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, 1998
[ ] 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)
Delaware 6711 71-0673405
- ------------------------------- ---------------------------- -------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
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
- --------------------------------------------------------------------------------
(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 July 31, 1998
---------------------------- ----------------------------
Common Stock, $.01 par value 19,610,213 shares
2
ARKANSAS BEST CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1998 and December 31, 1997 ......................... 3
Consolidated Statements of Operations --
For the Three and Six Months Ended June 30, 1998 and 1997 .... 5
Consolidated Statements of Shareholders' Equity
For the Six Months Ended June 30, 1998 ...................... 7
Condensed Consolidated Statements of Cash Flows --
For the Six Months Ended June 30, 1998 and 1997 .............. 8
Notes to Consolidated Financial Statements - June 30, 1998 ..... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 24
Item 2. Changes in Securities ........................................ 24
Item 3. Defaults Upon Senior Securities .............................. 24
Item 4. Submission of Matters to a Vote of Security Holders .......... 24
Item 5. Other Information ............................................ 24
Item 6. Exhibits and Reports on Form 8-K ............................. 25
SIGNATURES ............................................................ 26
3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JUNE 30 DECEMBER 31
1998 1997
-----------------------------
($ THOUSANDS)
(UNAUDITED) NOTE
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 6,344 $ 7,203
Trade receivables less allowances
1998 -- $7,565,000; 1997--$7,603,000).......... 178,321 175,693
Inventories....................................... 30,459 30,685
Prepaid expenses ................................. 11,461 14,456
Deferred income taxes ............................ 5,590 5,584
Other ............................................ 5,298 3,275
- -----------------------------------------------------------------------------------
TOTAL CURRENT ASSETS .......................... 237,473 236,896
PROPERTY, PLANT AND EQUIPMENT
Land and structures .............................. 215,204 212,847
Revenue equipment ................................ 243,675 207,471
Manufacturing equipment .......................... 17,183 18,891
Service, office and other equipment .............. 71,875 64,598
Leasehold improvements ........................... 7,327 7,281
- -----------------------------------------------------------------------------------
555,264 511,088
Less allowances for depreciation and amortization (239,263) (225,733)
- -----------------------------------------------------------------------------------
316,001 285,355
OTHER ASSETS ........................................ 35,915 41,999
ASSETS HELD FOR SALE ................................ 2,171 3,342
GOODWILL, less amortization (1998 -- $34,131,000
1997 -- $31,867,000) .......................... 128,325 130,747
- -----------------------------------------------------------------------------------
$ 719,885 $ 698,339
===================================================================================
3
4
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JUNE 30 DECEMBER 31
1998 1997
-------------------------------
(UNAUDITED) NOTE
($ THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft ................................................ $ 14,961 $ 13,801
Bank drafts payable ........................................... 5,459 1,172
Trade accounts payable ........................................ 77,887 77,403
Accrued expenses............................................... 148,815 157,622
Federal and state income taxes................................. 299 1,222
Current portion of long-term debt ............................. 14,609 16,484
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES .................................. 262,030 267,704
LONG-TERM DEBT, less current portion ............................. 221,675 202,604
OTHER LIABILITIES ................................................ 19,341 21,921
DEFERRED INCOME TAXES ............................................ 26,240 24,448
MINORITY INTEREST IN TREADCO, INC. ............................... 32,460 32,600
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 10,000,000 shares;
issued and outstanding 1,495,000 shares .................... 15 15
Common stock, $.01 par value, authorized 70,000,000 shares;
issued and outstanding 1998: 19,610,213 shares;
1997: 19,596,213 shares ................................... 196 196
Additional paid-in capital .................................... 193,117 192,910
Retained earnings (deficit) ................................... (35,189) (44,059)
- --------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY ................................. 158,139 149,062
COMMITMENTS AND CONTINGENCIES ....................................
- --------------------------------------------------------------------------------------------------------
$ 719,885 $ 698,339
========================================================================================================
NOTE: The balance sheet at December 31, 1997 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.
The accompanying notes are an integral part of the consolidated financial
statements.
