to the reported loss before income taxes since we did not meet the more likely than not criteria to recognize the tax benefits of losses in most of our jurisdictions. The loss before income taxes generated deferred tax assets for which we increased the valuation allowance.

(13) Commitments and Contingencies

(a) Effect of Chapter 11 Filings

As discussed in Note 1, on July 31, 2005 Allied Holdings, Inc. and substantially all of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. Our Canadian subsidiaries are included among the subsidiaries that filed voluntary petitions seeking bankruptcy protection in the Bankruptcy Court and they also filed applications for creditor protection under the Companies Creditors’ Arrangement Act in Canada, which, like Chapter 11, allows for reorganization under the protection of the court system. Our captive insurance company, Haul Insurance Limited, as well as our subsidiaries in Mexico and Bermuda were not included in the Chapter 11 filings.

As debtors-in-possession, we are authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. As of the Petition Date, most pending litigation and pre-petition liabilities are stayed, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action, again subject to certain exceptions, to recover pre-petition claims against us. One exception to this stay of litigation is any action or proceeding by a governmental agency to enforce its police or regulatory power. The claims asserted in litigation and proceedings to which the stay applies may be fully and finally resolved in connection with the administration of the Chapter 11 Proceedings and, to the extent not resolved, will need to be addressed in the context of any plan of reorganization. At this time, it is not possible to predict the outcome of the Chapter 11 Proceedings or its effect on our business or on outstanding legal proceedings.

(b) Letters of Credit

At March 31, 2006, we had issued $141.2 million of outstanding letters of credit to third parties related primarily to the settlement of insurance claims and reserves and support for a line of credit at one of our foreign subsidiaries. Of the $141.1 million, $38.5 million of these letters of credit were secured by borrowings under the Revolver in the DIP Facility and $102.6 million were issued by our wholly owned captive insurance subsidiary, Haul Insurance Limited, and are collateralized by $102.6 million of restricted cash, cash equivalents and other time deposits held by this subsidiary. We renew these letters of credit annually.

The amount of letters of credit that we may issue under the Revolver may not exceed $75 million and may be less than this amount based on existing availability under the DIP Facility. We utilized $38.5 million of this availability

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

at March 31, 2006 and the remaining letter of credit availability under the DIP Facility as of March 31, 2006 was $17.2 million.

(c) Litigation, Claims, Assessments

We are involved in various litigation and environmental matters relating to employment practices, damages, and other matters arising from operations in the ordinary course of business. In our opinion, the ultimate disposition of these matters will not have a material adverse effect on our financial position but could have a material effect on our results of operations in a future period.

As part of the previously disclosed settlement agreement with Ryder System, Inc. (“Ryder”), we issued a letter of credit in favor of Ryder and agreed to certain scheduled increases in the amount of the letter of credit. At March 31, 2006, the letter of credit totaled $7.5 million and is included in the $38.5 million of outstanding letters of credit noted in (b) above. Ryder may only draw on the letter of credit if we fail to pay workers’ compensation and liability claims assumed by us in the Ryder Automotive Carrier Group acquisition. We have provided the letter of credit in favor of Ryder because Ryder has issued a letter of credit to its insurance carrier relating to the workers’ compensation and liability claims assumed by us. Under the agreement with Ryder, effective March 31, 2005 and periodically thereafter, an actuarial valuation will be performed to determine the remaining amount outstanding of the workers’ compensation and liability claims that we assumed. Based on the results of the actuarial valuation, the letter of credit will be adjusted, as appropriate. As a result of the valuation completed on January 11, 2006, the letter of credit was reduced by $2.0 million on January 20, 2006. The letter of credit totals $7.5 million as of August 8, 2006.

(d) Purchase and Service Contract Commitments

We have a ten-year agreement with IBM, which commenced in February 2004, whereby IBM provides our mainframe computer processing services, manages those applications relating to our electronic data interchange, network services, technical services and provides us with applications development and support services. Our Chapter 11 filing has not affected the services pursuant to this contract. The purchase commitment for the remaining life of the agreement was approximately $85.5 million as of March 31, 2006.

(e) Leases

We lease Rigs, office space, computer equipment, and certain terminal facilities under non-cancelable operating lease agreements. Included in these non-cancelable leases are operating lease commitments for approximately 443 Rigs. Lease terms range between five and seven years, expire between 2006 and 2010, and contain residual guarantees of up to 25% of the original cost of the Rigs. We included these residual value guarantees in the calculations that we performed in determining the proper classification of these leases. No accruals for these guarantees were considered necessary at March 31, 2006.

