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, 1999
-----------------
[ ] 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
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(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
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(Address, including zip code, and telephone number, including
area code, of the registrant's principal executive offices)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1999
---------------------------------- ---------------------------------
Common Stock, $.01 par value 19,667,333 shares
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ARKANSAS BEST CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1999 and December 31, 1998 ................................................... 3
Consolidated Statements of Operations --
For the Three and Six Months Ended June 30, 1999 and 1998 .............................. 5
Consolidated Statements of Shareholders' Equity
For the Six Months Ended June 30, 1999 ................................................. 7
Condensed Consolidated Statements of Cash Flows --
For the Six Months Ended June 30, 1999 and 1998 ........................................ 8
Notes to Consolidated Financial Statements - June 30, 1999 ............................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................... 16
Item 2a. 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
3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
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JUNE 30 DECEMBER 31
1999 1998
------------ ------------
(UNAUDITED) NOTE
($ thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................... $ 4,436 $ 4,543
Trade receivables less allowances
(1999 -- $5,573,000; 1998 -- $7,051,000) ......... 174,543 166,520
Inventories ......................................... 31,239 33,150
Prepaid expenses .................................... 8,104 12,700
Deferred income taxes ............................... 852 874
Net assets of discontinued operations ............... 1,145 3,546
Other ............................................... 3,367 5,467
------------ ------------
TOTAL CURRENT ASSETS ............................. 223,686 226,800
PROPERTY, PLANT AND EQUIPMENT
Land and structures ................................. 219,261 218,250
Revenue equipment ................................... 280,294 256,474
Manufacturing equipment ............................. 15,688 17,506
Service, office and other equipment ................. 77,835 73,891
Leasehold improvements .............................. 9,974 9,484
------------ ------------
603,052 575,605
Less allowances for depreciation and amortization ... (269,988) (255,732)
------------ ------------
333,064 319,873
OTHER ASSETS ........................................... 41,218 35,682
GOODWILL, less amortization (1999 -- $34,348,000;
1998 -- $36,740,000) ................................ 111,433 124,975
------------ ------------
$ 709,401 $ 707,330
============ ============
NOTE: The balance sheet at December 31, 1998, 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.
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ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
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JUNE 30 DECEMBER 31
1999 1998
--------------- --------------
(UNAUDITED) NOTE
($ thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft and drafts payable ........................................... $ 15,992 $ 19,830
Trade accounts payable ...................................................... 73,910 69,983
Accrued expenses............................................................. 156,290 145,432
Federal and state income taxes............................................... 5,699 8,179
Current portion of long-term debt ........................................... 19,119 17,504
--------------- --------------
TOTAL CURRENT LIABILITIES ................................................ 271,010 260,928
LONG-TERM DEBT, less current portion ........................................... 207,663 196,079
OTHER LIABILITIES .............................................................. 25,590 20,577
DEFERRED INCOME TAXES .......................................................... 15,296 22,319
MINORITY INTEREST IN TREADCO, INC............................................... - 33,512
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 1999: 19,634,133 shares;
1998: 19,610,213 shares .................................................. 196 196
Additional paid-in capital .................................................. 193,282 193,117
Retained earnings (deficit) ................................................. (3,651) (19,413)
Accumulated other comprehensive income....................................... - -
---------------- --------------
TOTAL SHAREHOLDERS' EQUITY ............................................... 189,842 173,915
COMMITMENTS AND CONTINGENCIES ..................................................
--------------- --------------
$ 709,401 $ 707,330
=============== ==============
NOTE: The balance sheet at December 31, 1998, 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.
