1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarter Ended June 30, 2001
-------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
____________
Commission file number 0-19969
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ARKANSAS BEST CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<Table>
Delaware 6711 71-0673405
- -------------------------------------- ----------------------------------- ----------------------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
</Table>
3801 Old Greenwood Road
Fort Smith, Arkansas 72903
(501) 785-6000
- --------------------------------------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of the registrant's principal
executive offices)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<Table>
Class Outstanding at July 31, 2001
---------------------------------------------- ---------------------------------------------
Common Stock, $.01 par value 20,641,398 shares
</Table>
2
ARKANSAS BEST CORPORATION
INDEX
<Table>
<Caption>
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 .................................................... 3
Condensed Consolidated Statements of Income -
For the Three and Six Months Ended June 30, 2001 and 2000............................... 5
Condensed Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 2001.................................................. 6
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 2001 and 2000 ........................................ 7
Notes to Condensed Consolidated Financial Statements - June 30, 2001 ..................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 24
Item 2. Changes in Securities .................................................................... 24
Item 3. Defaults Upon Senior Securities .......................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 24
Item 5. Other Information ........................................................................ 24
Item 6. Exhibits and Reports on Form 8-K ......................................................... 24
SIGNATURES ..................................................................................... 25
</Table>
3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
JUNE 30 DECEMBER 31
2001 2000
------------ ------------
(UNAUDITED) NOTE
($ thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .............................................. $ 3,709 $ 36,742
Trade receivables, less allowances
(2001 -- $3,910; 2000 -- $4,595) ....................................... 163,405 173,485
Prepaid expenses ....................................................... 9,312 8,325
Deferred income taxes .................................................. 15,582 11,442
Other .................................................................. 4,510 4,459
------------ ------------
TOTAL CURRENT ASSETS ............................................... 196,518 234,453
PROPERTY, PLANT AND EQUIPMENT
Land and structures .................................................... 216,726 208,220
Revenue equipment ...................................................... 364,289 347,388
Service, office and other equipment .................................... 81,199 74,397
Leasehold improvements ................................................. 13,634 12,693
------------ ------------
675,848 642,698
Less allowances for depreciation and amortization ...................... 313,885 296,679
------------ ------------
361,963 346,019
INVESTMENT IN WINGFOOT .................................................... 59,341 59,341
OTHER ASSETS .............................................................. 58,473 51,893
GOODWILL, less amortization (2001 -- $42,442; 2000 -- $40,416) ............ 103,392 105,418
------------ ------------
$ 779,687 $ 797,124
============ ============
</Table>
See notes to condensed consolidated financial statements.
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at the date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
3
4
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
- --------------------------------------------------------------------------------
<Table>
<Caption>
JUNE 30 DECEMBER 31
2001 2000
------------ ------------
(UNAUDITED) NOTE
($ thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft and drafts payable ................................. $ 22,310 $ 24,667
Accounts payable .................................................. 62,657 59,999
Accrued expenses .................................................. 139,433 168,625
Federal and state income taxes .................................... 2,314 4,127
Current portion of long-term debt ................................. 17,521 23,948
------------ ------------
TOTAL CURRENT LIABILITIES ..................................... 244,235 281,366
LONG-TERM DEBT, less current portion ................................. 141,987 152,997
OTHER LIABILITIES .................................................... 39,626 31,052
DEFERRED INCOME TAXES ................................................ 41,085 39,519
COMMITMENTS AND CONTINGENCIES.........................................
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 10,000,000 shares;
issued and outstanding 2001: 1,390,000 shares;
2000: 1,390,000 shares ......................................... 14 14
Common stock, $.01 par value, authorized 70,000,000 shares;
issued 2001: 20,549,480 shares; 2000: 20,219,137 shares ...... 205 202
Additional paid-in capital ........................................ 199,005 194,211
Retained earnings ................................................. 115,632 98,718
Treasury stock, at cost, 2001 and 2000: 59,782 shares ............. (955) (955)
Accumulated other comprehensive income ............................ (1,147) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .................................... 312,754 292,190
------------ ------------
$ 779,687 $ 797,124
============ ============
</Table>
See notes to condensed consolidated financial statements.
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at the date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
4
5
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
(UNAUDITED)
($ thousands, except per share data)
OPERATING REVENUES
Transportation operations .................. $ 406,577 $ 424,293 $ 807,153 $ 826,537
Tire operations(3) ......................... -- 47,694 -- 88,465
------------ ------------ ------------ ------------
406,577 471,987 807,153 915,002
------------ ------------ ------------ ------------
OPERATING EXPENSES AND COSTS
Transportation operations .................. 386,680 390,298 767,192 766,070
Tire operations(3) ......................... -- 46,598 -- 87,559
------------ ------------ ------------ ------------
386,680 436,896 767,192 853,629
------------ ------------ ------------ ------------
OPERATING INCOME .............................. 19,897 35,091 39,961 61,373
OTHER INCOME (EXPENSE)
Net gains on sales of property and other ... 628 252 628 1,569
Interest expense ........................... (3,470) (4,342) (7,135) (8,863)
Other, net ................................. (283) (609) (1,182) (1,132)
------------ ------------ ------------ ------------
(3,125) (4,699) (7,689) (8,426)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .................... 16,772 30,392 32,272 52,947
FEDERAL AND STATE INCOME TAXES
Current .................................... 9,736 13,206 15,204 20,963
Deferred ................................... (2,797) (563) (1,844) 1,063
------------ ------------ ------------ ------------
6,939 12,643 13,360 22,026
------------ ------------ ------------ ------------
NET INCOME .................................... 9,833 17,749 18,912 30,921
Preferred stock dividends .................. 999 1,074 1,998 2,149
------------ ------------ ------------ ------------
NET INCOME FOR
COMMON STOCKHOLDERS ......................... $ 8,834 $ 16,675 $ 16,914 $ 28,772
============ ============ ============ ============
NET INCOME PER COMMON SHARE
BASIC:
NET INCOME PER SHARE (1) ...................... $ 0.43 $ 0.84 $ 0.83 $ 1.46
------------ ------------ ------------ ------------
AVERAGE COMMON SHARES
OUTSTANDING (BASIC) ........................... 20,454,699 19,785,000 20,402,187 19,774,067
============ ============ ============ ============
DILUTED:
NET INCOME PER SHARE (2) ...................... $ 0.40 $ 0.74 $ 0.76 $ 1.28
------------ ------------ ------------ ------------
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED) ......................... 24,834,232 24,081,375 24,764,011 24,077,569
============ ============ ============ ============
CASH DIVIDENDS PAID PER COMMON SHARE .......... $ -- $ -- $ -- $ --
============ ============ ============ ============
</Table>
(1) Gives consideration to preferred stock dividends of $1.0 million and
$1.1 million for the three months ended June 30, 2001 and 2000,
respectively, and $2.0 million and $2.2 million for the six months
ended June 30, 2001 and 2000, respectively.
(2) For the three and six months ended June 30, 2001 and 2000, conversion
of preferred shares into common is assumed.