4
5
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
-------------------------------------------------------------
($ thousands, except per share data)
CONTINUING OPERATIONS:
OPERATING REVENUES
LTL motor carrier operations ................. $ 325,531 $ 311,489 $ 634,285 $ 608,024
Truckload motor carrier operations............ - 20,345 - 39,366
Intermodal operations......................... 41,334 48,629 80,393 93,418
Tire operations .............................. 46,456 41,014 83,523 73,108
Service and other ............................ 3,537 2,203 6,564 4,377
- ----------------------------------------------------------------------------------------------------------------
416,858 423,680 804,765 818,293
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES AND COSTS
LTL motor carrier operations ................. 307,971 294,178 604,049 579,263
Truckload motor carrier operations ........... - 18,814 - 37,304
Intermodal operations ........................ 41,235 47,228 80,836 92,452
Tire operations .............................. 45,248 40,800 82,927 75,438
Service and other ............................ 3,728 2,266 7,041 4,492
- ----------------------------------------------------------------------------------------------------------------
398,182 403,286 774,853 788,949
- ----------------------------------------------------------------------------------------------------------------
OPERATING INCOME ................................ 18,676 20,394 29,912 29,344
OTHER INCOME (EXPENSE)
Net gains (losses) on sales of property
and non-revenue equipment .................. 756 (1,120) 1,348 (1,814)
Interest expense ............................. (4,541) (6,756) (9,009) (13,841)
Minority interest in Treadco, Inc. ........... (470) 29 (129) 1,054
Other, net ................................... (1,983) (1,341) (3,446) (3,100)
- ----------------------------------------------------------------------------------------------------------------
(6,238) (9,188) (11,236) (17,701)
- ----------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ........................ 12,438 11,206 18,676 11,643
FEDERAL AND STATE INCOME TAXES .................. 5,037 4,930 7,657 4,787
- ----------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS ............... 7,401 6,276 11,019 6,856
- ----------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations (net of tax
benefits of $761 and $1,268 for the three and
six months ended June 30,1997) .............. - (1,268) - (2,166)
- ----------------------------------------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS ............... - (1,268) - (2,166)
- ----------------------------------------------------------------------------------------------------------------
NET INCOME ...................................... 7,401 5,008 11,019 4,690
Preferred stock dividends .................... 1,074 1,074 2,149 2,149
- ----------------------------------------------------------------------------------------------------------------
NET INCOME FOR COMMON SHAREHOLDERS............... $ 6,327 $ 3,934 $ 8,870 $ 2,541
================================================================================================================
5
6
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS -- Continued (Unaudited)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
--------------------------------------------------------------
($ thousands, except per share data)
EARNINGS (LOSS) PER COMMON SHARE
BASIC:
Continuing operations (1) ................ $ 0.32 $ 0.27 $ 0.45 $ 0.24
Discontinued operations .................. - (0.07) - (0.11)
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (1) .................... $ 0.32 $ 0.20 $ 0.45 $ 0.13
- ------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES
OUTSTANDING (BASIC) ...................... 19,610,213 19,504,473 19,607,713 19,504,473
============================================================================================================
Diluted:
Continuing operations (2) ................ $ 0.31 $ 0.26 $ 0.44 $ 0.24
Discontinued operations .................. - (0.06) - (0.11)
- ------------------------------------------------------------------------------------------------------------
NET INCOME (2) .......................... $ 0.31 $ 0.20 $ 0.44 $ 0.13
- ------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED) .................... 23,850,481 19,570,220 20,065,431 19,538,521
============================================================================================================
CASH DIVIDENDS PAID PER COMMON SHARE ..... $ 0.00 $ 0.00 $ 0.00 $ 0.00
============================================================================================================
(1) Gives consideration to preferred stock dividends of $1.1 million per
quarter.
(2) For the three months ended June 30, 1997 and for the six months ended June
30, 1998 and 1997, consideration is given to preferred dividends ($1.1
million for the three months and $2.1 million for six months). For the
three months ended June 30, 1998, conversion of preferred shares into
common is assumed. Conversions of preferred shares would be anti-dilutive
for all other periods presented.
6
7
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE
STOCK STOCK CAPITAL (DEFICIT) INCOME (NOTE)
- ------------------------------------------------------------------------------------------------------------
($ thousands)
Balances at January 1, 1998 ............ $ 15 $ 196 $ 192,910 $ (43,788) $ (271)
Net income ............................. - - - 11,019 -
Common stock issued on exercise
of stock options..................... - - 89 - -
Dividends paid ......................... - - - (2,149) -
Tax effect of stock options exercised .. - - 118 - -
- ------------------------------------------------------------------------------------------------------------
Balances at June 30, 1998 .............. $ 15 $ 196 $ 193,117 $ (34,918) $ (271)
============================================================================================================
NOTE: Included in retained earnings in the accompanying consolidated balance
sheet.
7
8
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30
1998 1997
- -------------------------------------------------------------------------------------------------
($ thousands)
OPERATING ACTIVITIES
Net cash provided by operating activities .......... $ 26,881 $ 35,426
INVESTING ACTIVITIES
Purchases of property, plant and equipment
less capitalized leases .......................... (39,694) (5,387)
Proceeds from asset sales .......................... 9,463 26,575
- -------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES ...... (30,231) 21,188
FINANCING ACTIVITIES
Deferred financing costs and expenses............... (688) (898)
Borrowings under revolving credit facilities ....... 291,700 216,585
Payments under revolving credit facilities ......... (261,700) (233,885)
Payments on long-term debt ......................... (12,922) (8,887)
Payments under term loan facilities ................ (13,000) (32,048)
Dividends paid on preferred stock................... (2,149) (2,149)
Other .............................................. 1,250 2,862
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES....... 2,491 (58,420)
- -------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (859) (1,806)
Cash and cash equivalents at beginning of period ... 7,203 1,806
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 6,344 $ -
=================================================================================================
8
9
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
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, intermodal transportation operations and truck tire retreading and
new tire sales. Principal subsidiaries are ABF Freight System, Inc., ("ABF");
Treadco, Inc. ("Treadco"); and Clipper Exxpress Company, CaroTrans
International, Inc. ("Clipper Worldwide"), and related companies (collectively
"Clipper Group"); G.I. Trucking Company ("G.I. Trucking"); and FleetNet America,
Inc.; and, until July 15, 1997, Cardinal Freight Carriers, Inc. ("Cardinal").
Approximately 79% of ABF's employees are covered under a new five-year
collective bargaining agreement beginning April 1, 1998 with the International
Brotherhood of Teamsters ("IBT"). The agreement was reached February 9, 1998 and
approved by vote of IBT members on April 9, 1998.
NOTE B - FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited 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 months and six months ended June
30, 1998, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. 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, 1997.
