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 March 31, 2002
----------------
[ ] 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
---------
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
(479) 785-6000
-------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of the registrant's principal executive offices)
Not Applicable
- --------------------------------------------------------------------------------
(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.
Class Outstanding at April 30, 2002
---------------------------- -----------------------------
Common Stock, $.01 par value 24,830,743 shares
ARKANSAS BEST CORPORATION
INDEX
<Table>
<Caption>
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 ..........................3
Condensed Consolidated Statements of Income -
For the Three Months Ended March 31, 2002 and 2001 ............5
Condensed Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2002 .....................6
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2002 and 2001 ............7
Notes to Condensed Consolidated Financial Statements -
March 31, 2002 .................... ...........................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................27
Item 2. Changes in Securities ..............................................27
Item 3. Defaults Upon Senior Securities ....................................27
Item 4. Submission of Matters to a Vote of Security Holders ................27
Item 5. Other Information ..................................................27
Item 6. Exhibits and Reports on Form 8-K ...................................27
SIGNATURES ...................................................................28
</Table>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
MARCH 31 DECEMBER 31
2002 2001
------------ ------------
(UNAUDITED) NOTE
($ thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................. $ 3,856 $ 14,860
Accounts receivable, less allowances
(2002 - $3,097; 2001 - $3,483) ...................................... 124,348 116,430
Prepaid expenses ...................................................... 16,493 6,803
Deferred income taxes ................................................. 22,193 22,193
Federal and state income taxes prepaid ................................ 10,582 2,647
Other ................................................................. 3,691 4,027
------------ ------------
TOTAL CURRENT ASSETS ............................................... 181,163 166,960
PROPERTY, PLANT AND EQUIPMENT
Land and structures ................................................... 214,653 214,856
Revenue equipment ..................................................... 333,358 334,622
Service, office and other equipment ................................... 81,945 79,268
Leasehold improvements ................................................ 12,492 12,359
------------ ------------
642,448 641,105
Less allowances for depreciation and amortization ..................... 311,003 306,928
------------ ------------
331,445 334,177
INVESTMENT IN WINGFOOT ................................................... 59,341 59,341
OTHER ASSETS ............................................................. 59,575 58,949
ASSETS HELD FOR SALE ..................................................... 4,312 2,402
GOODWILL, less accumulated amortization (2002 - $32,037; 2001 - $44,469) .. 63,808 101,324
------------ ------------
$ 699,644 $ 723,153
============ ============
</Table>
See notes to condensed consolidated financial statements.
Note: The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
3
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
- --------------------------------------------------------------------------------
<Table>
<Caption>
MARCH 31 DECEMBER 31
2002 2001
------------ ------------
(UNAUDITED) NOTE
($ thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft and drafts payable .............................. $ 9,458 $ 6,515
Accounts payable ............................................... 51,724 50,366
Accrued expenses ............................................... 116,752 121,423
Current portion of long-term debt .............................. 13,150 14,834
------------ ------------
TOTAL CURRENT LIABILITIES ................................... 191,084 193,138
LONG-TERM DEBT, less current portion .............................. 119,151 115,003
FAIR VALUE OF INTEREST RATE SWAP .................................. 4,225 5,383
OTHER LIABILITIES ................................................. 40,527 40,097
DEFERRED INCOME TAXES ............................................. 24,617 31,736
FUTURE MINIMUM RENTAL COMMITMENTS, NET
(2002 - $43,060; 2001 - $46,124) .............................. -- --
OTHER COMMITMENTS AND CONTINGENCIES ............................... -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 70,000,000 shares;
issued 2002: 24,727,943 shares; 2001: 24,542,163 shares ... 247 245
Additional paid-in capital ..................................... 208,476 204,463
Retained earnings .............................................. 115,150 137,635
Treasury stock, at cost, 2002 and 2001: 59,782 shares ......... (955) (955)
Accumulated other comprehensive loss ........................... (2,878) (3,592)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .................................. 320,040 337,796
------------ ------------
$ 699,644 $ 723,153
============ ============
</Table>
See notes to condensed consolidated financial statements.
Note: The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
4
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31
2002 2001
------------ ------------
(UNAUDITED)
($ thousands, except per share data)
OPERATING REVENUES(3) ........................................ $ 320,198 $ 400,576
OPERATING EXPENSES AND COSTS(3) .............................. 315,380 380,512
------------ ------------
OPERATING INCOME ............................................. 4,818 20,064
OTHER INCOME (EXPENSE)
Net gains on sales of property and other .................. -- --
Interest expense .......................................... (2,049) (3,665)
Other, net ................................................ (303) (899)
------------ ------------
(2,352) (4,564)
------------ ------------
INCOME BEFORE INCOME TAXES ................................... 2,466 15,500
FEDERAL AND STATE INCOME TAXES
Current ................................................... (4,989) 5,468
Deferred .................................................. 6,005 953
------------ ------------
1,016 6,421
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ............................ 1,450 9,079
------------ ------------
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX BENEFITS OF $13,580 ...... (23,935) --
------------ ------------
NET INCOME (LOSS) ............................................ (22,485) 9,079
Preferred stock dividends ................................. -- 999
------------ ------------
NET INCOME (LOSS) FOR COMMON STOCKHOLDERS .................... $ (22,485) $ 8,080
============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Income before cumulative effect of change in accounting
principle(1) ............................................ $ 0.06 $ 0.40
Cumulative effect of change in accounting principle,
net of tax .............................................. (0.97) --
------------ ------------
NET INCOME (LOSS) PER SHARE(1) ............................... $ (0.91) $ 0.40
------------ ------------
AVERAGE COMMON SHARES
OUTSTANDING (BASIC) ....................................... 24,584,022 20,349,674
============ ============
DILUTED:
Income before cumulative effect of change in accounting
principle(2) ............................................ $ 0.06 $ 0.37
Cumulative effect of change in accounting principle,
net of tax .............................................. (0.95) --
------------ ------------
NET INCOME (LOSS) PER SHARE(2) ............................... $ (0.89) $ 0.37
------------ ------------
AVERAGE COMMON SHARES OUTSTANDING (DILUTED) .................. 25,334,995 24,693,788
============ ============
CASH DIVIDENDS PAID PER COMMON SHARE ......................... $ -- $ --
============ ============
</Table>
(1) Gives consideration to preferred stock dividends of $1.0 million for the
three months ended March 31, 2001.