(f) Collective Bargaining Agreements

Employees of our subsidiary, Allied Systems Ltd., which represents approximately 80% of our U.S. employees, are represented by the International Brotherhood of Teamsters Union in the U.S. A collective bargaining agreement, which covers our employees represented by the Teamsters, commenced on June 1, 2003 and will expire on May 31, 2008.

On March 8, 2006, our subsidiary, Allied Systems Ltd, made a proposal to the IBT for a new collective bargaining agreement regarding its employees in the U.S. represented by the Teamsters, by modifying the current collective bargaining agreement. The proposal seeks to eliminate future increases to wages, health and welfare benefits and pension contributions as contemplated by the current collective bargaining agreement and in the aggregate seeks to reduce current total compensation by approximately 17%. We believe that our proposal would reduce our costs during the remaining term of the current collective bargaining agreement as long as its proposed terms remain in effect. We have proposed a new five-year agreement, which would begin as soon as an agreement is reached.

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

On April 13, 2006 we filed a motion with the Bankruptcy Court requesting a 10% reduction in wages earned under the Master Agreement during the months of May and June 2006. The Bankruptcy Court granted this motion on May 1, 2006. The order granted by the Bankruptcy Court also allowed us to avoid paying wage and cost of living increases for the month of June 2006 that were previously scheduled under the Master Agreement to go into effect on June 1, 2006. The order reduced our labor costs for employees covered by the collective bargaining agreement in the U.S. in May and June 2006. The IBT has appealed the order granted by the Bankruptcy Court and the appeal is pending. Now that the order has expired, we have returned wages for these employees to the level required by the Master Agreement, including implementing effective July 1, 2006, the wage and cost of living increases previously scheduled to go into effect on June 1, 2006.

The agreement with the Teamsters Union in Eastern Canada and our subsidiary, Allied Systems (Canada) Company was extended on November 20, 2005 for a twelve-month period ending on October 31, 2006. This contract covers those drivers, mechanics and yard personnel that are represented by the Teamsters Union in the provinces of Ontario and Quebec, which represent approximately 70% of our Canadian bargaining employees.

(14) Earnings (Loss) Per Common Share

SFAS No. 128, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings (loss) per share is computed by dividing net income or loss available to common stockholders by the weighted- average number of common shares outstanding for the periods presented. Diluted earnings per share reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the entity. For the three months ended March 31, 2006 and 2005, we excluded options to acquire 1,572,667 and 1,681,167 shares of common stock, respectively, from the calculation of diluted loss per share as the impact would have been antidilutive. Any plan of reorganization could require the issuance of new or additional common stock or common stock equivalents, which could dilute current equity interests.

(15) Stock-Based Compensation

We have a long-term incentive plan that allows for the issuance of grants or awards of nonqualified and incentive stock options, restricted stock, stock appreciation rights, performance units, and performance shares to our employees and directors to acquire up to 2,150,000 shares of our common stock.

We have awarded nonqualified and incentive stock options under our long-term incentive plan that has been approved by our stockholders. The vesting period for each award varies from a minimum of two years to a maximum of five years and each award vests ratably by year over the vesting period. All options expire ten years from the date of the grant. Under our incentive plan, we are authorized to issue nonqualified and incentive stock options to employees and non-employee directors to purchase a limited number of our common stock at a price not less than the fair market value on the date of grant. Approximately 520,000 shares remain available for issuance as of March 31, 2006. Upon the issuance of stock options, shares are reserved under our long-term incentive plan, and upon stock option exercise, we increase our outstanding shares and record an increase to additional paid-in-capital. Upon the consummation of a plan of reorganization, the rights and values of the stock options issued could be modified significantly. As a result, the options could lose value, be rendered null and void, be replaced by new options or be otherwise impacted.

Prior to January 1, 2006, SFAS No. 123 required the adoption of either the fair-value-based method or the intrinsic- value-based method with pro forma disclosures of the impact of the fair-value-based method. We elected to apply the intrinsic value based method of accounting prescribed by APB Opinion No. 25 and related interpretations. Under this method, we recorded no compensation expense on the date we granted stock-based awards if the market price of the underlying stock on the date of grant was equal to the exercise price of the stock option, and recognized compensation expense for restricted stock ratably over the associated service period.

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Effective January 1, 2006, we adopted SFAS No. 123(R) using the modified prospective transition method under which compensation expense is recognized for any new stock options granted and for the unvested portion of outstanding stock options at the date of adoption of SFAS No. 123(R). We recognize compensation expense on a straight-line basis over the vesting period. In accordance with the provisions of the modified prospective method, the financial statements of prior periods have not been restated.