The differences between the effective tax rate for the three and six months
ended June 30, 1998, and the federal statutory rate resulted from state income
taxes, amortization of goodwill, minority interest, and other nondeductible
expenses.
NOTE C - DISCONTINUED OPERATIONS
As of June 30, 1997 and prior periods since 1995, the Company was engaged in
providing logistics services, including warehousing and distribution, through
two wholly owned subsidiaries, The Complete Logistics Company ("CLC") and
Integrated Distribution Inc. ("IDI"). CLC was sold on August 8, 1997. In
September 1997, the Company completed a formal plan to exit the logistics
segment by disposing of IDI. The Company closed the sale of IDI on October 31,
1997.
9
10
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- --------------------------------------------------------------------------------
Results of operations of the logistics segment have been reported as
discontinued operations as of September 30, 1997 and the statements of
operations for all prior periods have been restated to remove revenue and
expenses of the logistics segment. Results of the logistics operations segment
included in discontinued operations are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
----------------------------------------------------------------------
($ thousands)
Revenues ......................... $ - $ 12,089 $ - $ 24,223
Operating loss ................... - (1,817) - (3,039)
Pre-tax loss ..................... - (2,029) - (3,434)
NOTE D - INVENTORIES
JUNE 30
1998 1997
- -----------------------------------------------------------------------------------------------------------
($ thousands)
Finished goods .................................................. $ 22,577 $ 22,392
Materials ....................................................... 5,137 4,934
Repair parts, supplies and other ................................ 2,745 3,359
- -----------------------------------------------------------------------------------------------------------
................................................................. $ 30,459 $ 30,685
===========================================================================================================
10
11
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited)
- --------------------------------------------------------------------------------
NOTE E - OPERATING EXPENSES AND COSTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
($ THOUSANDS)
LTL Motor Carrier Operations:
Salaries and wages ..................... $ 214,169 $ 204,237 $ 418,510 $ 402,216
Supplies and expenses .................. 29,875 30,403 59,025 60,156
Operating taxes and licenses ........... 10,180 10,589 20,575 20,986
Insurance .............................. 5,650 6,214 11,708 12,824
Communications and utilities ........... 7,186 6,977 14,139 13,690
Depreciation and amortization .......... 8,108 8,348 15,664 17,466
Rents and purchased transportation ..... 31,862 26,217 61,185 49,734
Other .................................. 2,499 1,957 4,924 3,796
(Gain) on sale of revenue equipment .... (1,558) (764) (1,681) (1,605)
- --------------------------------------------------------------------------------------------------------------------
307,971 294,178 604,049 579,263
Truckload Motor Carrier Operations:
Salaries and wages ..................... - 7,390 - 14,310
Supplies and expenses .................. - 3,570 - 7,257
Operating taxes and licenses ........... - 1,788 - 3,543
Insurance .............................. - 764 - 1,677
Communications and utilities ........... - 306 - 589
Depreciation and amortization .......... - 953 - 1,910
Rents and purchased transportation ..... - 3,975 - 7,741
Other .................................. - 68 - 275
Loss on sale of revenue equipment ...... - - - 2
- --------------------------------------------------------------------------------------------------------------------
- 18,814 - 37,304
Intermodal Operations:
Cost of services ....................... 34,565 40,300 67,293 78,473
Selling, administrative and general ....... 6,714 6,928 13,607 13,979
(Gain) on sale of revenue equipment........ (44) - (64) -
- --------------------------------------------------------------------------------------------------------------------
41,235 47,228 80,836 92,452
Tire Operations:
Cost of sales .......................... 32,526 30,050 59,192 54,525
Selling, administrative and general ....... 12,722 10,750 23,735 20,913
- --------------------------------------------------------------------------------------------------------------------
45,248 40,800 82,927 75,438
Service and other: ........................ 3,728 2,266 7,041 4,492
- --------------------------------------------------------------------------------------------------------------------
$ 398,182 $ 403,286 $ 774,853 $ 788,949
====================================================================================================================
11
12
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- --------------------------------------------------------------------------------
NOTE F - 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 store some fuel for its tractors and trucks in
approximately 101 underground tanks located in 30 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. Environmental
regulations have been adopted by the United States Environmental Protection
Agency ("EPA") that will require the Company to upgrade its underground tank
systems by December 1998. The Company currently estimates that such upgrades,
which are currently in progress, will not 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 $250,000 over the last five 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, 1998, the Company has accrued approximately $3.2 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 present environmental regulations.
NOTE G - INTEREST RATE SWAP
In February 1998, the Company entered into an interest-rate swap effective April
1, 1998, on a notional amount of $110 million. The swap agreement has a term of
seven years with an interest rate of 5.845% plus the Credit Agreement margin,
which was .875% of as June 30, 1998. The Company entered into the interest-rate
swap agreement to fix the interest rate on a portion of its outstanding credit
agreement debt. The interest-rate swap agreement has been designated with all or
a portion of the outstanding balance and expected term of revolving credit debt.
The agreement involves the exchange of amounts based on a fixed interest rate
for amounts based on variable interest rates over the life of the agreement
without an exchange of the notional amount upon which the payments are based.
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
accounting method). The related amount payable to or receivable from
counterparties is included in other liabilities or assets. The fair value of the
swap agreement and changes in the fair value as a result of changes in market
interest rates are not recognized in the financial statements.