(2) For the three months ended March 31, 2001, conversion of preferred shares
into common is assumed.
(3) Includes three months of G.I. Trucking Company's operations for the
three-month period ended March 31, 2001. G.I. Trucking Company was sold on
August 1, 2001.
See notes to condensed consolidated financial statements.
5
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------ PAID-IN RETAINED COMPREHENSIVE TREASURY TOTAL
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS)(a) STOCK EQUITY
-------- -------- ---------- ---------- ---------------- --------- --------
(UNAUDITED)
($ thousands)
BALANCES AT JANUARY 1, 2002 ......... 24,542 $ 245 $ 204,463 $ 137,635 $ (3,592) $ (955) $337,796
Net loss............................. (22,485) (22,485)
Changes in fair value of interest
rate swap, net of taxes........... 707 707
Foreign currency translation,
net of taxes..... (1) 7 6
--------
Comprehensive loss(b)............. (21,772)
--------
Issuance of common stock............. 186 2 1,715 1,717
Tax effect of stock options
exercised.......... .............. 2,309 2,309
Fair value change in Treadco
officer stock options............. (10) (10)
-------- -------- --------- ---------- -------- -------- --------
BALANCES AT MARCH 31, 2002 24,728 $ 247 $ 208,476 $ 115,150 $ (2,878) $ (955) $320,040
======== ======== ========= ========== ======== ======== ========
</Table>
(a) Net of tax benefits of $1.6 million relating to the fair value of the
interest rate swap and $0.2 million relating to foreign currency
translation.
(b) Total comprehensive income for the three months ended March 31, 2001 was
$7.3 million.
See notes to condensed consolidated financial statements.
6
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31
2002 2001
------------ ------------
(UNAUDITED)
($ thousands)
OPERATING ACTIVITIES
Net cash (used) provided by operating activities ....................... $ (6,374) $ 13,193
INVESTING ACTIVITIES
Purchases of property, plant and equipment, less capitalized leases .... (10,131) (14,825)
Proceeds from asset sales .............................................. 815 831
Other .................................................................. (1,344) (866)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES ..................................... (10,660) (14,860)
------------ ------------
FINANCING ACTIVITIES
Borrowings under revolving credit facilities ........................... 54,000 --
Payments under revolving credit facilities ............................. (45,600) --
Payments on long-term debt ............................................. (1,990) (6,465)
Retirement of bonds .................................................... (4,983) (153)
Net increase (decrease) in bank overdraft .............................. 2,935 (9,453)
Dividends paid ......................................................... -- (999)
Other, net ............................................................. 1,668 1,978
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES .......................... 6,030 (15,092)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (11,004) (16,759)
Cash and cash equivalents at beginning of period ....................... 14,860 36,742
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 3,856 $ 19,983
============ ============
</Table>
See notes to condensed consolidated financial statements.
7
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2002
- --------------------------------------------------------------------------------
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"); Clipper Exxpress Company and related companies
("Clipper"); FleetNet America, LLC; and until August 1, 2001, G.I. Trucking
Company ("G.I. Trucking") (see Note I).
Approximately 77% 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 accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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 months ended March 31, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2002. 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, 2001.
The difference between the effective tax rate for the three months ended March
31, 2002 and the federal statutory rate resulted from state income taxes and
nondeductible expenses.
On August 13, 2001, the Company announced the call for redemption of its $2.875
Series A Cumulative Convertible Exchangeable Preferred Stock ("ABFSP"). As of
August 10, 2001, 1,390,000 shares of Preferred Stock were outstanding. At the
end of the extended redemption period on September 14, 2001, 1,382,650 shares of
Preferred Stock were converted to 3,511,439 shares of Common Stock. A total of
7,350 shares of Preferred Stock were redeemed at the redemption price of $50.58
per share. The Company paid $0.4 million to the holders of these shares in
redemption of their Preferred Stock. As a result of this transaction, the
Company no longer has an obligation to pay Preferred Stock dividends, which
approximated $4.0 million per year. Outstanding shares of Preferred Stock had
historically been included in the Company's diluted earnings per share on an
as-converted basis. Therefore, the conversion of preferred shares into common
did not result in an increase in the Company's diluted common shares.
On January 24, 2002, the Company called for redemption, the remaining $5.0
million of WorldWay Corporation 6 1/4% Convertible Subordinated Debentures. The
redemption date of the debentures was February 25, 2002 and the redemption price
was the par value of each debenture plus accrued and unpaid interest to, but not
including, the redemption date. The redemption resulted in a loss to the Company
of $0.2 million.
8
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
On August 15, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 143, Accounting for Asset Retirement Obligations. Statement No.
143 addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated retirement
costs. This Statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. The Statement is effective for the Company in
2003. The Company is evaluating the impact, if any, the Statement will have on
its financial statements and related disclosures.
NOTE D - 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 certain
risks arising out of the normal course of its business, subject to certain
self-insured retention limits.
The Company's subsidiaries, or lessees, store fuel for use in tractors and
trucks in approximately 76 underground tanks located in 25 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 $195,000 over the last 10 years at seven sites), 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 March 31, 2002, 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 E - GOODWILL
On January 1, 2002, the Company adopted FASB Statement No. 142 ("Statement
142"), Goodwill and Other Intangible Assets. Under the provisions of Statement
142, goodwill, the Company's only intangible asset, is no longer amortized but
reviewed annually for impairment. At December 31, 2001, the Company's assets
included goodwill of $101.3 million of which $63.8 million related to ABF and is
from a leveraged buyout ("LBO") transaction and $37.5 million is from the 1994
acquisition of Clipper.