(3) Tire operations for the three months and six months ended June 30, 2000
included the operations of Treadco, Inc. ("Treadco"). Treadco's
operations became a part of Wingfoot Commercial Tire Systems, LLC on
November 1, 2000.
See notes to condensed consolidated financial statements.
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6
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<Table>
<Caption>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
($ thousands)
BALANCES AT JANUARY 1, 2001 ............ 1,390 $ 14 20,219 $ 202 $ 194,211
Net income ............................. -- -- -- -- --
Change in fair value of interest
rate swap, net of taxes ............. -- -- -- -- --
Comprehensive income(b) .........
Issuance of common stock ............... -- -- 330 3 2,842
Tax effect of stock options
exercised and other ................. -- -- -- -- 1,952
Dividends paid on preferred stock ...... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCES AT JUNE 30, 2001 .............. 1,390 $ 14 20,549 $ 205 $ 199,005
============ ============ ============ ============ ============
<Caption>
ACCUMULATED
RETAINED OTHER
EARNINGS COMPREHENSIVE TREASURY TOTAL
(DEFICIT) LOSS(a) STOCK EQUITY
------------ ------------- ------------ ------------
(UNAUDITED)
($ thousands)
BALANCES AT JANUARY 1, 2001 ............ $ 98,718 $ -- $ (955) $ 292,190
Net income ............................. 18,912 -- -- 18,912
Change in fair value of interest
rate swap, net of taxes ............. -- (1,147) -- (1,147)
------------
Comprehensive income(b) ......... 17,765
------------
Issuance of common stock ............... -- -- -- 2,845
Tax effect of stock options
exercised and other ................. -- -- -- 1,952
Dividends paid on preferred stock ...... (1,998) -- -- (1,998)
------------ ------------ ------------ ------------
BALANCES AT JUNE 30, 2001 .............. $ 115,632 $ (1,147) $ (955) $ 312,754
============ ============ ============ ============
</Table>
(a) Net of tax benefits of $0.7 million.
(b) Comprehensive income for three months ended June 30, 2001 was $10.5 million.
See notes to condensed consolidated financial statements.
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7
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30
2001 2000
------------ ------------
(UNAUDITED)
($ thousands)
OPERATING ACTIVITIES
Net cash provided by operating activities ........... $ 23,344 $ 53,927
INVESTING ACTIVITIES
Purchases of property, plant and equipment .......... (44,413) (54,198)
Proceeds from asset sales ........................... 6,540 7,185
Other ............................................... (542) (1,280)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES .................. (38,415) (48,293)
------------ ------------
FINANCING ACTIVITIES
Borrowings under revolving credit facilities ........ 44,300 89,800
Payments under revolving credit facilities .......... (21,300) (81,100)
Payments on long-term debt .......................... (16,695) (8,880)
Dividends paid ...................................... (1,998) (2,149)
Net increase (decrease) in bank overdraft ........... (2,454) 1,366
Retirement of bonds ................................. (23,048) (4,781)
Other, net .......................................... 3,233 264
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES .................. (17,962) (5,480)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ... (33,033) 154
Cash and cash equivalents at beginning of period .... 36,742 4,319
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 3,709 $ 4,473
============ ============
</Table>
See notes to condensed consolidated financial statements.
7
8
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Arkansas Best Corporation (the "Company") is a diversified holding company
engaged through its subsidiaries primarily in motor carrier transportation
operations and intermodal transportation operations. Principal subsidiaries are
ABF Freight System, Inc. ("ABF"); G.I. Trucking Company ("G.I. Trucking");
Clipper Exxpress Company and related companies ("Clipper"); and FleetNet
America, LLC. The Company's 2000 operations included the truck tire retreading
and new tire sales operations of Treadco, Inc. ("Treadco") until October 31,
2000 (see Note G).
See Note H - Subsequent Event for a discussion of the sale of G.I. Trucking to a
company formed by the senior executives of G.I. Trucking and Estes Express Lines
("Estes") of Richmond, Virginia which closed on August 1, 2001.
Approximately 80% of ABF's employees are covered under a five-year collective
bargaining agreement, which began on April 1, 1998, with the International
Brotherhood of Teamsters ("IBT").
The Company utilizes tractors and trailers primarily in its motor carrier
transportation operations. Tractors and trailers are commonly referred to as
"revenue equipment" in the transportation business.
NOTE B - FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. For further information, refer to the Company's
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
The difference between the effective tax rate for the three months and six
months ended June 30, 2001 and the federal statutory rate resulted from state
income taxes, amortization of nondeductible goodwill and other nondeductible
expenses.
In June, 2001, the Company retired a portion of its outstanding WorldWay
Corporation 6 1/4% convertible subordinated debentures with a face value of
$24.6 million at an average cost of $93.17 per $100.00 or $23.0 million in cash.
The second quarter 2001 gain resulting from the bond retirement was $740,000.
Debentures with a face value of $5.1 million and a book value of $4.9 million
remain outstanding.
8
9
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
NOTE C - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
Various legal actions, the majority of which arise in the normal course of
business, are pending. None of these legal actions are expected to have a
material adverse effect on the Company's financial condition, cash flows or
results of operations. The Company maintains liability insurance against risks
arising out of the normal course of its business, subject to certain
self-insured retention limits.
The Company's subsidiaries store some fuel for its tractors and trucks in
approximately 83 underground tanks located in 26 states. Maintenance of such
tanks is regulated at the federal and, in some cases, state levels. The Company
believes that it is in substantial compliance with all such regulations. The
Company is not aware of any leaks from such tanks that could reasonably be
expected to have a material adverse effect on the Company.
The Company has received notices from the EPA and others that it has been
identified as a potentially responsible party ("PRP") under the Comprehensive
Environmental Response Compensation and Liability Act or other federal or state
environmental statutes at several hazardous waste sites. After investigating the
Company's or its subsidiaries' involvement in waste disposal or waste generation
at such sites, the Company has either agreed to de minimis settlements
(aggregating approximately $340,000 over the last 12 years), or believes its
obligations with respect to such sites would involve immaterial monetary
liability, although there can be no assurances in this regard.
As of June 30, 2001, the Company has accrued approximately $2.5 million to
provide for environmental-related liabilities. The Company's environmental
accrual is based on management's best estimate of the actual liability. The
Company's estimate is founded on management's experience in dealing with similar
environmental matters and on actual testing performed at some sites. Management
believes that the accrual is adequate to cover environmental liabilities based
on the present environmental regulations. Accruals for environmental liability
are included in the balance sheet as accrued expenses.
NOTE D - DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Statement addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities. In
June 1999, the FASB issued Statement No. 137, which deferred for one year the
implementation date of FASB Statement No. 133. The Company adopted Statement No.
133 on January 1, 2001.
The Company has, from time to time, entered into interest-rate swap agreements
and interest-rate cap agreements designated to modify the interest
characteristic of outstanding debt or limit exposure to increasing interest
rates in accordance with its interest rate risk management policy. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the debt (the accrual
method of accounting). The related amount payable or receivable from
counter-parties is included in other current liabilities or current assets. In
connection with the Company's adoption of Statement No. 133, the Company is
required to recognize all derivatives on its balance sheet at fair value.