12
13
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- --------------------------------------------------------------------------------
Under the Company's accounting policy, gains and losses on terminations of
interest-rate swap agreements are deferred as an adjustment to the carrying
amount of the outstanding debt and amortized as an adjustment to interest
expense related to the debt over the remaining term of the original contract
life of the terminated swap agreement. In the event of the early extinguishment
of a designated debt obligation, any realized or unrealized gain or loss from
the swap would be recognized in income coincident with the extinguishment gain
or loss.
Any swap agreements or portions thereof, that are not designated with
outstanding debt or notional amounts (or durations) of interest-rate swap
agreements in excess of the principal amounts (or expected maturities) of the
underlying debt obligations will be recorded as an asset or liability at fair
value, with changes in fair value recorded in other income or expense (the fair
value method).
NOTE H - CREDIT AGREEMENT
On June 12, 1998, the Company entered into a new senior five-year revolving
credit agreement ("Credit Agreement") in the amount of $250 million, which
includes a $75 million sublimit for the issuance of letters of credit. The
parties to the Credit Agreement are the Company, Societe Generale, Southwest
Agency, as Administrative Agent and Bank of America National Trust and Savings
Association and Wells Fargo Bank (Texas), N.A. as Co-Documentation Agents, as
well as five other participating banks. The Company's previous $347 million
credit agreement was terminated upon entering into the new Credit Agreement. The
Credit Agreement contains covenants limiting among other things, indebtedness,
distributions, dispositions of assets, capital expenditures as well as requiring
the Company to meet certain quarterly financial ratio tests. Interest rates
under the agreement are at variable rates as defined by the Credit Agreement.
NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. The proposal superseded FASB Statement No. 14
on segments. The Statement is effective for the Company in 1999. The Company is
currently evaluating the impact that the Statement will have on its business
segment reporting.
In March 1998, the Accounting Standards Executive Committee of The American
Institute of CPA's ("AcSEC") issued Statement of Position ("SOP") 98-1,
Accounting for Costs of Computer Software Developed For or Obtained For Internal
Use. Under the SOP, qualifying computer software costs incurred during the
"application development stage" are required to be capitalized and amortized
over the software's estimated useful life. The SOP will be effective for the
Company on January 1, 1999. The SOP will result in capitalization of costs
related to internal computer software development. All such costs are currently
expensed. The amount of costs capitalized within any period will be dependent on
the nature of software development activities and projects in that period.
13
14
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- --------------------------------------------------------------------------------
In June 1998, the 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. The Statement is effective for the
Company in 2000. The Company is evaluating the impact of the Statement will have
on its financial statements and disclosures.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
The Statement requires the classification components of other comprehensive
income by their nature in financial statements and display of the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid in capital in the consolidated financial statements. The Company
adopted FASB Statement No. 130 on January 1, 1998. Comprehensive income was the
same as net income for the periods ended June 30, 1997 and 1998.
14
15
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
- --------------------------------------------------------------------------------
NOTE J - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
($ thousands, except per share data)
NUMERATOR:
Numerator for basic earnings per share --
Net income ................................ $ 7,401 $ 5,008 $ 11,019 $ 4,690
Preferred stock dividends ................. (1,074) (1,074) (2,149) (2,149)
- --------------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share --
Net income available to
common shareholders ....................... 6,327 3,934 8,870 2,541
Effect of dilutive securities (1)............. 1,074 - - -
- --------------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share --
Net income available
to common shareholders .................... $ 7,401 $ 3,934 $ 8,870 $ 2,541
==========================================================================================================================
DENOMINATOR:
Denominator for basic earnings
per share -- weighted average shares ......... 19,610,213 19,504,473 19,607,713 19,504,473
Effect of dilutive securities:
Conversion of preferred stock ............. 3,796,852
Employee stock options .................... 443,416 65,747 457,718 34,048
- --------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings
per share -- adjusted weighted-average
shares and assumed conversion ................ 23,850,481 19,570,220 20,065,431 19,538,521
==========================================================================================================================
EARNINGS (LOSS) PER COMMON SHARE
BASIC:
Continuing operations ........................ $ 0.32 $ 0.27 $ 0.45 $ 0.24
Discontinued operations ...................... - (0.07) - (0.11)
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE ............................ $ 0.32 $ 0.20 $ 0.45 $ 0.13
==========================================================================================================================
AVERAGE COMMON SHARES
OUTSTANDING (BASIC): ............................ 19,610,213 19,504,473 19,607,713 19,504,473
==========================================================================================================================
DILUTED:
Continuing operations ........................ $ 0.31 $ 0.26 $ 0.44 $ 0.24
Discontinued operations ...................... - (0.06) - (0.11)
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE ............................ $ 0.31 $ 0.20 $ 0.44 $ 0.13
==========================================================================================================================
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED): .......................... 23,850,481 19,570,220 20,065,431 19,538,521
==========================================================================================================================
CASH DIVIDENDS PAID
PER COMMON SHARE ................................ $ - $ - $ - $ -
==========================================================================================================================
(1) For the three months ended June 30, 1998, conversion of preferred shares is
assumed. For all other periods presented the conversion of preferred shares
would be anti-dilutive.
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Arkansas Best Corporation (the "Company") is a diversified holding company
engaged through its subsidiaries primarily in three defined business segments:
1) Motor carrier which includes less-than-truckload ("LTL") conducted by ABF and
G.I. Trucking, and truckload operations which were handled primarily by Cardinal
until its sale in July, 1997; 2) Intermodal operations which includes the
domestic and international operations of Clipper Group (including Clipper
Worldwide); and 3) Tire operations which consists of the operations of Treadco.