During the first quarter of 2006, we recorded stock-based compensation expense of approximately $93,000, which increased our loss before income taxes and net loss by approximately $93,000 and increased our basic and diluted loss per share by $0.01. The expense recorded represented compensation expense related to stock options that were unvested at the date of adoption of SFAS No. 123(R). The method used to determine the fair value of those stock options and the related weighted-average assumptions are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005. No new stock options were granted during the first quarter of 2006, and we do not expect to grant any stock options during the Chapter 11 Proceedings. The stock option expense recorded in the first quarter of 2006 is included in salaries, wages and fringe benefits in the accompanying unaudited consolidated statement of operations.

At the date of adoption of SFAS No. 123(R), our unrecognized compensation expense associated with unvested stock options was approximately $594,000, which, subject to any modifications that may occur in future years, will be recognized at $372,000, $197,000 and $25,000 during the years ending December 31, 2006, 2007 and 2008, respectively. This amount of unrecognized compensation cost, the period of amortization and other parameters could be significantly impacted by the plan of reorganization.

If we had applied the fair-value-based-method prescribed by SFAS No. 123 prior to January 1, 2006, net loss and loss per common share would have been changed to the pro forma amounts presented below for the three months ended March 31, 2005 (in thousands, except per share data):

Reported net loss		$	(10,058	)
Less: stock-based employee compensation determined using the fair-value-based-method (no applicable income tax effect)			(147	)
Pro forma net loss		$	(10,205	)
Loss per share:
As reported:
Basic and Diluted		$	(1.13	)
Pro forma:
Basic and Diluted		$	(1.14	)

No stock options were granted, forfeited, expired or exercised during the three months ended March 31, 2006. During the three months ended March 31, 2005 we granted 210,000 incentive stock options. The weighted average-grant date fair value of those options was $3.07 per share. The fair values of the options granted during the three months ended March 31, 2005 were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield – 0%, expected volatility – 74%, risk-free interest rate – 4.2%, expected holding period – 7.85 years. No options were exercised during the three months ended March 31, 2005. The total fair value of options that vested during the three months ended March 31, 2006 and March 31, 2005 was approximately $385,000 and $393,000, respectively. Information regarding stock options as of March 31, 2006 is summarized below:

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

										Weighted-
						Weighted-				Average
		Number of				Average				Remaining				Aggregate
		Options				Exercise				Contractual				Intrinsic Value
		(in thousands)				Price				Life				(in thousands)
Outstanding as of December 31, 2005			1,573			$	3.67
Outstanding as of March 31, 2006			1,573			$	3.67			6.3 years					—
Options exercisable at March 31, 2006			1,363			$	3.53			5.9 years					—
Vested and expected to vest at March 31, 2006			1,513			$	3.64			6.2 years					—

The options had no intrinsic value at March 31, 2006 since the respective exercise prices of all options exceeded the market value of a share of our common stock at March 31, 2006.

(16) Other Comprehensive Loss

Total comprehensive losses for the three months ended March 31, 2006 and 2005 are presented below (in thousands):

		Three Months Ended
		March 31,
		2006				2005
Net loss		$	(8,288	)		$	(10,058	)
Foreign currency translation adjustments			56				(305	)
		$	(8,232	)		$	(10,363	)

The foreign currency translation adjustment for the three months ended March 31, 2005 is net of income taxes of $195,000. No such tax adjustments were recorded during the three months ended March 31, 2006.

Accumulated other comprehensive loss, net of income tax benefits of $1.9 million as of March 31, 2006 and December 31, 2005, respectively, consisted of the following (in thousands):

		March 31,				December 31,
		2006				2005
Cumulative foreign currency translation adjustments		$	373			$	317
Cumulative minimum pension liability adjustments			(20,891	)			(20,891	)
		$	(20,518	)		$	(20,574	)

(17) Industry Segment and Geographic Information

In accordance with the requirements of SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, we have identified two reportable industry segments through which we conduct our operating activities, Allied Automotive Group and the Axis Group. These two segments reflect the internal reporting that we use to assess performance and allocate resources. Allied Automotive Group is engaged in the business of transporting automobiles, light trucks and SUVs from manufacturing plants, ports, auctions, and railway distribution points to automobile dealerships. The Axis Group is engaged in the business of securing and managing vehicle distribution services, automobile inspections, auction and yard management services, vehicle tracking, vehicle accessorization, and dealer preparatory services for the automotive industry.