Derivatives that are not hedges will be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Hedge ineffectiveness associated with interest rate swap agreements
will be reported by the Company in interest expense.
9
10
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
The Company entered into an interest rate swap agreement on February 23, 1998
with an effective date of April 1, 1998 and a termination date of April 1, 2005
on a notional amount of $110.0 million. The Company's interest rate strategy is
to hedge its variable 30-day LIBOR-based interest rate for a fixed interest rate
of 5.845% (plus the current Credit Agreement margin of 0.55%) on $110.0 million
of Credit Agreement borrowings for the term of the interest rate swap to protect
the Company from potential interest rate increases. The Company has designated
its benchmark variable 30-day LIBOR-based interest rate on $110.0 million of
borrowings under the Company's Credit Agreement as a hedged item under a cash
flow hedge. If the Company had terminated the interest rate swap on June 30,
2001, it would have had to pay an estimated $1.9 million. The Company recognized
this liability on its balance sheet in other liabilities in accordance with
Statement No. 133, at June 30, 2001, through other comprehensive income, net of
income taxes.
The Company reported no gain or loss during the second quarter of 2001 as a
result of hedge ineffectiveness, other derivative instruments' gain or loss or
the discontinuance of a cash flow hedge. Future changes in the swap arrangement
(including termination of the swap agreement), swap notional amount, hedged
portion or forecasted Credit Agreement borrowings below $110.0 million may
result in a reclassification of any gain or loss reported in other comprehensive
income, into earnings.
NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 142, Goodwill and Other Intangible Assets. Under Statement 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually for impairment. Statement 142 is effective for the Company on
January 1, 2002, and beginning on that date, the Company will no longer amortize
its goodwill, but will review it annually for impairment. At June 30, 2001 the
Company's assets include goodwill of $103.4 million of which $65.1 is from a
1988 leveraged buyout transaction and $38.3 is from the 1994 acquisition of
Clipper. The Company's annual goodwill amortization expense is $4.1 million.
Statement 142 requires that the Company perform transitional impairment testing
on its goodwill during the first six months of 2002 based on January 1, 2002
values. The Company will perform the required impairment testing beginning in
the first quarter of 2002.
10
11
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
NOTE F - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
($ thousands, except per share data)
NUMERATOR:
Numerator for basic earnings per share --
Net income .................................. $ 9,833 $ 17,749 $ 18,912 $ 30,921
Preferred stock dividends ..................... (999) (1,074) (1,998) (2,149)
------------ ------------ ------------ ------------
Numerator for basic earnings per share --
Net income available to
common stockholders ......................... 8,834 16,675 16,914 28,772
Effect of dilutive securities(1) .............. 999 1,074 1,998 2,149
------------ ------------ ------------ ------------
Numerator for diluted earnings per share --
Net income available to
common stockholders ......................... $ 9,833 $ 17,749 $ 18,912 $ 30,921
============ ============ ============ ============
DENOMINATOR:
Denominator for basic earnings
per share -- weighted-average shares ....... 20,454,699 19,785,000 20,402,187 19,774,067
Effect of dilutive securities:
Conversion of preferred stock(1) ........... 3,530,183 3,796,852 3,530,183 3,796,852
Employee stock options ..................... 849,350 499,523 831,641 506,650
------------ ------------ ------------ ------------
Denominator for diluted earnings
per share -- adjusted weighted-average
shares and assumed conversion .............. 24,834,232 24,081,375 24,764,011 24,077,569
============ ============ ============ ============
NET INCOME PER COMMON SHARE
BASIC:
NET INCOME PER SHARE ............................. $ 0.43 $ 0.84 $ 0.83 $ 1.46
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING (BASIC): ....... 20,454,699 19,785,000 20,402,187 19,774,067
============ ============ ============ ============
DILUTED:
NET INCOME PER SHARE ............................. $ 0.40 $ 0.74 $ 0.76 $ 1.28
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING (DILUTED): ..... 24,834,232 24,081,375 24,764,011 24,077,569
============ ============ ============ ============
CASH DIVIDENDS PAID PER COMMON SHARE ............. $ -- $ -- $ -- $ --
============ ============ ============ ============
</Table>
(1) For the three and six months ended June 30, 2001 and 2000, conversion
of preferred shares into common is assumed.
11
12
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
NOTE G - CONTRIBUTION OF TREADCO'S ASSETS AND LIABILITIES TO WINGFOOT
On September 13, 2000, Treadco entered into an agreement with The Goodyear Tire
& Rubber Company ("Goodyear") to form a new limited liability company called
Wingfoot Commercial Tire Systems, LLC ("Wingfoot"). The transaction closed on
October 31, 2000. Effective October 31, 2000, Treadco contributed substantially
all of its assets and liabilities to Wingfoot in a non-taxable transaction in
exchange for a 19% ownership in Wingfoot. Goodyear contributed substantially all
of the assets and liabilities of its Commercial Tire and Service Centers and
Brad Ragan Tire Centers to Wingfoot in exchange for an 81% interest in Wingfoot.
The final ownership percentages for Treadco and Goodyear were based upon the
terms of the agreement. The assets and liabilities contributed by Treadco to
Wingfoot were $86.8 million and $37.9 million, respectively.
The Company has the right, at any time after April 30, 2003 and before April 30,
2004, to sell its interest in Wingfoot to Goodyear for a cash "Put Price" equal
to approximately $74.0 million. Goodyear has the right, at any time after April
30, 2003 until October 31, 2004, to purchase the Company's entire interest, for
cash, at a "Call Price" equal to the "Put Price" plus $5.0 million. The Company
accounts for its investment in Wingfoot under the equity method and the
provisions of the Wingfoot Operating Agreement. As provided in the agreement,
during the term of the "Put," the Company does not share in the profits or
losses of Wingfoot. In the event the Company does not elect to sell its interest
in Wingfoot to Goodyear nor Goodyear elects to purchase the Company's interest,
then the parties' respective rights and obligations relating to Wingfoot will
continue to be governed by the Wingfoot Operating Agreement, including
accounting for Wingfoot profit and loss allocations at the respective 19% and
81% ownership percentages beginning May 1, 2004.
The transaction was accounted for using fair value accounting, as prescribed by
the EITF Issue 00-5, which resulted in 81% of the fair value gain being
recognized in the fourth quarter of 2000. The fair value of 19% of Wingfoot is
$62 million determined by using the discounted "put" price, which represents the
fair value of Treadco's net assets at the October 31, 2000 closing date. The
Company's carrying value of Treadco's net assets at the closing date was $49
million. The gain on the transaction was $13 million of which 81% was recognized
in the fourth quarter of 2000, or $10.5 million. This gain was reduced by costs
of the transaction of $5.5 million, which included investment banking fees,
legal and accounting fees, transaction bonuses and the acceleration of certain
benefits for the former Treadco officers, for a fair value net gain recognized
of $5.0 million. The Company's investment in Wingfoot at December 31, 2000 and
June 30, 2001 was $59.3 million.