At June 30, 1998, the Company's percentage ownership of Treadco was 46%. The
Company's consolidated financial statements reflect full consolidation of the
accounts of Treadco, with the ownership interests of the other stockholders
reflected as minority interest, because the Company controls Treadco through
stock ownership, board representation and management services provided under a
transition services agreement.
OPERATING RESULTS
The discussion and analysis of results of operations reflects information
regarding the operating units within the Company before intercompany
eliminations. The table that follows summarizes operating expenses as a percent
of revenue by operating unit.
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
ABF FREIGHT SYSTEM, INC.
Salaries and wages .......................... 67.8% 67.0% 67.9% 67.5%
Supplies and expenses ....................... 10.7 11.0 10.8 11.2
Operating taxes and licenses ................ 3.2 3.4 3.3 3.5
Insurance ................................... 1.5 1.8 1.6 2.0
Communications and utilities ................ 1.2 1.2 1.2 1.2
Depreciation and amortization ............... 2.1 2.3 2.1 2.4
Rents and purchased transportation........... 7.8 7.2 7.9 7.0
Other ....................................... 0.4 0.3 0.5 0.4
(Gain) on sale of revenue equipment ......... (0.5) (0.3) (0.3) (0.3)
- ---------------------------------------------------------------------------------------------------------
94.3% 94.1% 95.0% 94.9%
G.I. TRUCKING COMPANY
Salaries and wages .......................... 45.7% 47.6% 46.5% 48.7%
Supplies and expenses ....................... 8.3 9.8 8.8 9.6
Operating taxes and licenses ................ 1.9 2.3 2.1 2.0
Insurance ................................... 3.8 4.0 3.7 3.9
Communications and utilities ................ 1.3 1.4 1.3 1.4
Depreciation and amortization ............... 2.7 3.6 2.5 3.8
Rents and purchased transportation........... 31.9 28.3 31.1 28.1
Other ....................................... 2.5 2.5 2.5 2.8
(Gain) on sale of revenue equipment ......... (0.2) (0.1) (0.1) 0.0
- ---------------------------------------------------------------------------------------------------------
97.9% 99.4% 98.4% 100.3%
CLIPPER DOMESTIC
Cost of services............................. 86.0% 85.0% 86.9% 86.4%
Selling, administrative & general ........... 12.6 10.5 13.1 11.1
(Gain) on sale of revenue equipment ......... (0.1) 0.0 (0.1) 0.0
- ---------------------------------------------------------------------------------------------------------
98.5% 95.5% 99.9% 97.5%
CLIPPER INTERNATIONAL
Cost of services............................. 78.8% 78.9% 86.9% 86.4%
Selling, administrative & general ........... 24.0 23.1 13.1 11.1
(Gain) on sale of revenue equipment ......... 0.0 0.0 (0.1) 0.0
- ---------------------------------------------------------------------------------------------------------
102.9% 102.0% 101.8% 103.0%
TREADCO, INC.
Cost of sales................................ 69.9% 73.3% 70.8% 74.6%
Selling, administrative & general ........... 26.9 25.8 28.1 28.2
(Gain) on sale of revenue equipment ......... 0.0 0.0 0.0 0.0
- ---------------------------------------------------------------------------------------------------------
96.9% 99.2% 98.9% 102.8%
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1997
Consolidated revenues from continuing operations of the Company for the three
and six months ended June 30, 1998 declined 1.6% and 1.7% compared to the same
periods in 1997 due primarily to the sale of Cardinal on July 15, 1997. The
Company's operating income from continuing operations for second quarter 1998
declined 8.4% when compared to second quarter 1997. This decline relates
primarily to the sale of Cardinal. The Company's operating income for the
six-month period ended 1998 equaled that of the same period in 1997. The
Company's ability to equal the operating income for the first six months of
1997, even with the loss of Cardinal's operating income, was due to the
significantly improved operating results of Treadco and G.I. Trucking from the
same periods in 1997. The Company's net income from continuing operations
improved 17.9% and 60.7% for the three and six months ended June 30, 1998 from
the same periods in 1997. This improvement results primarily from lower interest
expense of $2.3 million and $4.8 million for the three and six-month periods
ended June 30, 1998 compared to the same periods in 1997.
The Company had losses from discontinued operations during the three and six
months ended June 30, 1997. See Note C Discontinued Operations.
The Company had improvements in net income of 47.8% and 134.9% for the three and
six months ended June 30, 1998 compared to the prior year. Net income
improvements result from lower interest expense amounts and the fact that the
Company had no losses from discontinued operations during 1998.
MOTOR CARRIER OPERATIONS.
The Company's LTL motor carrier operations are conducted by ABF (including the
U.S., Canadian and Puerto Rican affiliates of ABF) and G.I. Trucking.
ABF. Effective January 1, 1997 and January 1, 1998, ABF implemented overall rate
increases of 5.5% and 5.3%, respectively. Revenues for the three and six months
ended June 30, 1998 were $293.8 million and $574.1 million, respectively,
compared to revenues for the three and six months ended June 30, 1997 of $286.9
million and $561.0 million. ABF generated operating income for the three and six
months ended June 30, 1998, of $16.7 million and $28.5 million compared to
operating income for the three and six months ended June 30, 1997 of $17.2
million and $28.9 million.