The Company performed the required transitional impairment testing on its
goodwill during the first quarter of 2002 based on January 1, 2002 values. The
Company performed both the first and second phases of the transitional
impairment testing on its Clipper goodwill and found the entire $37.5 million
balance to be impaired.
9
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
As a result, the Company recognized a non-cash impairment loss of $23.9 million,
net of tax benefits of $13.6 million, as the cumulative effect of a change in
accounting principle as provided in Statement 142. This impairment loss results
from the change in method of determining recoverable goodwill from using
undiscounted cash flows, as prescribed by FASB's Statement No. 121, Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
to the fair value method, as prescribed by Statement No. 142, determined by
using a combination of valuation methods, including EBITDA and net income
multiples and the present value of discounted cash flows.
The Company performed the first phase of impairment testing on its $63.8 million
of LBO goodwill, which was based on ABF's operations and fair value at January
1, 2002. There was no indication of impairment with respect to this goodwill.
A comparison of the Company's net income and earnings per share for the first
quarter of 2001, shown on an adjusted basis, excluding goodwill amortization, to
the Company's actual income before the cumulative effect change, net loss, and
earnings per share for the first quarter of 2002 is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31
2002 2001
------------ ------------
($ thousands, except per share data)
NET INCOME (LOSS)
Income before cumulative effect of change in accounting principle ..... $ 1,450 $ 9,079
Cumulative effect of change in accounting principle, net of tax ....... (23,935) --
------------ ------------
Reported net income (loss) ............................................ (22,485) 9,079
Add back goodwill amortization, net of taxes .......................... -- 853
------------ ------------
Adjusted net income (loss) ............................................ $ (22,485) $ 9,932
============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Income before cumulative effect of change in accounting principle ..... $ 0.06 $ 0.40
Cumulative effect of change in accounting principle, net of tax ....... (0.97) --
------------ ------------
Reported net income (loss) per common share ........................... (0.91) 0.40
Goodwill amortization, net of taxes ................................... -- 0.04
------------ ------------
Adjusted net income (loss) per common share ........................... $ (0.91) $ 0.44
============ ============
DILUTED:
Income before cumulative effect of change in accounting principle ..... $ 0.06 $ 0.37
Cumulative effect of change in accounting principle, net of tax ....... (0.95) --
------------ ------------
Reported net income (loss) per common share ........................... (0.89) 0.37
Goodwill amortization, net of taxes ................................... -- 0.03
------------ ------------
Adjusted net income (loss) per common share ........................... $ (0.89) $ 0.40
============ ============
</Table>
NOTE F - ACCOUNTING FOR THE IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS
On January 1, 2002, the Company adopted FASB Statement No. 144 ("Statement
144"), Accounting for the Impairment and Disposal of Long-Lived Assets. The
Company reviews its long-lived assets, including property, plant, equipment and
capitalized software, that are held and used in its motor carrier operations and
intermodal operations businesses for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable, as is required by Statement 144. If such an event or change in
circumstances is present, the Company will estimate the undiscounted future cash
flows, less the future cash
10
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
outflows necessary to obtain those inflows, expected to result from the use of
the asset and its eventual disposition. If the sum of the undiscounted future
cash flows is less than the carrying amount of the related assets, the Company
will recognize an impairment loss or review its depreciation policies as may be
appropriate. No such events or circumstances were present, indicating the
Company's long-lived assets would not be recoverable at March 31, 2002. Assets
to be disposed of are reclassified as assets held for sale at the lower of their
carrying amount or fair value less costs to sell.
Assets held for sale represent primarily ABF's non-operating freight terminals
and older revenue equipment that is no longer in service. Assets held for sale
are carried at the lower of their carrying value or fair value less costs to
sell. Write-downs to fair value less costs to sell are included in gains or
losses on sales of property, in the case of real property, or as gains or losses
on sales of equipment, in the case of revenue or other equipment. Assets held
for sale are expected to be disposed of by selling the properties to a third
party within the next 12 to 24 months.
Total assets held for sale at December 31, 2001 were $2.4 million. During the
first quarter of 2002, additional assets of $1.9 million were identified and
reclassified to assets held for sale. During the first quarter of 2002, there
were no write-downs to fair value less costs to sell.
NOTE G - RELIANCE INSURANCE COMPANY INSOLVENCY
Reliance Insurance Company ("Reliance") insured the Company's workers'
compensation claims in excess of $300,000 ("excess claims") for the period from
1993 through 1999. According to an Official Statement by the Pennsylvania
Insurance Department on October 3, 2001, Reliance was determined to be
insolvent, with total admitted assets of $8.8 billion and liabilities of $9.9
billion, or a negative surplus position of $1.1 billion, as of March 31, 2001.
As of March 31, 2002, the Company estimates its workers' compensation claims
insured by Reliance to be approximately $5.3 million. The Company has been in
contact with and has received either written or verbal confirmation from a
number of state guaranty funds that they will accept excess claims, representing
a total of approximately $4.0 million of the $5.3 million. Based upon the
limited available Reliance financial information, the Company estimates its
current exposure to Reliance to be $0.5 million, for which it established
reserves during the third quarter of 2001. In evaluating that same financial
information, the Company anticipates receiving, from guaranty funds or through
orderly liquidation, partial reimbursement for future claims payments, a process
that could take several years.
NOTE H - DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for its derivative financial instruments in accordance with
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. On February 23, 1998, the Company entered into an interest-rate swap
agreement 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
0.575%) 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 March 31, 2002, it would have had to pay an
estimated $4.2 million. The Company recorded liabilities of $4.2 million and
$5.4 million, respectively, on its balance sheet in accordance with Statement
No. 133, at March 31, 2002 and December 31, 2001, with changes in value included
in other comprehensive income, net of income tax benefits.