NOTE H - SUBSEQUENT EVENT
On August 1, 2001, the Company sold the stock of G.I. Trucking Company for
approximately $40 million in cash to a company formed by the senior executives
of G.I. Trucking and Estes. G.I. Trucking and Estes have been partners in
ExpressLINK, a North American transportation partnership since 1996. The Company
will recognize a pre-tax gain on the sale of approximately $5.2 to $5.8 million
in the third quarter of 2001.
The Company will retain ownership of three California terminal facilities and
has agreed to lease them for an aggregate amount of $1.6 million per year to
G.I. Trucking for a period of up to four years. G.I. Trucking has an option to
purchase these terminals for approximately $20 million. The facilities have a
net book value of approximately $6 million. If the terminal facilities are sold
to G.I. Trucking, the Company will recognize a gain of approximately $14 million
in the period they are sold.
The final sales price for G.I. Trucking is subject to adjustments based on the
closing balance sheet. The Company estimates that its cash proceeds from the
sale, net of costs and income taxes, will be approximately $34 million and will
be used to pay down debt.
12
13
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
NOTE I - OPERATING SEGMENT DATA
The Company used the "management approach" to determine its reportable operating
segments as well as to determine the basis of reporting the operating segment
information. The management approach focuses on financial information that the
Company's decision makers use to make decisions about operating matters.
Management uses operating revenues, operating expense categories, operating
ratios, operating income, and key operating statistics to evaluate performance
and allocate resources to the Company's operating segments.
During the periods being reported on, the Company operated in four defined
reportable operating segments: 1) ABF; 2) G.I. Trucking (which was sold on
August 1, 2001, See Note H); 3) Clipper; and 4) Treadco (which was contributed
to Wingfoot on October 31, 2000, See Note G).
The Company eliminates intercompany transactions in consolidation. However, the
information used by the Company's management with respect to its reportable
segments is before intersegment eliminations of revenues and expenses.
Intersegment revenues and expenses are not significant.
Further classifications of operations or revenues by geographic location beyond
the descriptions provided above are impractical, and are, therefore, not
provided. The Company's foreign operations are not significant.
No material changes have occurred in the total assets for any reportable
operating segment since December 31, 2000.
The following tables reflect reportable operating segment information for the
Company, as well as a reconciliation of reportable segment information to the
Company's consolidated operating revenues, operating expenses and operating
income.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
($ thousands)
OPERATING REVENUES
ABF Freight System, Inc. .................. $ 324,836 $ 344,671 $ 650,349 $ 676,507
G.I. Trucking Company ..................... 41,994 42,795 82,532 80,496
Clipper ................................... 34,319 34,126 65,147 63,757
Treadco, Inc.(1) .......................... -- 48,292 -- 89,556
Other revenues and eliminations ........... 5,428 2,103 9,125 4,686
------------ ------------ ------------ ------------
Total consolidated operating revenues ... $ 406,577 $ 471,987 $ 807,153 $ 915,002
============ ============ ============ ============
</Table>
(1) Tire operations for the three months and six months ended June 30, 2000
were the operations of Treadco, Inc. ("Treadco"). Treadco's operations
became a part of Wingfoot Commercial Tire Systems, LLC on November 1,
2000.
13
14
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
($ thousands)
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC
Salaries and wages ................................. $ 214,022 $ 217,449 $ 425,776 $ 426,441
Supplies and expenses .............................. 43,358 41,936 87,363 85,293
Operating taxes and licenses ....................... 10,151 10,478 20,410 20,744
Insurance .......................................... 3,851 5,731 7,861 10,601
Communications and utilities ....................... 3,724 3,592 7,759 7,613
Depreciation and amortization ...................... 9,737 8,900 19,348 17,136
Rents and purchased transportation ................. 19,115 23,070 38,393 47,035
Other .............................................. 1,049 1,083 2,586 2,023
(Gain) loss on sale of revenue equipment ........... (39) (190) 34 (242)
------------ ------------ ------------ ------------
304,968 312,049 609,530 616,644
------------ ------------ ------------ ------------
G.I. TRUCKING COMPANY
Salaries and wages ................................. 21,604 19,453 42,453 37,644
Supplies and expenses .............................. 4,159 3,627 7,901 7,125
Operating taxes and licenses ....................... 939 774 1,925 1,630
Insurance .......................................... 991 931 2,030 1,785
Communications and utilities ....................... 559 526 1,145 1,028
Depreciation and amortization ...................... 1,410 1,117 2,777 2,184
Rents and purchased transportation ................. 11,064 13,562 21,698 25,348
Other .............................................. 970 968 2,012 1,909
(Gain) loss on sale of revenue equipment ........... 2 (8) (47) (10)
------------ ------------ ------------ ------------
41,698 40,950 81,894 78,643
------------ ------------ ------------ ------------
CLIPPER
Cost of services ................................... 29,428 28,646 56,517 54,454
Selling, administrative and general ................ 3,745 4,671 7,824 8,467
(Gain) loss on sale of revenue equipment ........... 22 -- 32 (3)
------------ ------------ ------------ ------------
33,195 33,317 64,373 62,918
------------ ------------ ------------ ------------
TREADCO, INC.(1)
Cost of sales ...................................... $ -- $ 32,260 $ -- $ 60,163
Selling, administrative and general ................ -- 14,639 -- 27,996
------------ ------------ ------------ ------------
-- 46,899 -- 88,159
------------ ------------ ------------ ------------
Other expenses and eliminations ....................... 6,819 3,681 11,395 7,265
------------ ------------ ------------ ------------
Total consolidated operating expenses and costs .... $ 386,680 $ 436,896 $ 767,192 $ 853,629
============ ============ ============ ============
OPERATING INCOME (LOSS)
ABF Freight System, Inc. .............................. $ 19,868 $ 32,622 $ 40,819 $ 59,863
G.I. Trucking Company ................................. 296 1,845 638 1,853
Clipper ............................................... 1,124 809 774 839
Treadco, Inc.(1) ...................................... -- 1,393 -- 1,397
Other income (loss) and eliminations .................. (1,391) (1,578) (2,270) (2,579)
------------ ------------ ------------ ------------
Total consolidated operating income ................ $ 19,897 $ 35,091 $ 39,961 $ 61,373
============ ============ ============ ============
</Table>
(1) Tire operations for the three months and six months ended June 30, 2000
were the operations of Treadco, Inc. ("Treadco"). Treadco's operations
became a part of Wingfoot Commercial Tire Systems, LLC on November 1,
2000.