Presented below is certain financial information related to these two segments and corporate/other for the three months ended March 31, 2006 and 2005 (in thousands):

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

		Three Months Ended March 31,
		2006				2005
Revenues — unaffiliated customers:
Allied Automotive Group		$	233,412			$	214,615
Axis Group			7,416				6,335
Total		$	240,828			$	220,950
Operating income (loss):
Allied Automotive Group		$	3,454			$	(525	)
Axis Group			1,561				422
Corporate/other			(918	)			(1,778	)
Total			4,097				(1,881	)
Reconciling items:
Interest expense			(9,541	)			(8,212	)
Investment income			1,036				438
Foreign exchange gains, net			(170	)			(199	)
Other, net			—				—
Loss before reorganization items and income taxes			(4,578	)			(9,854	)
Reorganization items			(3,583	)			—
Loss before income taxes		$	(8,161	)		$	(9,854	)

Total assets of these two segments and corporate/other as of March 31, 2006 and December 31, 2005 are presented below (in thousands):

		March 31,				December 31,
		2006				2005
Total assets:
Allied Automotive Group		$	227,827			$	233,394
Axis Group			20,163				22,141
Corporate/other			122,097				127,581
Total		$	370,087			$	383,116

Geographic financial information for the three months ended March 31, 2006 and 2005 and as of March 31, 2006 and December 31, 2005, respectively, are presented below (in thousands):

		Three Months Ended March 31,
		2006				2005
Revenues:
United States		$	192,098			$	180,569
Canada			48,730				40,381
Total		$	240,828			$	220,950

		March 31,				December 31,
		2006				2005
Long-lived assets:
United States		$	90,587			$	90,223
Canada			32,175				33,681
Total		$	122,762			$	123,904

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Revenues are attributed to the respective countries based on the terminal that provides the service and long-lived assets consist of property and equipment.

Our Automotive Group’s three largest customers are General Motors, Ford and DaimlerChrysler. During the three months ended March 31, 2006, these customers accounted for 36%, 23% and 14%, respectively, of our Automotive Group’s revenues. A significant reduction in production, changes in product mix, plant closings, changes in production schedules, changes in our Automotive Group’s customers’ distribution strategies or the imposition of vendor price reductions by these manufacturers, the loss of General Motors Corporation, Ford Motor Company, DaimlerChrysler Corporation, Toyota or Honda as a customer, or a significant reduction in the services provided to any of these customers by the Automotive Group would have a material adverse effect on our operations. General Motors Corporation, DaimlerChrysler Corporation and Ford Motor Company, in particular, have publicly announced plans to significantly reduce vendor costs including those associated with transportation services. In addition, our two largest customers have recently announced plans regarding their intent to close certain production facilities, some of which we serve. A loss of volume would negatively impact our financial results.

(18) Supplemental Guarantor Information

Substantially all of our subsidiaries, the Guarantor Subsidiaries, guarantee our obligations under the Senior Notes. The guarantees are full and unconditional. The Guarantors are jointly and severally liable for our obligations under the Senior Notes and there are no restrictions on the ability of the Guarantors to make distributions to the parent company, Allied Holdings, Inc. who owns 100% of the Guarantor Subsidiaries. See Note 11 for a description of the Senior Notes and a listing of the Nonguarantor Subsidiaries.

The following consolidating balance sheet information, statement of operations information, and statement of cash flows information present the financial statement information of our parent company and the combined financial statement information of the Guarantor Subsidiaries and Nonguarantor Subsidiaries:

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
March 31, 2006
(In thousands)