For the three and six months ended June 30, 1998, ABF accounted for 90.2% and
90.5%, respectively, of LTL revenues. ABF's revenues increased 2.4% and 2.3% for
the three months and six months ended June 30, 1998 compared to the same periods
in 1997. ABF's revenue per hundredweight increased to $18.26 and $18.24 for the
three and six months ended June 30, 1998, increasing approximately 4.3% when
compared to the three and six months ended June 30, 1997. Revenue per
hundredweight increases
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
reflect a continuing favorable pricing environment. ABF's tonnage declined
slightly, 1.5% and 1.6%, for the three and six months ended June 30, 1998,
compared to the same periods in 1997. Declines in tonnage resulted from some
freight diversions caused by customer concerns regarding labor contract
negotiations. However, for the month of June 1998, ABF's per day tonnage
increased slightly from the prior year.
The IBT voted in favor of a new labor contract on April 9, 1998. The contract is
for a five-year term and provides for average annual wage and benefit increases
of approximately 2.1% including a lump-sum payment for all active employees who
are IBT members of $750 for the first contract year. The lump-sum payment is
being amortized over the first twelve months of the contract period.
ABF's operating ratio ("O.R.") remained steady at 94.3% and 95.0% for the three
and six month periods ended June 30, 1998, compared to 94.1% and 94.9% for the
same periods ending in 1997.
Salaries and wages expense increased 0.8% and 0.4% of revenue for the three and
six months ended June 30,1998, when compared to the same periods in 1997. The
increases are primarily due to a $750 lump-sum payment made to the
non-contractual employees of ABF. The payment made to non-contractual employees
was expensed during the second quarter of 1998.
Decreases in operating supplies and expenses of 0.3% and 0.4% of revenue for the
three and six months ended June 30, 1998, primarily reflect a decline in fuel
prices, which were below the prices for the three and six months ended June 30,
1997, by 17.1% and 15.7%, respectively.
Insurance expense declined 0.3% and 0.4% of revenue for the three and six months
ended June 30, 1998, as compared to the three and six months ended June 30,
1997. The decline for each period is attributable to better claims experience,
primarily in cargo claims.
ABF's rail usage increased to 15.3% and 14.4% of total miles for the three and
six months ended June 30, 1998, as compared to 12.0% and 11.4% for the same
periods in 1997. Rents and purchased transportation expenses increased 0.6% and
0.9% as a percent of revenue for the three and six months ended June 30, 1998
over the same periods in 1997, primarily as a result of ABF's increased rail
usage.
G.I. Trucking. Revenues increased 28.6% and 27.4% to $31.8 million and $60.4
million for the three and six months ended June 30, 1998 compared to $24.7
million and $47.4 million for the three months and six months ended June 30,
1997. G. I. Trucking has continued to expand its operations, opening new
terminal locations in Oklahoma City, OK, Tulsa, OK, Albuquerque, NM, El Paso, TX
and Kansas City, MO, since January 1, 1998. G.I. Trucking's tonnage increased
25.0% and 24.4% for the three and six months ended June 30, 1998, from the same
periods in 1997.
G.I. Trucking's operating ratio improved to 97.9% and 98.4% for the three and
six months ended June 30, 1998, compared to 99.4% and 100.3% for the same
periods in 1997. Operating expense improvements as a percent of revenue related
to salaries and wages, supplies and expenses, and depreciation and amortization.
Offsetting these improvements is an increase in rents and purchased
transportation expense as a percent of revenue.
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
Salaries and wages expense declined 1.9% and 2.2% as a percent of revenue for
the three and six months ended June 30, 1998, when compared to the same periods
in 1997. These declines reflect lower pension costs and, in part, the fact that
a portion of salaries and wages expense is generally fixed in nature and
declines as a percent of revenue with increases in revenue levels.
G.I. Trucking has handled its increased level of business in part by utilizing a
higher level of purchased transportation relative to previous periods. As a
result, rents and purchased transportation increased 3.6% and 3.0% as a percent
of revenue for the three and six months ended June 30, 1998, compared to the
same periods in 1997. Increases in rents and purchased transportation are
partially offset by decreases in salaries and wages, as well as supplies and
expenses which decreased 1.5% and 0.8% as a percent of revenue for the three and
six months ended June 30, 1998, when compared to the three and six months ended
June 30, 1997. Included in the supplies and expense category are fuel expenses
and repairs and maintenance expenses. Both categories are decreasing as a
percent of revenue primarily due to the increased use of purchased
transportation in G.I. Trucking's business. Depreciation and amortization
declines of 0.9% and 1.3% as a percent of revenue for the three and six month
periods ended June 30, 1998, when compared to the same periods in 1997, can also
be attributed to the fact that G.I. Trucking's growth in revenues utilizes
higher levels of purchased transportation.
G.I. Trucking is in the process of adding some new, more efficient revenue
equipment. G.I. Trucking's equipment additions began late in the first quarter
of 1998. As of June 30, 1998, G.I. Trucking had purchased 114 new tractors and
253 new trailers.
INTERMODAL OPERATIONS. The Company's intermodal operations are conducted
primarily by Clipper Group (including Clipper Worldwide).
Clipper Domestic. Revenues from the domestic operation of Clipper Group were
$31.8 million and $62.1 million for the three and six months ended June 30,
1998, representing decreases of 14.1% and 12.4% from the three months and six
months ended June 30, 1997, which had revenues of $37.1 million and $70.9
million, respectively.