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
OPERATING SEGMENT DATA
The following table sets forth, for the periods indicated, a summary of the
Company's operating expenses by segment as a percentage of revenue for the
applicable segment.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC
Salaries and wages ....................... 65.9% 63.1% 65.5% 63.0%
Supplies and expenses .................... 13.3 12.2 13.4 12.6
Operating taxes and licenses ............. 3.1 3.0 3.1 3.1
Insurance ................................ 1.2 1.7 1.2 1.6
Communications and utilities ............. 1.1 1.0 1.2 1.1
Depreciation and amortization ............ 3.0 2.6 3.0 2.5
Rents and purchased transportation ....... 5.9 6.7 5.9 7.0
Other .................................... 0.4 0.3 0.4 0.3
(Gain) on sale of revenue equipment ...... -- (0.1) -- --
------------ ------------ ------------ ------------
93.9% 90.5% 93.7% 91.2%
------------ ------------ ------------ ------------
G.I. TRUCKING COMPANY (2)
Salaries and wages ....................... 51.4% 45.5% 51.4% 46.8%
Supplies and expenses .................... 9.9 8.5 9.6 8.9
Operating taxes and licenses ............. 2.2 1.8 2.3 2.0
Insurance ................................ 2.4 2.2 2.5 2.2
Communications and utilities ............. 1.3 1.2 1.4 1.3
Depreciation and amortization ............ 3.4 2.6 3.4 2.7
Rents and purchased transportation ....... 26.3 31.7 26.3 31.5
Other .................................... 2.4 2.2 2.4 2.3
(Gain) on sale of revenue equipment ...... -- -- (0.1) --
------------ ------------ ------------ ------------
99.3% 95.7% 99.2% 97.7%
------------ ------------ ------------ ------------
CLIPPER
Cost of services ......................... 85.7% 83.9% 86.8% 85.4%
Selling, administrative and general ...... 10.9 13.7 12.0 13.3
Loss on sale of revenue equipment ........ 0.1 -- -- --
------------ ------------ ------------ ------------
96.7% 97.6% 98.8% 98.7%
------------ ------------ ------------ ------------
TREADCO, INC.(1)
Cost of sales ............................ -- 66.8% -- 67.1%
Selling, administrative and general ...... -- 30.3 -- 31.3
------------ ------------ ------------ ------------
-- 97.1% -- 98.4%
------------ ------------ ------------ ------------
OPERATING INCOME
ABF Freight System, Inc. .................... 6.1% 9.5% 6.3% 8.8%
G. I. Trucking Company ...................... 0.7 4.3 0.8 2.3
Clipper ..................................... 3.3 2.4 1.2 1.3
Treadco, Inc.(1) ............................ -- 2.9 -- 1.6
</Table>
(1) Tire operations for the three months and six months ended June 30, 2000
were the operations of Treadco, Inc. ("Treadco"). Treadco's operations
became a part of Wingfoot Commercial Tire Systems, LLC on November 1,
2000.
(2) G.I. Trucking was sold on August 1, 2001 - see Note H.
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2001, COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 2000
Consolidated revenues for the three and six months ended June 30, 2001 were
$406.6 million and $807.2 million compared to $472.0 million and $915.0 million
for the same periods in 2000, representing a decrease of 13.9% and 11.8% due
primarily to a decline in revenues for Treadco as a result of the contribution
of substantially all of the Treadco assets and liabilities to Wingfoot on
October 31, 2000 (see Note G). In addition, there were decreases in revenues for
ABF and G.I. Trucking, with Clipper's revenues remaining flat for the three
months ended June 30, 2001 compared to the same period in 2000. For the six
months ended June 30, 2001, in addition to a decline in revenue due to Treadco,
as mentioned above, revenue decreased for ABF, with revenue increasing for both
G.I. Trucking and Clipper. Operating income decreased 43.3% and 34.9% to $20.0
million and $40.0 million for the three and six months ended June 30, 2001 from
$35.1 million and $61.4 million compared to the same periods in 2000. The
decrease in operating income is due primarily to a decline in operating income
for ABF. Net income for the three and six months ended June 30, 2001 was $9.8
million and $18.9 million, or $0.40 and $0.76 per diluted common share, compared
to $17.7 million and $30.9 million, or $0.74 and $1.28 per diluted common share
for the same periods in 2000. The decrease in net income reflects primarily the
decrease in operating income.
The Company continued to experience a slowdown in business levels resulting from
a decline in the U.S. economy beginning in mid-2000. Tonnage and shipment levels
at all of the Company's operating segments were impacted by the slowing economy.
If business levels continue at this slower pace, the Company's 2001 business
levels, and its results of operations, will continue to be adversely impacted
relative to 2000.
The Company's results of operations for the third quarter 2001 will include only
one month of G.I. Trucking's operations since G. I. Trucking was sold on August
1, 2001 (see Note H).
ABF FREIGHT SYSTEM, INC.
ABF implemented a general rate increase of 4.9%, effective August 1, 2001.
Effective August 14, 2000, ABF implemented a general rate increases of 5.7%.
Revenues for the three and six months ended June 30, 2001 declined 5.8% and 3.1%
on a per day basis to $324.8 million and $650.3 million, respectively, from
$344.7 million and $676.5 million for the same periods in 2000. ABF generated
operating income for the three and six months ended June 30, 2001 of $19.9
million and $40.8 million compared to $32.6 million and $59.9 million for the
three and six months ended June 30, 2000.
ABF's decline in revenue is due to a decrease in LTL tonnage which was partially
offset by an increase in revenue per hundredweight. ABF's LTL tonnage decreased
9.0% and 7.8% on a per day basis for the three and six months ended June 30,
2001, compared to the same periods in 2000. ABF's performance for the three and
six months ended June 30, 2001, was affected by less available freight due to
decreased business levels at customer facilities. The decrease in tonnage was
offset, in part, by LTL revenue per hundredweight increases of 3.1% and 4.5% to
$21.35 and $21.38 when the three and six months ended June 30, 2001 are compared
to the same periods in 2000, as the pricing environment remains relatively firm.
ABF implemented a fuel surcharge on July 7, 1999, based on the increase in
diesel fuel prices compared to an index price. The fuel surcharge in effect
during the three and six months ended June 30, 2001 ranged from 3.0% to 4.5% of
revenue. The fuel surcharge in effect during the three months ended June 30,
2000 ranged from 3.0%
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
to 4.0% of revenue, and the fuel surcharge in effect for the six months ended
June 30, 2000 ranged from 2.0% to 4.0% of revenue.
ABF's operating ratio increased to 93.9% and 93.7% for the three and six months
ended June 30, 2001 from 90.5% and 91.2% during the same periods in 2000 as a
result of tonnage declines and changes in certain operating expense categories
as follows:
Salaries and wages expense for the three and six months ended June 30, 2001
increased 2.8% and 2.5% as a percent of revenue compared to the same periods in
2000. The increases result primarily from the annual general IBT contractual
wage and benefit rate increase on April 1, 2001 of approximately 3.0%, as well
as an increase in wages and benefits costs for road drivers, resulting from
ABF's decision to utilize additional road drivers and company-owned equipment to
move freight, in certain poor service rail lanes, rather than rail. These cost
increases were offset, in part, by a decline in worker's compensation costs,
which resulted from favorable claims experience during the three and six months
ended June 30, 2001, compared to the same periods in 2000.
Supplies and expenses increased 1.1% and 0.8% as a percent of revenue for the
three and six months ended June 30, 2001, compared to the same periods in 2000.