11
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
The Company reported no gain or loss during the first quarter of 2002 or 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 I - SALE OF G.I. TRUCKING COMPANY
On August 1, 2001, the Company sold the stock of G.I. Trucking for $40.5 million
in cash to a company formed by the senior executives of G.I. Trucking and Estes
Express Lines ("Estes"). G.I. Trucking and Estes have been partners in
ExpressLINK(R), a North American transportation partnership since 1996. The
Company recognized a pre-tax gain on the sale of $4.6 million in the third
quarter of 2001.
The Company retained 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 at any
time during the four-year lease term to purchase these terminals for $19.5
million. The facilities have a net book value of approximately $6.0 million. If
the terminal facilities are sold to G.I. Trucking, the Company will recognize a
pre-tax gain of approximately $14.0 million in the period they are sold. Cash
proceeds from the sale of G.I. Trucking, net of costs and income taxes, of
approximately $33.0 million were used to pay down the Company's outstanding
debt.
12
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
NOTE J - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31
2002 2001
------------ ------------
($ thousands, except per share data)
NUMERATOR:
Numerator for basic earnings per share -
Income before cumulative effect of change in accounting principle ...... $ 1,450 $ 9,079
Cumulative effect of change in accounting principle, net of tax ........ (23,935) --
Preferred stock dividends .............................................. -- (999)
------------ ------------
Net income (loss) available to common stockholders ..................... (22,485) 8,080
Effect of dilutive securities (1) ......................................... -- 999
------------ ------------
Numerator for diluted earnings per share -
Net income (loss) available to common stockholders ..................... $ (22,485) $ 9,079
============ ============
DENOMINATOR:
Denominator for basic earnings per share - weighted-average shares ........ 24,584,022 20,349,674
Effect of dilutive securities:
Conversion of preferred stock (1) ...................................... -- 3,530,183
Employee stock options ................................................. 750,973 813,931
------------ ------------
Denominator for diluted earnings per share - adjusted weighted-average
shares and assumed conversions ......................................... 25,334,995 24,693,788
============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Income before cumulative effect of change in accounting principle ......... $ 0.06 $ 0.40
Cumulative effect of change in accounting principle, net of tax ........... (0.97) --
------------ ------------
NET INCOME (LOSS) PER SHARE .................................................. $ (0.91) $ 0.40
============ ============
DILUTED:
Income before cumulative effect of change in accounting principle ......... $ 0.06 $ 0.37
Cumulative effect of change in accounting principle, net of tax ........... (0.95) --
------------ ------------
NET INCOME (LOSS) PER SHARE .................................................. $ (0.89) $ 0.37
============ ============
CASH DIVIDENDS PAID PER COMMON SHARE ......................................... $ -- $ --
============ ============
</Table>
(1) For the three months ended March 31, 2001, conversion of preferred shares
into common is assumed.
13
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
NOTE K - 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 management uses 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 three defined
reportable operating segments: (1) ABF; (2) Clipper; and (3) G.I. Trucking
(which was sold on August 1, 2001) (see Note I).
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.
The following table reflects asset information by reportable operating segment
for the Company, as well as a reconciliation of reportable segment information
to the Company's consolidated assets at March 31, 2002, subsequent to the
recognition of the impairment loss on the Company's Clipper goodwill and the
reclassification of a portion of the Company's LBO goodwill to ABF, resulting in
the entire amount of LBO goodwill being allocated to ABF (see Note E) and at
December 31, 2001:
<Table>
<Caption>
MARCH 31 DECEMBER 31
2002 2001
------------ ------------
($ thousands)
ABF Freight System, Inc. ............ $ 474,216 $ 441,644
Clipper ............................. 23,135 46,618
Investment in Wingfoot .............. 59,341 59,341
Other assets and eliminations ....... 142,952 175,550
------------ ------------
Total consolidated assets ......... $ 699,644 $ 723,153
============ ============
</Table>
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
MARCH 31
2002 2001
------------ ------------
($ thousands)
OPERATING REVENUES
ABF Freight System, Inc. ...................... $ 288,641 $ 325,513
Clipper ....................................... 25,869 30,827
G.I. Trucking Company (1) ..................... -- 40,538
Other revenues and eliminations ............... 5,688 3,698
------------ ------------
Total consolidated operating revenues ....... $ 320,198 $ 400,576
============ ============
</Table>
(1) Includes three months of G.I. Trucking Company's operations for the
three-month period ended March 31, 2001. G.I. Trucking Company was sold on
August 1, 2001.
14
ARKANSAS BEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
- --------------------------------------------------------------------------------
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31
2002 2001
------------ ------------
($ thousands)
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC .................................
Salaries and wages ................................... $ 199,531 $ 211,754
Supplies and expenses ................................ 35,365 44,005
Operating taxes and licenses ......................... 9,863 10,259
Insurance ............................................ 5,934 4,011
Communications and utilities ......................... 3,443 4,034
Depreciation and amortization ........................ 10,439 9,611
Rents and purchased transportation ................... 17,728 19,278
Other ................................................ 862 1,538
(Gain) loss on sale of equipment ..................... (67) 72
------------ ------------
283,098 304,562
------------ ------------
CLIPPER
Cost of services ..................................... 22,814 27,090
Selling, administrative and general .................. 3,793 4,078
Loss on sale of equipment ............................ 5 9
------------ ------------
26,612 31,177
------------ ------------
G.I. TRUCKING COMPANY (1)
Salaries and wages ................................... -- 20,849
Supplies and expenses ................................ -- 3,743
Operating taxes and licenses ......................... -- 986
Insurance ............................................ -- 1,039
Communications and utilities ......................... -- 586
Depreciation and amortization ........................ -- 1,366
Rents and purchased transportation ................... -- 10,633
Other ................................................ -- 1,044
(Gain) on sale of equipment .......................... -- (50)
------------ ------------
-- 40,196
------------ ------------
Other expenses and eliminations ......................... 5,670 4,577
------------ ------------
Total consolidated operating expenses and costs ..... $ 315,380 $ 380,512
============ ============
OPERATING INCOME (LOSS)
ABF Freight System, Inc. ................................ $ 5,543 $ 20,951
Clipper ................................................. (743) (350)
G.I. Trucking Company (1) ............................... -- 342
Other income (loss) and eliminations .................... 18 (879)
------------ ------------
Total consolidated operating income ................. $ 4,818 $ 20,064
============ ============
</Table>
(1) Includes three months of G.I. Trucking Company's operations for the
three-month period ended March 31, 2001. G.I. Trucking Company was sold on
August 1, 2001.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company's accounting policies that are "critical," or the most important, to
understand the Company's financial condition and results of operations and that
require management of the Company to make the most difficult judgments are
described as follows:
The Company's accounting policy for revenue recognition is a method prescribed
by the Emerging Issues Task Force ("EITF") 91-9 for motor carrier transportation
companies, where revenue is recognized based on relative transit times in each
reporting period with expenses being recognized as incurred. Management of the
Company utilizes a bill-by-bill analysis to establish the associated revenue to
recognize in each reporting period.