Beginning in the fourth quarter of 1997, Clipper Group's domestic operations
were adversely affected by the service problems with the U.S. rail system. This
trend continued into the second quarter of 1998, causing decreases in the number
of LTL shipments by 4.3% and 4.7% and intermodal shipments by 29.2% and 44.4%
for the three and six months ended June 30, 1998, compared to the same periods
in 1997. Improvements in rail service are expected to be gradual and rail
service problems will likely continue to adversely impact Clipper Group's
domestic operations through the remainder of 1998. If rail service is not
improved, Clipper Group will continue to be adversely affected beyond 1998.
Clipper Domestic's operating ratio increased to 98.5% and 99.9% for the three
and six months ended June 30, 1998, compared to 95.5% and 97.5% for the three
and six months ended June 30, 1997. This increase reflects an increase in
selling, administrative and general costs of 2.1% and 2.0% as a percent of
revenue for the three and six months ended June 30, 1998. Selling,
administrative and general costs are primarily fixed in nature and increase as a
percentage of revenue with a decline in revenue levels. Clipper Domestic's
operating ratio also reflects increased costs of services of 1.0% and 0.5% for
the three and six months ended June 30, 1998 as compared to the same periods in
1997. Clipper Domestic has
20
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
experienced an increase in cost of services from utilizing higher cost modes of
transportation (primarily trucks) because of rail service problems.
Clipper International. Clipper International's revenue declined 14.0% and 14.3%
to $11.3 million and $22.2 million for the three and six months ended June 30,
1998, when compared to $13.1 million and $25.9 million for the three and six
months ended June 30, 1997. Declines in revenues result from a decrease in
exports to Asia, a focus on account profitability as well as adverse pricing
trends, especially in South America. Clipper International reported operating
ratios of 102.9% and 101.8% for the three and six months ended June 30, 1998,
compared to 102.0% and 103.0% for the three and six months ended June 30, 1997.
The increase in Clipper International's operating ratio for the second quarter
results primarily from a 0.9% increase in selling, administrative and general
expenses as compared to the second quarter 1997. Selling, administrative and
general category of expense includes fixed costs, which increase as a percent of
revenue, as revenue declines. Clipper International's operating ratio for the
six months ended June 30, 1998, improved when compared to the same period in
1997. This improvement is attributable to lower costs of services reflecting
Clipper International's focus on account profitability and lower costs of
transportation in some lanes.
TIRE OPERATIONS.
Treadco, Inc. Revenues for the three months and six months ended June 30, 1998
increased 14.5% and 13.8% to $47.1 million and $84.6 million from $41.1 million
and $74.3 million for the three and six months ended June 30, 1997. For the
three and six months ended June 30, 1998, "same store" sales increased 13.2% and
12.9% and "new store" sales increased 1.3% and 0.9% when compared to the same
periods in 1997. "Same store" sales include both production locations and sales
locations that have been in existence for the entire periods presented. "New
store" sales resulted from two new sales locations. Revenues from retreading for
the three and six months ended June 30, 1998, increased 9.6% and 11.3% compared
to the same periods in 1997. Retread revenue increases resulted primarily from a
8.2% and 10.0% increase in the number of units sold and a slight increase in the
sales price per retread, when three and six months ended June 30, 1998 are
compared to the same periods in 1997. Revenues from new tire sales increased
14.8% and 13.2% for the three and six months ended June 30, 1998 when compared
to the same periods in 1997. Increases in new tire sales result primarily from
an increase in the number of new tire units sold of 17.3% and 14.9% for the
three and six months ended June 30, 1998, when compared to the same periods in
1997. This increase was offset by a slight decrease in the price per unit of new
tires. Service revenues for the three and six months ended June 30, 1998, were
up 34.8% and 28.3%, compared to the same periods in 1997. The increase in
service revenues results from Treadco's continued emphasis on its service
operations.
Treadco's operating ratio improved to 96.8% and 98.9% for the three and six
months ended June 30, 1998, from 99.2% and 103.0% for the three and six months
ended June 30, 1997. The second quarter 1998 improvement results from a decrease
in cost of sales offset by a slight increase in selling, general and
administrative costs for the second quarter 1998 compared to the second quarter
of 1997. The decrease in cost of sales of 3.4% of revenue resulted primarily
from lower new-tire costs and retread production efficiencies resulting from
higher sales levels, which allowed higher production volume. The increase
selling, administrative, and general expenses of 1.1% resulted from Treadco's
implementation of a gross profit-based commission plan for its salesmen
effective January 1, 1998. The improvement in the operating ratio for the six
months ended June 30, 1998 compared to the six months ended June 30,
21
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
1997, results from reduced costs of sales. Improvements in costs of sales of
3.8% as a percent of revenue resulted primarily from lower new tire costs and
retread production efficiencies resulting from higher sales levels, which
allowed higher production volume.
INTEREST. Interest expense was $4.5 million and $9.0 million for three months
and six months ended June 30, 1998, compared to $6.8 million and $13.8 million
for the three months and six months ended June 30, 1997. Interest expense
declined primarily due to a reduction of outstanding debt and lower interest
rates, from the same periods in 1997.