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ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
------------ ------------ ------------ ------------
(UNAUDITED)
($ thousands, except per share data)
CONTINUING OPERATIONS:
OPERATING REVENUES
Transportation operations ..................... $ 372,772 $ 359,133 $ 726,687 $ 699,011
Tire operations ............................... 46,133 46,456 86,593 83,523
------------ ------------ ------------ ------------
418,905 405,589 813,280 782,534
------------ ------------ ------------ ------------
OPERATING EXPENSES AND COSTS
Transportation operations ..................... 347,793 341,327 683,533 669,275
Tire operations ............................... 45,807 45,248 86,734 82,927
------------ ------------ ------------ ------------
393,600 386,575 770,267 752,202
------------ ------------ ------------ ------------
OPERATING INCOME ................................. 25,305 19,014 43,013 30,332
OTHER INCOME (EXPENSE)
Net gains (losses) on sales of property
and non-revenue equipment .................. (32) 756 464 1,348
Interest expense .............................. (4,784) (4,449) (9,327) (8,831)
Minority interest in Treadco, Inc. ............ -- (470) 245 (129)
Other, net .................................... (1,356) (1,982) (2,376) (3,445)
------------ ------------ ------------ ------------
(6,172) (6,145) (10,994) (11,057)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ............. 19,133 12,869 32,019 19,275
FEDERAL AND STATE INCOME TAXES (CREDIT)
Current ....................................... 7,144 4,407 13,832 8,316
Deferred ...................................... 892 743 (388) (519)
------------ ------------ ------------ ------------
8,036 5,150 13,444 7,797
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS ................ 11,097 7,719 18,575 11,478
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations
(net of tax benefits of $112 for the three
months ended June 30, 1998 and $394
and $140 for the six months ended
June 30, 1999 and 1998, respectively) ......... -- (318) (664) (459)
------------ ------------ ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS ................ -- (318) (664) (459)
------------ ------------ ------------ ------------
NET INCOME ....................................... 11,097 7,401 17,911 11,019
Preferred stock dividends ..................... 1,074 1,074 2,149 2,149
------------ ------------ ------------ ------------
NET INCOME
FOR COMMON SHAREHOLDERS ....................... $ 10,023 $ 6,327 $ 15,762 $ 8,870
============ ============ ============ ============
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ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS -- Continued
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(UNAUDITED)
($ thousands, except per share data)
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Continuing operations (1) ........... $ 0.51 $ 0.34 $ 0.83 $ 0.47
Discontinued operations ............. -- (0.02) (0.03) (0.02)
-------------- -------------- -------------- --------------
NET INCOME PER SHARE (1) ............... $ 0.51 $ 0.32 $ 0.80 $ 0.45
============== ============== ============== ==============
AVERAGE COMMON SHARES OUTSTANDING
(BASIC): ............................ 19,632,533 19,610,213 19,623,093 19,607,713
============== ============== ============== ==============
DILUTED:
Continuing operations (2) ........... $ 0.47 $ 0.32 $ 0.79 $ 0.46
Discontinued operations ............. -- (0.01) (0.03) (0.02)
-------------- -------------- -------------- --------------
NET INCOME PER SHARE (2) ............... $ 0.47 $ 0.31 $ 0.76 $ 0.44
-------------- -------------- -------------- --------------
AVERAGE COMMON SHARES OUTSTANDING
(DILUTED) ........................... 23,780,913 23,850,481 23,681,525 20,065,431
============== ============== ============== ==============
CASH DIVIDENDS PAID PER COMMON SHARE ... $ -- $ -- $ -- $ --
============== ============== ============== ==============
(1) Gives consideration to preferred stock dividends of $1.1 million per
quarter.
(2) For the six months ended June 30, 1998, consideration is given to
preferred dividends of $2.1 million. Conversion of preferred stock into
common would be antidilutive for the six months ended June 30, 1998.
For the three months ended June 30, 1999 and 1998, and the six months
ended June 30, 1999, conversion of preferred shares into common is
assumed.
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ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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ACCUMULATED
ADDITIONAL RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE TOTAL
STOCK STOCK CAPITAL (DEFICIT) INCOME EQUITY
--------- ------ ------- --------- ------------ ------
(UNAUDITED)
($ thousands)
Balances at January 1, 1999 ........... $ 15 $ 196 $ 193,117 $ (19,413) $ -- $ 173,915
Net income ............................ -- -- -- 17,911 -- 17,911
Common stock issued on
exercise of stock options............ -- -- 158 -- -- 158
Tax effect of stock options exercised . -- -- 7 -- -- 7
Dividends paid on preferred stock ..... -- -- -- (2,149) -- (2,149)
----- ------- ---------- ---------- ------ ----------
Balances at June 30, 1999 ............. $ 15 $ 196 $ 193,282 $ (3,651) $ -- $ 189,842
===== ======= ========== ========== ====== ==========
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ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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SIX MONTHS ENDED
JUNE 30
1999 1998
---------- ----------
(UNAUDITED)
($ thousands)
OPERATING ACTIVITIES
Net cash provided by operating activities ............... $ 54,004 $ 26,881
INVESTING ACTIVITIES
Purchases of property, plant and equipment,
less capitalized leases ............................... (28,736) (39,694)
Purchase of Treadco, Inc. stock ......................... (23,673) --
Proceeds from asset sales and other ..................... 9,085 9,463
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES ...................... (43,324) (30,231)
---------- ----------
FINANCING ACTIVITIES
Deferred financing costs and expenses ................... (125) (688)
Borrowings under revolving credit facilities ............ 231,250 291,700
Payments under revolving credit facilities .............. (222,500) (261,700)
Payments on long-term debt .............................. (13,409) (12,922)
Payments under term loan facilities ..................... -- (13,000)
Dividends paid .......................................... (2,149) (2,149)
Other, net .............................................. (3,854) 1,250
---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ........... (10,787) 2,491
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................. (107) (859)
Cash and cash equivalents at beginning of period ........ 4,543 7,203
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 4,436 $ 6,344
========== ==========
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
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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 (see Note H). Principal subsidiaries are ABF Freight System,
Inc., ("ABF"); Treadco, Inc. ("Treadco"); Clipper Exxpress Company and related
companies ("Clipper Domestic"); G.I. Trucking Company ("G.I. Trucking"); and
FleetNet America, Inc.