The Company's accounting policy for its allowance for doubtful accounts is based
on the Company's historical write-offs, as well as trends and factors
surrounding the credit risk of specific customers. In order to gather
information regarding these trends and factors, the Company performs ongoing
credit evaluations of its customers. The Company's allowance for revenue
adjustments is based on the Company's historical revenue adjustments. Actual
write-offs or adjustments could differ from the allowance estimates the Company
makes as a result of a number of factors. These factors include unanticipated
changes in the overall economic environment or factors and risks surrounding a
particular customer. The Company continually updates the history it uses to make
these estimates to reflect the most recent trends, factors and other information
available. Actual write-offs and adjustments are charged against the allowances
for doubtful accounts and revenue adjustments.
Under its accounting policy for property, plant and equipment, management
establishes appropriate depreciable lives and salvage values for the Company's
revenue equipment (tractors and trailers) based on their estimated useful lives
and estimated fair values to be received when the equipment is sold or traded
in. Management has a policy of purchasing its revenue equipment or entering into
capital leases rather than utilizing off-balance sheet financing.
The Company has elected to follow Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees and related interpretations in
accounting for stock options because the alternative fair value accounting
provided for under FASB Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123") requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee and director options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company is self-insured up to certain limits for workers' compensation and
certain property damage and liability claims. These claims liabilities recorded
in the financial statements totaled $45.2 million and $46.3 million at March 31,
2002 and December 31, 2001, respectively. The Company does not discount its
claims liabilities. Under the Company's accounting policy for claims, management
annually estimates the development of the claims based upon the Company's
historical development factors over a number of years. The Company utilizes a
third party to calculate the development factors and analyze historical trends.
Actual payments may differ from management's estimates as a result of a number
of factors. These factors include increases in
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
medical costs and the overall economic environment, as well as many other
factors. The actual claims payments are charged against the Company's accrued
claims liabilities.
The Company hedged its interest rate risk by entering into a fixed rate interest
rate swap on $110.0 million of revolving Credit Agreement borrowings. The
Company's accounting policy for derivative financial instruments is as
prescribed by FAS 133, Accounting for Derivative Financial Instruments and
Hedging Activities. The Company's fixed rate interest rate swap is an effective
hedge on $110.0 million of revolving Credit Agreement borrowings in accordance
with its accounting policy. As a result, the fair value of the swap ($4.2)
million and ($5.4) million at March 31, 2002 and December 31, 2001,
respectively, is recorded on the Company's balance sheet through other
comprehensive income rather than through the income statement. If the swap
terminated at March 31, 2002, the Company would have had to pay $4.2 million.
Future changes in the fair value of the swap will also be reflected in other
comprehensive income as long as the swap remains in place and is effectively
hedged.
The Company's accounting policy for its 19% investment in Wingfoot Commercial
Tire Systems, LLC ("Wingfoot") is the equity method of accounting, similar to a
partnership investment. Under the terms of the LLC operating agreement, the
Company does not share in the profits or losses of Wingfoot during the term of
the Company's "Put" option. 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 $73.4 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. If the Company "puts" its interest to Goodyear, the Company
will record a pre-tax gain of approximately $14.0 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 approximately $19.0 million during the
quarter the "call" is made by Goodyear.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2002, net additional borrowings under revolving
credit facilities of $8.4 million and available cash were used primarily to
purchase revenue equipment and other property and equipment totaling $11.0
million, retire the remaining $5.0 million in face value of the Company's
WorldWay 6 1/4% Convertible Subordinated Debentures (see Note B), pay $2.0
million in outstanding capital lease obligations and provide $6.4 million of
cash used in the Company's operations. During the first quarter of 2001, cash
provided by operations of $13.2 million, proceeds from asset sales of $0.8
million and available cash were used primarily to purchase revenue equipment and
other property and equipment totaling $14.8 million and reduce outstanding debt.
Revenue equipment includes tractors and trailers used primarily in the Company's
motor carrier transportation operations.
On August 13, 2001, the Company announced the call for redemption of its $2.875
Series A Cumulative Convertible Exchangeable Preferred Stock ("ABFSP"). As of
August 10, 2001, 1,390,000 shares of Preferred Stock were outstanding. At the
end of the extended redemption period on September 14, 2001, 1,382,650 shares of
Preferred Stock were converted to 3,511,439 shares of Common Stock. A total of
7,350 shares of Preferred Stock were redeemed at the redemption price of $50.58
per share. The Company paid $0.4 million to the holders of these shares in
redemption of their Preferred Stock. As a result of this transaction, the
Company no longer has an obligation to pay Preferred Stock dividends, which
approximated $4.0 million per year. Outstanding shares of Preferred Stock had
historically been included in the Company's diluted earnings per share on an
as-converted basis. Therefore, the conversion of preferred shares into common
did not result in an increase in the Company's diluted common shares.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
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.
At March 31, 2002, there were $118.4 million of Revolver Advances and
approximately $26.0 million of letters of credit outstanding. At March 31, 2002,
the Company had approximately $105.6 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 March
31, 2002, the Company was in compliance with the covenants.