INCOME TAXES. The difference between the effective tax rate for the three and
six months ended June 30, 1998, and the federal statutory rate resulted from
state income taxes, amortization of nondeductible goodwill, minority interest,
and other net nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June 30, 1998
was $26.9 million compared to net cash provided by operations of $35.4 million
for the six months ended June 30, 1997. The decrease is due primarily to
payments on loss, injury and damage claims, the majority of which are claims of
WorldWay Corporation subsidiaries incurred prior to 1995. In addition, the
Company resumed income tax payments in 1998 whereas in 1997 income taxes paid
were nominal due to available net operating loss carryovers. Cash provided by
operations, proceeds from asset sales of $9.5 million and borrowings were used
to purchase revenue equipment and other assets in the amount of $39.7 million,
million during the six months ended June 30, 1998. During the six months ended
June 30, 1997, cash was provided by the sale of assets was $26.6 million and
asset purchases were $5.4 million.
The Company is party to a new five-year, $250 million, Credit Agreement with
Societe Generale, Southwest Agency, as Administrative Agent and with Bank of
America National Trust and Savings Association and Wells Fargo Bank (Texas),
N.A., as Co-Documentation Agents which became effective June 12, 1998 (See Note
H). The Credit Agreement provides for up to $250 million of revolving credit
loans (including letters of credit).
At June 30, 1998, there were $139.0 million of Revolver Advances and
approximately $45.9 million of letters of credit outstanding. At June 30, 1998,
the Company had approximately $65.1 million of borrowing availability under the
Credit Agreement. The Credit Agreement contains various covenants, which limit,
among other things, indebtedness, distributions, disposition of assets and
capital expenditures as well as requiring the Company to meet certain quarterly
financial ratio tests.
In February, 1998, the Company entered into an interest rate swap effective
April 1, 1998, on a notional amount of $110 million. The purpose of the swap was
to limit the Company's exposure to increases in interest rates from current
levels on $110 million of bank borrowings over the seven-year term of the swap.
The interest rate under the swap will be 5.845% plus the Credit Agreement
margin, which was 0.875% at June 30, 1998.
Since January 1, 1998, a subsidiary of the Company, ABF, has entered into
approximately $14 million in capitalized lease obligations for the purchase of
revenue equipment.
22
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
Treadco is a party to a revolving credit facility with Societe Generale (the
"Treadco Credit Agreement"), providing for borrowings up to $20 million. The
Treadco Credit Agreement contains various covenants which limit, among other
things, dividends, disposition of receivables, indebtedness and investments, as
well as requiring Treadco to meet certain financial tests. The Treadco Credit
Agreement was amended and restated on September 30, 1997, primarily to extend
the termination date, to revise certain financial covenants and to revise
Treadco's interest rate on advances.
Management believes, based upon the Company's current levels of operations and
anticipated growth, 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 scheduled debt service
requirements.
YEAR 2000
Management of the Company has considered the impact of the Year 2000 on its
business operations. The Company commenced the Year 2000 conversion in 1996 and
is at various stages of completion. The most significant project is the revision
of the mainframe system. This project has completed the renovation phase and
will be tested during 1998, with a planned completion date of December 31, 1998.
The impact on the Company's financial condition and cash flows is expected to be
immaterial for all years. The Company has not identified any significant risks
or uncertainties associated with the Year 2000 rollover.
SEASONALITY
Motor carrier operations 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. Intermodal operations are similar to motor carrier
operations with revenues being weaker in the first quarter and stronger during
the months of September and October. Treadco's operations are somewhat seasonal
with the last nine months of the calendar year generally having the highest
levels of sales.
FORWARD-LOOKING STATEMENTS
The Management's Discussion and Analysis Section of this report contains
forward-looking statements that are based on current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from current expectations due to a number of factors, including
general economic conditions; competitive initiatives and pricing pressures;
union relations; availability and cost of capital; shifts in market demand;
weather conditions; the performance and needs of industries served by the
Company's businesses; 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; and the timing and amount of
capital expenditures.
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
against certain risks arising out of the normal course of its business (see Note
F 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 May 7, 1998.
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 are as follows:
Directors Votes For Votes Withheld
Robert A. Young III 17,405,589 125,659
Frank Edelstein 17,402,389 128,859
The second proposal was to approve a resolution to amend the Arkansas
Best Corporation 1992 Stock Option Plan. This proposal received
15,146,953 votes for adoption, 2,078,438 against adoption, 305,857
abstentions and -0- broker non-votes.
The third proposal was to ratify the appointment of Ernst & Young LLP
as independent auditors for the fiscal year 1998. This proposal
received 17,250,982 votes for adoption, 25,772 votes against adoption,
254,493 abstentions and -0- broker non-votes.
ITEM 5. OTHER INFORMATION.
The Company entered into a new five-year, $250 million Credit
Agreement, effective June 12, 1998 with Societe Generale, Southwest
Agency, as Administrative Agent and with Bank of America National Trust
and Savings Association and Wells Fargo Bank (Texas) N.A., as
Co-Documentation Agents.
24
25
PART II.
OTHER INFORMATION
ARKANSAS BEST CORPORATION -- Continued
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
10.2 $250 million Credit Agreement dated as of June 12, 1998 with
Societe Generale, Southwest Agency, as Administrative Agent and Bank of
America National Trust Savings Association and Wells Fargo Bank
(Texas), N.A., as Co-Documentation Agents.
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
None.
25
26
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 3, 1998 /s/ David E. Loeffler
--------------------------------
David E. Loeffler
Vice President-Treasurer,
Chief Financial Officer
and Principal Accounting Officer
27
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- ------------
10.2 Credit Agreement
27 Financial Data Schedule