Approximately 79% 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").
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 and six months ended June 30,
1999 and 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. 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, 1998.
The differences between the effective tax rates for the three and six month
periods ended June 30, 1999 and 1998, and the federal statutory rate resulted
from state income taxes, amortization of nondeductible goodwill, minority
interest, nondeductible tender offer response costs (incurred by Treadco) and
other nondeductible expenses.
NOTE C - DISCONTINUED OPERATIONS
The Company has engaged, since 1995, in international ocean freight services
through its subsidiary CaroTrans International, Inc. ("Clipper International"),
a non-vessel operating common carrier (N.V.O.C.C.). On February 28, 1999, the
Company completed a formal plan to exit its international ocean freight
N.V.O.C.C. services by disposing of the business and assets of Clipper
International. On April 17, 1999, the Company closed the sale of the business
and certain assets of Clipper International, including the trade name "CaroTrans
International, Inc." Remaining assets will be liquidated. The aggregate of the
selling price of these assets and the estimated liquidation value of the
remaining Clipper International assets was approximately $5.0 million which is
approximately equal to the Company's net investment in the related assets.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
- --------------------------------------------------------------------------------
Results of operations of the international ocean freight services segment have
been reported as discontinued operations as of June 30, 1999 and the statements
of operations for all periods have been restated to remove revenue and expenses
of this segment. Results of Clipper International included in discontinued
operations are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
---------- ---------- ---------- ----------
($ thousands, except per share data)
Revenues .................................... $ -- $ 11,269 $ 6,777 $ 22,231
Operating loss .............................. -- (338) (1,114) (420)
Pre-tax loss ................................ -- (430) (1,058) (599)
NOTE D - INVENTORIES
JUNE 30 DECEMBER 31
1999 1998
---------- ----------
($ thousands)
Finished goods ................................................................. $ 23,609 $ 25,523
Materials ...................................................................... 4,844 5,147
Repair parts, supplies and other ............................................... 2,786 2,480
---------- ----------
$ 31,239 $ 33,150
========== ==========
NOTE E - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
Various legal actions, the majority of which arise in the normal course of
business, are pending. None of these legal actions are expected to have a
material adverse effect on the Company's financial condition, cash flows or
results of operations. The Company maintains liability insurance against risks
arising out of the normal course of its business, subject to certain
self-insured retention limits.
The Company's subsidiaries store some fuel for its tractors and trucks in
approximately 81 underground tanks located in 26 states. Maintenance of such
tanks is regulated at the federal and, in some cases, state levels. The Company
believes that it is in substantial compliance with all such regulations. The
Company is not aware of any leaks from such tanks that could reasonably be
expected to have a material adverse effect on the Company. Environmental
regulations have been adopted by the United States Environmental Protection
Agency ("EPA") that required the Company to upgrade its underground tank systems
by December 1998. The Company successfully completed the upgrades prior to the
deadline set by the EPA.
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 $300,000 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.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
- --------------------------------------------------------------------------------
As of June 30, 1999, the Company has accrued approximately $3.1 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 F - RECENT ACCOUNTING PRONOUNCEMENTS
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 Company adopted SOP 98-1 January
1, 1999. The SOP results in capitalization of costs related to internal computer
software development. All such costs were previously expensed. The amount of
costs capitalized within any period is dependent on the nature of software
development activities and projects in each period. For the three and six months
ended June 30, 1999, the Company capitalized internal software development costs
amounting to approximately $.7 million and $1.1 million, respectively, which
increased net income (basic and diluted) and income from continuing operations
(basic and diluted) by $.02 per share and $.03 per share, respectively.