The Company's Credit Agreement contains two pricing grids. One of the grids is
based on a leverage ratio and the other grid is based on the Company's senior
debt rating agency ratings. The Company may choose whichever pricing grid to use
at any time. A change in the senior debt rating could potentially impact the
Company's Credit Agreement pricing. In addition, if the Company achieves certain
senior debt ratings, which it has, the Company's Credit Agreement provides for
no collateral filings, an increase in restricted payments allowed and no capital
expenditure covenant. In January 2002, Standard & Poor's upgraded the Company's
senior debt rating to BBB from BBB-. This upgrade represents a higher investment
grade rating. The Company has no downward rating triggers that would accelerate
the maturity of its debt.
The Company is in the process of negotiating a new credit facility that will
replace its existing Credit Agreement, which expires in June 2003. The Company
expects to have its new credit facility in place by the end of June 2002.
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 0.575%. The fair value of the Company's
interest rate swap was ($4.2) million at March 31, 2002 and ($5.4) million at
December 31, 2001. The fair value of the swap is impacted by changes in rates of
similarly termed Treasury instruments. The liability is recognized on the
Company's balance sheet in accordance with Statement No. 133, at March 31, 2002
and December 31, 2001, through other comprehensive income, net of income tax
benefits.
The Company's primary subsidiary, ABF, maintains ownership of most of its larger
terminals or distribution centers. Both ABF and Clipper lease certain terminal
facilities. At March 31, 2002, the Company has future minimum rental
commitments, net of noncancellable subleases totaling $41.9 million for terminal
facilities and $1.2 million primarily for revenue equipment.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
The following is a table providing the aggregate annual obligations of the
Company including debt, capital lease maturities and future minimum rental
commitments:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------
($ thousands)
LESS THAN 1-3 4-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
------------ ------------ ------------ ------------ ------------
Long-term debt (1) $ 118,523 $ 24 $ 118,456 $ 43 $ --
Capital lease obligations 13,778 13,126 413 239 --
Minimum rental commitments under
operating leases, net of subleases 43,060 8,585 15,150 9,790 9,535
Unconditional purchase obligations -- -- -- -- --
Other long-term debt obligations -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 175,361 $ 21,735 $ 134,019 $ 10,072 $ 9,535
============ ============ ============ ============ ============
</Table>
(1) The Company is negotiating a new revolving credit facility that it expects
to have in place by June 2002, which would extend the maturity of $118.4
million due in years 1-3.
In 2002, the Company forecasts total spending of approximately $45.0 million for
capital expenditures, net of proceeds from equipment and real estate sales. Of
the $45.0 million, ABF is budgeted for approximately $40.0 million primarily for
revenue equipment and facilities.
The Company has two principal sources of available liquidity, which are its
operating cash and the $105.6 million it has available under its revolving
Credit Agreement at March 31, 2002. The Company has generated between $60.0
million and $130.0 million of operating cash for the years 1999 through 2001,
and it expects cash from operations and its available revolver to continue to be
principal sources of liquidity to finance its annual debt maturities, lease
commitments and fund its 2002 capital expenditures.
The Company has not historically entered into financial instruments for trading
purposes, nor has the Company historically engaged in hedging fuel prices. No
such instruments were outstanding during 2002 or 2001. The Company has no
relationships with special-purpose entities or financial partnerships.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
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
MARCH 31
2002 2001
------------ ------------
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC .....................
Salaries and wages ....................... 69.1% 65.1%
Supplies and expenses .................... 12.3 13.5
Operating taxes and licenses ............. 3.4 3.2
Insurance ................................ 2.1 1.2
Communications and utilities ............. 1.2 1.2
Depreciation and amortization ............ 3.6 3.0
Rents and purchased transportation ....... 6.1 5.9
Other .................................... 0.3 0.5
------------ ------------
98.1% 93.6%
------------ ------------
CLIPPER
Cost of services ......................... 88.2% 87.9%
Selling, administrative and general ...... 14.7 13.2
------------ ------------
102.9% 101.1%
------------ ------------
G.I. TRUCKING COMPANY(1)
Salaries and wages ....................... -- 51.4%
Supplies and expenses .................... -- 9.2
Operating taxes and licenses ............. -- 2.4
Insurance ................................ -- 2.6
Communications and utilities ............. -- 1.4
Depreciation and amortization ............ -- 3.4
Rents and purchased transportation ....... -- 26.2
Other .................................... -- 2.7
(Gain) on sale of equipment .............. -- (0.1)
------------ ------------
-- 99.2%
------------ ------------
OPERATING INCOME (LOSS)
ABF Freight System, Inc. .................... 1.9% 6.4%
Clipper ..................................... (2.9) (1.1)
G. I. Trucking Company(1) ................... -- 0.8
</Table>
(1) Includes three months of G.I. Trucking Company's operations for the
three-month period ended March 31, 2001. G.I. Trucking Company was sold on
August 1, 2001.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Consolidated revenues for the three months ended March 31, 2002 were $320.2
million compared to $400.6 million for the same period in 2001, representing a
decrease of 20.1%, due in part to a decrease in revenue for G.I. Trucking. On
August 1, 2001, the Company sold the stock of G.I. Trucking (see Note I). The
Company's first quarter 2001 results included three months of operations for
G.I. Trucking. In addition, there were declines in revenues for ABF and Clipper
for the first quarter of 2002 compared to the same period in 2001, as a result
of a decline in the U.S. economy beginning in mid-2000. This economic decline
was further accelerated by the September 11 terrorist attacks on the World Trade
Center and on the Pentagon and has continued to negatively impact the Company
during 2002. Operating income decreased 76.0% to $4.8 million in the first
quarter of 2002 from $20.1 million in the first quarter of 2001. The decrease in
operating income is due primarily to a decline in operating income for ABF,
which relates primarily to the previously discussed revenue declines. Income
before the cumulative effect of change in accounting principle for the three
months ended March 31, 2002 was $1.5 million, or $0.06 per diluted common share,
compared to $9.1 million, or $0.37 per diluted common share, for the same period
in 2001. The decrease in income before the cumulative effect of change in
accounting principle reflects primarily the decrease in operating income, offset
in part by lower interest expense from lower average debt levels and no goodwill
amortization in the first quarter of 2002, in accordance with the Company's
adoption of Financial Accounting Standards Board ("FASB") Statement No. 142
("Statement 142"). During the first quarter of 2002, the Company recognized a
non-cash impairment loss on its Clipper goodwill of $23.9 million, net of taxes,
or ($0.95) per diluted common share, as the cumulative effect of change in
accounting principle as required by Statement No. 142 (see Note E). The net
loss, including the impact of the accounting change, for the three months ended
March 31, 2002 was ($22.5) million, or ($0.89) per diluted common share,
compared to net income of $9.1 million, or $0.37 per diluted common share, for
the same period in 2001.