Equipment repair costs have increased as a result of transferring used road
equipment to city use, rather than purchasing new city equipment and as a result
of an older trailer fleet. Fuel costs continue to be at high levels with an
average price-per-gallon, net of fuel taxes, of $0.93 for both the three and six
months ended June 30, 2001 compared to $0.87 and $0.88 for the same periods in
2000. Fuel expense has also increased as ABF has moved freight from poor service
rail lanes to the road, as mentioned above. The previously mentioned fuel
surcharge on revenue is intended to offset fuel price increases.
Insurance expense decreased 0.5% and 0.4% as a percent of revenue for the three
and six months ended June 30, 2001, compared to the same period in 2000. This
improvement was due primarily to favorable claims experience for bodily injury
and property damage claims and cargo claims.
Depreciation and amortization expense increased 0.4% and 0.5% as a percent of
revenue for the three and six months ended June 30, 2001, compared to the same
periods in 2000, due primarily to the purchase of 344 road tractors during the
first six months of 2001. The road tractors purchased were to replace older
tractors in the fleet that have been transferred to city use, including some
that were under operating leases in the first quarter of 2000.
Rents and purchased transportation expense decreased 0.8% and 1.1% as a percent
of revenue for the three and six months ended June 30, 2001, compared to the
same periods in 2000. This is due primarily to a decline in rail utilization to
12.8% and 13.1% of total miles for the three and six months ended June 30, 2001,
compared to 15.2% and 15.7% for the same periods in 2000 as the Company is
utilizing more company-owned equipment and road drivers for certain linehaul
moves, as previously discussed. In addition, rents and purchased transportation
costs decreased due to the disposal of some tractors under operating leases, as
previously mentioned.
G.I. TRUCKING COMPANY
G.I. Trucking implemented a general rate increase of 5.9%, effective July 30,
2001.
Effective September 1, 2000, G.I. Trucking implemented a general rate increase
of 5.9%. G.I. Trucking's revenues for the three months ended June 30, 2001
decreased 1.9% on a per day basis to $42.0 million from $42.8 million compared
to the same period in 2000, while revenue for the six months ended June 30, 2001
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
increased 3.3% on a per day basis to $82.5 million from $80.5 million for the
same period in 2000. G. I. Trucking generated operating income of $296,000 and
$638,000 for the three and six months ended June 30, 2001, compared to $1.8
million and $1.9 million for the same periods in 2000.
The revenue decrease for the three months resulted primarily from a decrease in
G.I. Trucking's revenue per hundredweight of 6.0% for the three months ended
June 30, 2001, compared to the same period in 2000. The decline in revenue per
hundredweight can be attributed to two factors. G. I. Trucking has increased its
emphasis on short-haul, next-day freight with the average length of haul
decreasing 24.3% to 753 miles for the three months ended June 30, 2001, compared
to 995 miles for the same period in 2000. The other factor is the addition of
lower yielding shipments moving in backhaul lanes during the three months ended
June 30, 2001. G.I. Trucking's revenue per hundredweight decline was offset, in
part, by an increase in tonnage of 4.3% on a per day basis for the three months
ended June 30, 2001.
G.I. Trucking's increase in revenue for the six months ended June 30, 2001 is
due primarily to a 5.5% increase in total pounds per day over the same period in
2000. During the early part of the first quarter 2000, G.I. Trucking expanded
its operational capabilities in the states of Texas, New Mexico, Oklahoma,
Kansas and parts of Missouri, in preparation for adding new business from an
existing carrier partner. In addition, during the last half of the first quarter
of 2000, G.I. Trucking increased its sales management and sales staff throughout
its system by nearly 50% over 1999 levels. The increase in pounds per day was
offset by a 2.1% decline in revenue per hundredweight due to the previously
mentioned emphasis on short-haul, next day freight and the addition of lower
yielding shipments moving in backhaul lanes.
G.I. Trucking implemented a fuel surcharge during the last week of August 1999,
based upon a West Coast average fuel index. The fuel surcharge in effect during
the three and six months ended June 30, 2001, ranged from 3.7% to 4.4% and 3.7%
to 5.8%, respectively, compared to a range of 3.1% to 4.5% and 2.6% to 4.6%,
respectively, for the same periods in 2000.
G.I. Trucking's operating ratio increased to 99.3% and 99.2% for the three and
six months ended June 30, 2001 from 95.7% and 97.7% during the same periods in
2000, in part, as a result of revenue yield declines and changes in certain
operating expenses as follows:
Salaries and wages expense increased 5.9% and 4.6% as a percent of revenue
during the three and six months ended June 30, 2001, compared to the same
periods in 2000. This increase is due, in part, to increased salaries and
benefits related to the addition of company drivers in an effort to utilize
company-owned equipment rather than third party purchased transportation
providers for certain linehaul moves and due to the impact of the additional
sales staff described above. In addition to the above mentioned increases, G.I.
Trucking was also negatively impacted by unfavorable health care claims
experience and higher pension costs.
Supplies and expenses increased 1.4% and 0.7% as a percent of revenue for the
three and six months ended June 30, 2001, compared to the same periods in 2000.
The increase is due primarily to higher fuel costs and an increase in
company-driven linehaul miles as G.I. Trucking has been utilizing more
company-owned equipment as previously discussed above. Fuel costs continue to be
at high levels with an average price-per-gallon, including taxes, of $1.60 and
$1.58 for the three and six months ended June 30, 2001 compared to $1.45 and
$1.44 for the same periods in 2000. Company-driven miles, as a percent of total
miles, have increased to 32.9% and 32.2%, for the three and six months ending
June 30, 2001 compared to 18.2% and 17.5% for the same periods in 2000. G.I.
Trucking's fuel surcharge on revenue is intended to offset the fuel price
increases.
Depreciation and amortization increased 0.8% and 0.7% as a percent of revenue
for the three and six months ended June 30, 2001, compared to the same periods
in 2000, due primarily to the addition of trailers and tractors
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
to G.I. Trucking's fleet during both the first six months of 2001 and the last
nine months of 2000, as a result of tonnage growth and an effort to utilize
company-owned equipment rather than purchased transportation for certain
linehaul moves.
Rents and purchased transportation expenses decreased 5.4% and 5.2% as a percent
of revenue for the three and six months ended June 30, 2001, as compared to the
same periods in 2000. G.I. Trucking has decreased its purchased transportation
costs by utilizing company-owned equipment and drivers for specific linehaul
moves, as previously discussed, and as a result of enhanced analysis of
lane-specific cost data during the first six months of 2001 compared to the same
period in 2000.
CLIPPER
Clipper implemented a general rate increase of 4.9% for LTL shipments as of
August 13, 2001.
Revenues for Clipper were $34.3 million and $65.1 million for the three and six
months ended June 30, 2001, representing increases on a per day basis of 0.5%
and 3.0% from the same periods in 2000. Intermodal revenue per shipment
increased 1.5% and 4.5% and the number of shipments increased 33.3% and 26.1%
for the three and six months ended June 30, 2001, compared to the same periods
in 2000. Intermodal's shipments for both the three and six months increased
primarily as a result of increased shipment volumes from existing customers. LTL
revenue per shipment increased 7.9% and 8.8% while LTL shipments declined 21.7%
and 21.9% for the three and six months ended June 30, 2001, compared to the same
periods in 2000. LTL shipment declines reflect Clipper's movement away from
unprofitable business and lower business levels, resulting from a slowdown in
the U.S. economy. In addition, the LTL division suffered from changes in the
shipping pattern of a large customer, which reduced the LTL shipments handled by
Clipper.