In April 1998, the AcSEC issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities. Under the SOP, certain costs associated with
start-up activities are required to be expensed as incurred. The Company adopted
SOP 98-5 in 1999. The Company has historically expensed start-up costs and,
therefore, there is no impact of adoption on the Company's financial statements
and related disclosures.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If a
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change in fair value
of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The Statement is effective for the Company in 2001. The Company is
evaluating the impact the Statement will have on its financial statements and
related disclosures.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
- --------------------------------------------------------------------------------
NOTE G - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
------------ ------------ ------------ ------------
($ thousands, except per share data)
NUMERATOR:
Numerator for basic earnings per share --
Net income .................................... $ 11,097 $ 7,401 $ 17,911 $ 11,019
Preferred stock dividends ....................... (1,074) (1,074) (2,149) (2,149)
------------ ------------ ------------ ------------
Numerator for basic earnings per share --
Net income available to common shareholders ... 10,023 6,327 15,762 8,870
Effect of dilutive securities (1) ............... 1,074 1,074 2,149 --
------------ ------------ ------------ ------------
Numerator for diluted earnings per share --
Net income available to common shareholders ... $ 11,097 $ 7,401 $ 17,911 $ 8,870
============ ============ ============ ============
DENOMINATOR:
Denominator for basic earnings per
share -- weighted-average shares .............. 19,632,533 19,610,213 19,623,093 19,607,713
Effect of dilutive securities:
Conversion of preferred stock (1) ............. 3,796,852 3,796,852 3,796,852 --
Employee stock options ........................ 351,528 443,416 261,580 457,718
------------ ------------ ------------ ------------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions ................ 23,780,913 23,850,481 23,681,525 20,065,431
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Continuing operations ........................... $ 0.51 $ 0.34 $ 0.83 $ 0.47
Discontinued operations ......................... -- (0.02) (0.03) (0.02)
------------ ------------ ------------ ------------
NET INCOME PER SHARE ............................... $ 0.51 $ 0.32 $ 0.80 $ 0.45
============ ============ ============ ============
AVERAGE COMMON SHARES
OUTSTANDING (BASIC): ............................. 19,632,533 19,610,213 19,623,093 19,607,713
============ ============ ============ ============
DILUTED:
Continuing operations ........................... $ 0.47 $ 0.32 $ 0.79 $ 0.46
Discontinued operations ......................... -- (0.01) (0.03) (0.02)
------------ ------------ ------------ ------------
NET INCOME PER SHARE ............................... $ 0.47 $ 0.31 $ 0.76 $ 0.44
============ ============ ============ ============
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED): ........................... 23,780,913 23,850,481 23,681,525 20,065,431
============ ============ ============ ============
CASH DIVIDENDS PAID PER COMMON SHARE ............... $ -- $ -- $ -- $ --
============ ============ ============ ============
(1) For the six months ended June 30, 1998, consideration is given to
preferred dividends of $2.1 million. Conversion of preferred stock into
common would be antidilutive for the six months ended June 30, 1998.
For the three months ended June 30, 1999 and 1998, and the six months
ended June 30, 1999, conversion of preferred shares into common is
assumed.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
- --------------------------------------------------------------------------------
NOTE H- ACQUISITION OF MINORITY INTEREST IN TREADCO, INC.
On January 22, 1999, the Company announced that it had submitted a formal
proposal to Treadco's Board of Directors in which the outstanding shares of
Treadco's common stock not owned by the Company would be acquired for $9.00 per
share in cash. The announcement stated that the proposal had the support of
Shapiro Capital Management Company, Inc., Treadco's largest independent
stockholder, which beneficially owned 1,132,775 shares (or approximately 22%) of
the common stock of Treadco. On March 15, 1999, the Company and Treadco signed a
definitive merger agreement for the acquisition of all shares of Treadco's stock
not owned by the Company for $9.00 per share in cash via a tender offer. The
tender offer commenced on March 23, 1999, and closed on April 20, 1999. A total
of approximately 2,457,000 shares were tendered to the Company. Including the
tendered shares, the Company owned approximately 98% of Treadco at the closing
of the tender. At a June 10, 1999 special meeting, the shareholders of Treadco,
Inc. approved the merger of Treadco Acquisition Corporation, a wholly owned
subsidiary of the Company, into Treadco, Inc. This transaction resulted in
Treadco, Inc. becoming a wholly owned subsidiary of the Company. Subject to the
terms of the merger agreement, shares of common stock not tendered were
converted into the right to receive $9.00 per share. As a result of the merger,
the Company voluntarily delisted Treadco Inc.'s common stock from trading on The
Nasdaq Stock Market, Inc. on June 10, 1999. The cost of the Treadco shares and
related expenses of $23.7 million was funded with the Company's Revolving Credit
Facility. The acquisition of the Treadco stock was accounted for as a purchase.