Tonnage levels in 2002 continue to be impacted by the decline in the U. S.
economy. The impact could continue through the second quarter of 2002 and
potentially further into 2002, if the U.S. economy does not improve.
Reliance Insurance Company ("Reliance") insured the Company's workers'
compensation claims in excess of $300,000 ("excess claims") for the period from
1993 through 1999. According to an Official Statement by the Pennsylvania
Insurance Department on October 3, 2001, Reliance was determined to be
insolvent, with total admitted assets of $8.8 billion and liabilities of $9.9
billion, or a negative surplus position of $1.1 billion, as of March 31, 2001.
As of March 31, 2002, the Company estimates its workers' compensation claims
insured by Reliance to be approximately $5.3 million. The Company has been in
contact with and has received either written or verbal confirmation from a
number of state guaranty funds that they will accept excess claims, representing
a total of approximately $4.0 million of the $5.3 million. Based upon the
limited available Reliance financial information, the Company estimates its
current exposure to Reliance to be $0.5 million, for which it established
reserves during the third quarter of 2001. In evaluating that same financial
information, the Company anticipates receiving, from guaranty funds or through
orderly liquidation, partial reimbursement for future claims payments, a process
that could take several years.
ABF FREIGHT SYSTEM, INC.
Effective August 1, 2001, ABF implemented a general rate increase of 4.9%, in
part, to cover known and expected cost increases.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
Revenues for the three months ended March 31, 2002 declined 9.9%, per workday,
to $288.6 million from $325.5 million in the first quarter of 2001. ABF
generated operating income of $5.5 million in the first quarter of 2002 compared
to $21.0 million during the same period in 2001.
ABF's decline in revenue is due to a continued decrease in LTL tonnage and fuel
surcharges, which was partially offset by an increase in revenue per
hundredweight. ABF's LTL tonnage decreased 8.4% per workday in the first quarter
of 2002, compared to the same period in 2001. ABF's performance for the first
quarter of 2002 was affected by less available freight due to decreased business
levels at customer facilities, primarily as a result of a decline in the U.S.
economy. The decrease in tonnage was offset, in part, by an increase in LTL
revenue per hundredweight, excluding fuel surcharge, of 2.0% to $21.10 in the
first quarter of 2002 compared to $20.68 in the first quarter of 2001. The
pricing environment remained relatively firm during the first quarter of 2002,
when compared to that in previous economic downturns.
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 first quarter of 2002 averaged 0.9% of revenue. The fuel surcharge in
effect during the first quarter of 2001 averaged 3.3% of revenue.
ABF's operating ratio increased to 98.1% for the three months ended March 31,
2002 from 93.6% in the first quarter of 2001, primarily as a result of continued
tonnage declines and changes in certain operating expense categories as follows:
Salaries and wages expense for the three months ended March 31, 2002 increased
4.0% as a percent of revenue compared to the same period in 2001. The increase
results from the annual general International Brotherhood of Teamsters ("IBT")
contractual wage and benefit rate increase on April 1, 2001 of approximately
3.0%, as well as the fact that a portion of salaries and wages are fixed in
nature and increase as a percent of revenue with decreases in revenue levels. In
addition, workers' compensation costs increased, which resulted primarily from a
severe workers' compensation claim increase and an increase in the Company's
self-insurance retention level, from $0.3 million per claim to $1.0 million per
claim when the first quarter of 2002 is compared to the same period in 2001.
During the second and third quarters of 2002, ABF will experience effective
annual general contractual wage and benefit increases under its agreement with
the IBT. The base wage and pension cost increases of 1.8% and 4.9%,
respectively, will occur on April 1, 2002 and the health and welfare cost
portion of the increases will occur on August 1, 2002. The health and welfare
increase has yet to be determined.
Supplies and expenses decreased 1.2% as a percent of revenue for the three
months ended March 31, 2002, compared to the same period in 2001, due primarily
to a decline in fuel costs, excluding taxes, which on an average
price-per-gallon basis, declined to $0.64 for the first quarter of 2002 from
$0.93 in the first quarter of 2001.
Insurance expense increased 0.9% as a percent of revenue for the three months
ended March 31, 2002, compared to the same period in 2001, due primarily to
increased insurance premium costs for property damage and liability claims, in
part, because of the effect of the September 11 terrorist attacks on the
insurance markets.
Depreciation and amortization expense increased 0.6% as a percent of revenue for
the three months ended March 31, 2002, compared to the same period in 2001, due
primarily to the purchase of 125 road tractors during the first quarter of 2002.
The road tractors purchased were to replace older tractors in the fleet that
have been transferred to city use. In addition, portions of such costs are
primarily fixed in nature and increase as a percent of revenue with decreases in
revenue levels.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
CLIPPER
Effective August 13, 2001, Clipper implemented a general rate increase of 4.9%
for LTL shipments. Revenues for Clipper decreased 16.1% to $25.9 million in the
first quarter of 2002 from $30.8 million in the first quarter of 2001.