Clipper's operating ratio improved to 96.7% for the three months ended June 30,
2001 from 97.6% during the same period in 2000, while increasing slightly to
98.8% for the six months ended June 30, 2001, compared to 98.7% for the same
period in 2000. The increase in intermodal shipments and revenue per shipment
compared to 2000 is the primarily reason for the improvement in the operating
ratio for the three months ended June 30, 2001. For the six months ended June
30, 2001, increases in intermodal shipments and revenue per shipment were offset
by LTL revenue declines and some costs increases in the LTL division. During the
first three months of 2001, Clipper added LTL sales personnel to increase
revenues in this competitive environment, which increased salaries and benefits
costs. In addition, Clipper experienced costs increases as a result of investing
in new information technology to improve network communications and to provide
document-imaging applications. Finally, a change in the mix of shipments handled
by the LTL division contributed to a decline in rail utilization. Clipper's rail
utilization was 58.1% and 58.5% of total miles for the three and six months
ended June 30, 2001, compared to 65.9% and 64.5% during the same periods in
2000. For Clipper, rail costs per mile are generally less expensive than
over-the-road costs per mile.
TREADCO, INC.
On September 13, 2000, Treadco entered into an agreement with Goodyear to form a
new limited liability company called Wingfoot Commercial Tire Systems, LLC
("Wingfoot") (see Note G). The transaction closed on October 31, 2000. Effective
October 31, 2000, Treadco contributed substantially all of its assets and
liabilities to Wingfoot in a non-taxable transaction in exchange for a 19%
ownership in Wingfoot. Revenue for Treadco for the three and six months ended
June 30, 2000 was $48.3 million and $89.6 million, respectively. Operating
income for Treadco was $1.4 million for both the three and six months ended June
30, 2000. (See Note I - Operating Segment Data).
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
In the last half of the 1990's changes were occurring in the traditional
relationship between retread equipment and raw materials franchisers and new
tire suppliers in Treadco's truck tire retreading and new tire sales business.
As a result of these changes, in the first quarter of 1998, ABC began evaluating
its then 46% investment in Treadco. This evaluation resulted in ABC's January
1999 proposal to Treadco's Board for ABC to acquire all outstanding Treadco
common stock. ABC believed this would lower costs associated with Treadco being
a small public company, lower state income tax costs and other tax benefits
available to the Company if Treadco were a wholly owned subsidiary, and maximize
its flexibility in managing Treadco in this changing environment. As these
changes continued to evolve throughout 1999 and 2000, ABC concluded that an
alliance of Treadco with one of the major new tire manufacturers, who was
expanding its presence in the retread industry, provided Treadco the best
opportunity at long-term survival and maximized its current value to ABC. In
September 2000, ABC entered into its agreement with The Goodyear Tire & Rubber
Company, which created Wingfoot and gave the Company the right to "put" its
interest to Goodyear for $74.0 million, as described below.
The Company has the right, at any time after April 30, 2003 and before April 30,
2004, to sell its interest in Wingfoot to Goodyear for a cash "Put Price" equal
to approximately $74.0 million. Goodyear has the right, at any time after April
30, 2003 until October 31, 2004, to purchase the Company's entire interest, for
cash, at a "Call Price" equal to the "Put Price" plus $5.0 million. As provided
in the agreement between Goodyear and Treadco, the Company will not share in the
profits or losses of Wingfoot during the term of the "put." If the Company does
not exercise its right to sell its 19% interest in Wingfoot, the Company will
account for its share of Wingfoot's profits or losses beginning May 1, 2004, as
provided in the Wingfoot Operating Agreement. If the Company "puts" its interest
to Goodyear, the Company will record a pre-tax gain in the amount of $14 million
in the quarter its interest is "put." If Goodyear "calls" the Company's interest
in Wingfoot, the Company will record a pre-tax gain of $19.0 million during the
quarter the "call" is made by Goodyear (see Note G).
INCOME TAXES
The difference between the effective tax rate for the three and six months ended
June 30, 2001 and the federal statutory rate resulted from state income taxes,
amortization of nondeductible goodwill and other nondeductible expenses.
In March 1999, the Tenth Circuit Court of Appeals ruled against an appealing
taxpayer regarding the timing of deductibility of contributions to multiemployer
pension plans. The Internal Revenue Service ("IRS") has raised the same issue
with respect to the Company. There are certain factual differences between those
present in the Tenth Circuit case and those relating specifically to the
Company. The Company has been involved in the administrative appeals process
with the IRS regarding those factual differences. Based on the most recent
information available, it is likely that the Company will receive an unfavorable
decision from the IRS on the issues involved. The Company presently intends to
pursue its judicial remedies as necessary. If all the issues involved in the
pension matter were decided adversely to the Company, the amount of tax and
interest due and unpaid as of June 30, 2001 would be approximately $28.0
million. In June 2001, the Company paid approximately $12.4 million of the tax
and interest and it is likely that the remaining approximately $28.0 million of
tax and interest will be assessed by the IRS and paid by the Company within the
next nine months. Because of the complex issues and the fact that multiple tax
years and IRS examinations of the Company and an acquired company are involved,
management believes the resolution of this matter will occur over an extended
future period. If the remaining tax and interest is assessed and paid, the
Company presently intends to file claims for refunds, in order to pursue
judicial remedies with the greatest chance of success. All related income taxes
have been provided for, and, in the opinion of management, adequate provision
has been made for all related
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
interest liabilities that may arise as a result of the proposed IRS adjustments.
In the opinion of management, any additional liability that may arise will not
have a material adverse effect on the Company's results of operations, and the
impact on the Company's financial position and cash flows should not exceed the
amount described above.
OTHER ASSETS
Other assets increased $6.6 million from December 31, 2000 to June 30, 2001, due
primarily to incentive pay deferrals and matching contributions made to the
Company's Voluntary Savings Plan assets, which are held in a trust account.
ACCRUED EXPENSES
Accrued expenses decreased $29.2 million from December 31, 2000 to June 30,
2001, due primarily to the payment of incentive pay amounts, a decrease in the
required reserves for loss, injury, damage and workers' compensation claims and
a decrease in accrued interest due to the payment of interest to the IRS as
described above.
OTHER LIABILITIES
Other liabilities increased $8.6 million from December 31, 2000 to June 30,
2001, due to incentive pay deferrals and matching contributions made to the
Company's Voluntary Savings Plan assets, which are held in a trust account. In
addition, other liabilities increased due to an increase in the accruals for
supplemental pension benefits and due to an increase in liabilities as a result
of recording the fair value of the Company's interest rate swap in the amount of
$1.9 million, in accordance with FASB Statement No. 133 (See Note D).