		Allied				Guarantor				Nonguarantor
		Holdings				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Current assets:
Cash and cash equivalents		$	—			$	296			$	2,586			$	—			$	2,882
Restricted cash, cash equivalents and other time deposits			—				—				32,827				—				32,827
Receivables, net of allowances			—				57,648				1,754				—				59,402
Inventories			—				5,149				—				—				5,149
Deferred income taxes			202				—				(36	)			36				202
Prepayments and other current assets			3,403				43,385				2,239				—				49,027
Total current assets			3,605				106,478				39,370				36				149,489
Property and equipment, net of accumulated depreciation			3,565				115,602				3,595				—				122,762
Goodwill, net			—				3,545				—				—				3,545
Other assets:
Restricted cash, cash equivalents and other time deposits			—				—				69,758				—				69,758
Other noncurrent assets			8,151				15,950				432				—				24,533
Intercompany receivables (payables)			76,787				(76,787	)			—				—				—
Investment in subsidiaries			(96,702	)			5,547				—				91,155				—
Total other assets			(11,764	)			(55,290	)			70,190				91,155				94,291
Total assets		$	(4,594	)		$	170,335			$	113,155			$	91,191			$	370,087
Current liabilities not subject to compromise:
Debtor-in-possession credit facility		$	150,496			$	—			$	—			$	—			$	150,496
Accounts and notes payable			5,074				43,621				1,068				—				49,763
Intercompany (receivables) payables			(130,994	)			114,898				16,096				—				—
Accrued liabilities			5,829				59,630				24,343				(198	)			89,604
Total current liabilities			30,405				218,149				41,507				(198	)			289,863
Long-term liabilities not subject to compromise:
Postretirement benefits other than pensions			—				4,309				—				—				4,309
Deferred income taxes			218				—				—				—				218
Other long-term liabilities			2,786				17,657				51,514				—				71,957
Total long-term liabilities			3,004				21,966				51,514				—				76,484
Liabilities subject to compromise			157,503				41,743				—				—				199,246
Commitments and contingencies			—				—				—				—				—
Stockholders’ (deficit) equity :
Preferred stock, no par value			—				—				—				—				—
Common stock, no par value			—				—				—				—				—
Additional paid-in capital			48,638				166,130				2,488				(168,618	)			48,638
Treasury stock			(707	)			—				—				—				(707	)
(Accumulated deficit) retained earnings			(222,919	)			(263,845	)			17,646				246,199				(222,919	)
Accumulated other comprehensive loss, net of tax			(20,518	)			(13,808	)			—				13,808				(20,518	)
Total stockholders’ (deficit) equity			(195,506	)			(111,523	)			20,134				91,389				(195,506	)
Total liabilities and stockholders’ (deficit) equity		$	(4,594	)		$	170,335			$	113,155			$	91,191			$	370,087

ALLIED HOLDINGS, INC. AND SUBSIDIARIES
(Debtor-in-Possession since July 31, 2005)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
December 31, 2005
(In thousands)

		Allied				Guarantor				Nonguarantor
		Holdings				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Current assets:
Cash and cash equivalents		$	—			$	730			$	3,387			$	—			$	4,117
Restricted cash, cash equivalents and other time deposits			—				—				32,830				—				32,830
Receivables, net of allowances			—				59,896				1,531				—				61,427
Inventories			—				5,132				—				—				5,132
Deferred income taxes			151				—				(23	)			—				128
Prepayments and other current assets			3,364				52,535				3,535				—				59,434
Total current assets			3,515				118,293				41,260				—				163,068
Property and equipment, net of accumulated depreciation			3,762				116,450				3,692				—				123,904
Goodwill, net			—				3,545				—				—				3,545
Other assets:
Restricted cash, cash equivalents and other time deposits			—				—				69,764				—				69,764
Other noncurrent assets			11,826				10,541				468				—				22,835
Intercompany receivables (payables)			76,862				(76,862	)			—				—				—
Investment in subsidiaries			(95,374	)			5,282				—				90,092				—
Total other assets			(6,686	)			(61,039	)			70,232				90,092				92,599
Total assets		$	591			$	177,249			$	115,184			$	90,092			$	383,116
Current liabilities not subject to compromise:
Debtor-in-possession credit facility		$	151,997			$	—			$	—			$	—			$	151,997
Accounts and notes payable			3,764				52,682				750				—				57,196
Intercompany (receivables) payables			(133,008	)			117,201				15,807				—				—
Accrued liabilities			5,027				50,812				27,478				—				83,317
Total current liabilities			27,780				220,695				44,035				—				292,510
Long-term liabilities not subject to compromise:
Postretirement benefits other than pensions			—				4,412				—				—				4,412
Deferred income taxes			143				—				—				—				143
Other long-term liabilities			2,521				19,608				51,967				—				74,096
Total long-term liabilities			2,664				24,020				51,967				—				78,651
Liabilities subject to compromise			157,514				41,808				—				—				199,322
Commitments and contingencies			—				—				—				—				—
Stockholders’ (deficit) equity :
Preferred stock, no par value			—				—				—				—				—
Common stock, no par value			—				—				—				—				—
Additional paid-in capital			48,545				166,130				2,488				(168,618	)			48,545
Treasury stock			(707	)			—				—				—				(707	)
(Accumulated deficit) retained earnings			(214,631	)			(261,466	)			16,694				244,772				(214,631	)
Accumulated other comprehensive loss, net of tax			(20,574	)			(13,938	)			—				13,938				(20,574	)
Total stockholders’ (deficit) equity			(187,367	)			(109,274	)			19,182				90,092				(187,367	)
Total liabilities and stockholders’ (deficit) equity		$	591			$	177,249			$	115,184			$	90,092			$	383,116