LTL shipments decreased 5.3% per workday for the three months ended March 31,
2002, compared to the same period in 2001. LTL shipment declines reflect
Clipper's movement away from unprofitable LTL business and lower business
levels, resulting from the decline in the U.S. economy. LTL revenue per shipment
decreased 8.3% for the three months ended March 31, 2002, compared to the same
period in 2001. LTL revenue per shipment declines reflect, in part, an increase
in Clipper's mix of heavier weighted shipments with a shorter length of haul. In
addition, LTL revenue per shipment was also negatively impacted by declines in
fuel surcharges and an increasingly competitive pricing marketplace.
Intermodal shipments decreased 11.4% per workday for the three months ended
March 31, 2002, compared to the same period in 2001. The number of intermodal
shipments decreased, primarily due to lower shipment volumes from existing
customers. Intermodal revenue per shipment decreased 4.5% for the three months
ended March 31, 2002, compared to the same period in 2001. Intermodal revenue
per shipment declines reflect declines in fuel surcharges and an increasingly
competitive pricing marketplace.
Clipper's operating ratio increased to 102.9% for the first quarter of 2002,
from 101.1% in the first quarter of 2001. Clipper's operating ratio was
adversely affected by reduced business levels and from the reduced rail
incentives created by these reduced business levels. In addition, one of
Clipper's customers, with a significant accounts receivable balance, filed for
bankruptcy during the first quarter of 2002, which increased bad debt expense.
Clipper is soliciting additional shipments in its traditional metro-to-metro
lanes. These shipments will provide a better match with Clipper's core
operations and have historically been more profitable. However, Clipper most
likely will not return to profitability in 2002 until business levels improve.
G.I. TRUCKING COMPANY
On August 1, 2001, the Company sold the stock of G.I. Trucking to a company
formed by the senior executives of G.I. Trucking and Estes Express Lines
("Estes") (see Note I). The Company retained 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 at any time during the four-year lease term to purchase
these terminals for $19.5 million. The facilities have a net book value of
approximately $6.0 million. If the terminal facilities are sold to G.I.
Trucking, the Company will recognize a pre-tax gain of approximately $14.0
million in the period they are sold. The Company's revenue and operating income
includes three months of operations for G.I. Trucking for the first quarter of
2001. Revenues and operating income for G.I. Trucking for the three months ended
March 31, 2001 were $40.5 million and $0.3 million, respectively.
INVESTMENT IN WINGFOOT
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 $73.4 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
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
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 of approximately $14.0 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 approximately $19.0 million during the quarter the
"call" is made by Goodyear.
INCOME TAXES
The difference between the effective tax rate for the three months ended March
31, 2002 and the federal statutory rate resulted from state income taxes and
nondeductible expenses.
In March 1999, the Tenth Circuit Court of Appeals ruled against an appealing
taxpayer regarding the timing of the 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. During 2001, the
Company paid approximately $33.0 million, which represented a substantial
portion of the tax and interest that would be due if all the issues involved
were decided adversely to the Company, and which was accounted for in prior
years as a part of the Company's net deferred tax liability and accrued
expenses. The Company continues to contest the issues and will pursue judicial
remedies if appropriate. 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 final resolution of this matter will occur
over an extended future period. In the opinion of management, any additional
liability that may arise has been accrued for and will not have a material
adverse effect on the Company's results of operations, financial position and
cash flows in any future period.
PREPAID EXPENSES
Prepaid expenses increased $9.7 million from December 31, 2001 to March 31,
2002, due primarily to the prepayment of 2002 annual insurance premiums for the
Company.
FEDERAL AND STATE INCOME TAXES PREPAID
Federal and state income taxes prepaid increased $7.9 million from December 31,
2001 to March 31, 2002, due primarily to tax deductions from accelerated
depreciation on equipment purchases, prepaid expenses deductible when paid for
tax purposes, and tax benefits relating to stock options exercised.
ACCRUED EXPENSES
Accrued expenses decreased $4.7 million from December 31, 2001 to March 31,
2002, due primarily to the payment of incentive pay amounts and a decrease in
the required reserves for loss, injury, damage and workers' compensation claims.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) - continued
- --------------------------------------------------------------------------------
CURRENT DEFERRED INCOME TAX ASSETS AND LONG-TERM DEFERRED INCOME TAX LIABILITIES
Net deferred income tax liabilities decreased $7.1 million from December 31,
2001 to March 31, 2002, due primarily to an increase in deferred tax assets
associated with the write-off of the tax deductible goodwill of Clipper (see
Note E).
SEASONALITY
ABF is affected by seasonal fluctuations, which affects its 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 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.
25
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 0.575%). This instrument is
recorded on the balance sheet of the Company in other liabilities (see Note H).
Details regarding the swap, as of March 31, 2002, are as follows:
<Table>
<Caption>
NOTIONAL RATE RATE FAIR
AMOUNT MATURITY PAID RECEIVED VALUE(2)(3)
-------- -------- ---- -------- -----------
$110.0 million April 1, 2005 5.845% Plus Credit Agreement LIBOR rate(1) ($4.2) million
Margin (currently 0.575%) Plus Credit Agreement
Margin (currently 0.575%)
</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 March 31, 2002 to terminate the
agreement.
(3) The swap value changed from ($5.4) million at December 31, 2001. The fair
value is impacted by changes in rates of similarly termed Treasury
instruments.
OTHER MARKET RISKS
Since December 31, 2001, there have been no significant changes in the Company's
other market risks, as reported in the Company's Form 10-K Annual Report.
26
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 for
certain risks arising out of the normal course of its business (see Note G 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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
None.
(b) REPORTS ON FORM 8-K.
The Company filed Form 8-K dated March 7, 2002, for Item No. 5 -
Other Information. The filing announced the Company's non-cash
impairment charge of $23.9 million on its Clipper goodwill.
27
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: May 9, 2002 /s/ David E. Loeffler
-------------------------------------------------
David E. Loeffler
Vice President-Treasurer, Chief Financial Officer
and Principal Accounting Officer
28