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations of $23.3 million, proceeds from asset sales of $6.5
million and available cash were used primarily to purchase revenue equipment and
other property and equipment totaling $44.4 million and reduce outstanding debt
during the six months ended June 30, 2001 including the retirement of $24.6
million in face value of the Company's WorldWay 6 1/4% convertible subordinated
debentures (See Note B). Cash provided by operations of $53.9 million and
proceeds from asset sales of $7.2 million were used primarily to purchase
revenue equipment and other property and equipment in the amount of $54.2
million and reduce outstanding debt during the six months ended June 30, 2000.
Revenue equipment includes tractors and trailers used in the Company's motor
carrier transportation operations.
The Company is party to a $250 million credit agreement (the "Credit Agreement")
with Wells Fargo Bank ("Texas"), N.A., as Administrative Agent and with Bank of
America National Trust and Savings Association and Wells Fargo Bank ("Texas"),
N.A., as Co-Documentation Agents. The Credit Agreement provides for up to $250
million of revolving credit loans (including letters of credit) and extends into
2003.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
At June 30, 2001, there were $133.0 million of Revolver Advances and
approximately $22.2 million of letters of credit outstanding. At June 30, 2001,
the Company had approximately $94.8 million of borrowing availability under the
Credit Agreement. The Credit Agreement contains various covenants, which limit,
among other things, indebtedness, distributions and dispositions of assets and
require the Company to meet certain quarterly financial ratio tests. As of June
30, 2001, the Company was in compliance with the covenants.
The Company is party to an interest rate swap on a notional amount of $110.0
million. The purpose of the swap is to limit the Company's exposure to increases
in interest rates on $110.0 million of bank borrowings over the seven-year term
of the swap. The interest rate under the swap is fixed at 5.845% plus the Credit
Agreement margin, which is currently 0.55%. The fair value of the Company's
interest rate swap was ($1.9) million and ($0.1) million at June 30, 2001 and
December 31, 2000, respectively. The fair value of the swap is impacted by
changes in rates of similarly termed Treasury instruments.
The Company disclosed in its Annual Report for 2000 that it expected to spend
between $90.0 million and $100.0 million for capital expenditures in 2001.
Because of the economic slowdown and the potential impact on the Company's
business levels and results of operations for 2001, the Company has reduced its
2001 forecasted capital expenditures to be approximately $80.0 million.
Management believes, based upon the Company's current levels of operations, the
Company's cash, capital resources, borrowings available under the Credit
Agreement and cash flow from operations will be sufficient to finance current
and future operations and meet all present and future debt service requirements
through 2002, as well as fund its forecasted capital expenditures for 2001 and
to fund the payment of potential tax and interest liabilities (see previous
discussion under Income Taxes heading.)
See Note H - Subsequent Event regarding the Company's sale of G.I. Trucking
Company on August 1, 2001.
SEASONALITY
ABF and G.I. Trucking are affected by seasonal fluctuations, which affect
tonnage to be transported. Freight shipments, operating costs and earnings are
also affected adversely by inclement weather conditions. The third calendar
quarter of each year usually has the highest tonnage levels while the first
quarter has the lowest. Clipper's operations are similar to operations at ABF
and G.I. Trucking with revenues being weaker in the first quarter and stronger
during the months of September and October.
FORWARD-LOOKING STATEMENTS
Statements contained in the Management's Discussion and Analysis section of this
report that are not based on historical facts are "forward-looking statements."
Terms such as "estimate," "forecast," "expect," "predict," "plan," "anticipate,"
"believe," "intend," "should," "would," "scheduled," and similar expressions and
the negatives of such terms are intended to identify forward-looking statements.
Such statements are by their nature subject to uncertainties and risks,
including, but not limited to, union relations; availability and cost of
capital; shifts in market demand; weather conditions; the performance and needs
of industries served by Arkansas Best's subsidiaries; actual future costs of
operating expenses such as fuel and related taxes; self-insurance claims and
employee wages and benefits; actual costs of continuing investments in
technology; the timing and amount of capital expenditures; competitive
initiatives and pricing pressures; general economic conditions; and other
financial, operational and legal risks and uncertainties detailed from time to
time in the Company's Securities and Exchange Commission ("SEC") public filings.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
INTEREST RATE INSTRUMENTS
The Company has historically been subject to market risk on all or a part of its
borrowings under bank credit lines, which have variable interest rates.
In February 1998, the Company entered into an interest rate swap effective April
1, 1998. The swap agreement is a contract to exchange variable interest rate
payments for fixed rate payments over the life of the instrument. The notional
amount is used to measure interest to be paid or received and does not represent
the exposure to credit loss. The purpose of the swap is to limit the Company's
exposure to increases in interest rates on the notional amount of bank
borrowings over the term of the swap. The fixed interest rate under the swap is
5.845% plus the Credit Agreement margin (currently .55%). This instrument is
recorded on the balance sheet of the Company in other liabilities (see Note D).
Details regarding the swap, as of June 30, 2001, are as follows:
<Table>
<Caption>
Notional Rate Rate Fair
Amount Maturity Paid Received Value(2)
------- -------- ---- -------- --------
$110.0 million April 1, 2005 5.845% Plus LIBOR rate (1) ($1.9) million
Credit Agreement Plus Credit
Margin (currently Agreement Margin
.55%) (currently .55%)
</Table>
(1) LIBOR rate is determined two London Banking Days prior to the first day
of every month and continues up to and including the maturity date.
(2) The fair value is an amount estimated by Societe Generale ("process
agent") that the Company would have paid at June 30, 2001 to terminate
the agreement.
OTHER MARKET RISKS
Since December 31, 2000, there have been no significant changes in the Company's
other market risks, as reported in the Company's Form 10-K Annual Report.
23
24
PART II.
OTHER INFORMATION
ARKANSAS BEST CORPORATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is named as a defendant in legal
actions, the majority of which arise out of the normal course of its business.
The Company is not a party to any pending legal proceeding which the Company's
management believes to be material to the financial condition of the Company.
The Company maintains liability insurance in excess of self-retention levels of
certain risks arising out of the normal course of its business (see Note C to
the Company's unaudited consolidated financial statements).
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on April 25,
2001. The first proposal considered at the Annual Meeting was to elect
two persons to serve as directors of the Company. The results of this
proposal were as follows:
Directors Votes For Votes Withheld
Robert A. Young, III 15,573,136 2,541,897
Frank Edelstein 17,974,881 140,152
The second proposal was to ratify the appointment of Ernst & Young LLP
as independent auditors for the fiscal year 2001. This proposal
received 17,982,058 votes for adoption, 109,536 against adoption,
23,439 abstentions and no broker non-votes.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10. Stock Purchase Agreement by and between Arkansas
Best Corporation and Estes Express Lines dated as of
August 1, 2001
(b) REPORTS ON FORM 8-K.
None.
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25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARKANSAS BEST CORPORATION
(Registrant)
Date: August 9, 2001 /s/ David E. Loeffler
--------------------------------------
David E. Loeffler
Vice President-Treasurer,
Chief Financial Officer
and Principal Accounting Officer
25
26
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10. Agreement for the sale of G.I. Trucking Company dated August
1, 2001, by and between Arkansas Best Corporation and Estes
Express Lines.
</Table>