The application of purchase accounting to the acquired assets and liabilities of
Treadco resulted in the elimination of Treadco's goodwill of approximately $12.0
million and a reduction of Treadco's fixed assets of approximately $4.0 million.
Pro forma information (as if the acquisition and related transactions were
completed at the beginning of their respective periods) for the six months ended
June 30, 1999 and 1998 is as follows:
SIX MONTHS ENDED
JUNE 30
-------------------------
1999 1998
Operating revenues ................. $ 813,280 $ 782,534
Net income.......................... 17,699 11,245
Net income per share (diluted)...... 0.75 0.45
NOTE I - OPERATING SEGMENT DATA
The Company used the "management approach" to determine its reportable operating
segments as well as to determine the basis of reporting the operating segment
information. The management approach focuses on financial information that the
Company's decision-makers use to make decisions about operating matters.
Management uses operating revenues, operating expense categories, operating
ratios, operating income, and key operating statistics to evaluate performance
and allocate resources to the Company's operating segments.
During the periods being reported on, the Company operated in four defined
reportable operating segments: 1) ABF; 2) G.I. Trucking; 3) Clipper Domestic;
and 4) Treadco.
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14
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
- --------------------------------------------------------------------------------
Results of operations for Clipper International, previously reflected as a
reportable segment, have been reported as discontinued operations for the three
and six months ended June 30, 1999, and the statements of operations for all
prior periods have been restated to remove the revenue and expense of the ocean
freight services N.V.O.C.C. segment (see Note C).
The Company eliminates intercompany transactions in consolidation. However, the
information used by the Company's management with respect to its reportable
segments is before intersegment eliminations of revenues and expenses.
Intersegment revenues and expenses are not significant.
Further classifications of operations or revenues by geographic location beyond
the descriptions provided above are impractical, and are, therefore, not
provided. The Company's foreign operations are not significant.
No material changes have occurred in the total assets, for any reportable
operating segment since December 31, 1998, except for the impact of purchase
accounting on Treadco's assets as discussed in Note H, and the reclassification
of Clipper International's assets to discontinued operations.
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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
------------- ------------- ------------- ------------
(UNAUDITED)
($ thousands)
OPERATING REVENUES
ABF Freight System, Inc.............................. $ 308,667 $ 293,832 $ 604,119 $ 574,099
G.I. Trucking Company................................ 34,913 31,816 66,447 60,414
Clipper Domestic..................................... 26,810 31,856 51,275 62,101
Treadco, Inc......................................... 46,684 47,094 87,629 84,599
Other revenues and eliminations...................... 1,831 991 3,810 1,321
------------- ------------- ------------- ------------
Total consolidated operating revenues.............. $ 418,905 $ 405,589 $ 813,280 $ 782,534
============= ============= ============= ============
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages................................... $ 201,658 $ 199,146 $ 398,374 $ 389,890
Supplies and expenses................................ 34,515 31,416 65,542 62,053
Operating taxes and licenses......................... 9,114 9,396 18,722 18,883
Insurance............................................ 4,809 4,445 9,827 9,468
Communications and utilities......................... 3,882 3,383 7,543 6,708
Depreciation and amortization........................ 7,296 6,294 14,284 12,160
Rents and purchased transportation................... 23,160 23,054 45,602 45,142
Other................................................ 1,140 1,491 2,499 2,945
(Gain) on sale of revenue equipment ................. (207) (1,501) (248) (1,619)
------------- ------------- ------------- ------------
285,367 277,124 562,145 545,630
------------- ------------- ------------- ------------
14
15
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- Continued
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
------------ ------------ ------------ ------------
(UNAUDITED)
($ thousands)
G.I. TRUCKING COMPANY
Salaries and wages ................................. 15,938 14,550 30,722 28,105
Supplies and expenses .............................. 2,826 2,644 5,370 5,297
Operating taxes and licenses ....................... 813 595 1,574 1,240
Insurance .......................................... 1,004 1,197 2,035 2,232
Communications and utilities ....................... 427 417 855 776
Depreciation and amortization ...................... 763 852 1,505 1,540
Rents and purchased transportation ................. 10,979 10,149 20,768 18,765
Other .............................................. 796 812 1,693 1,575
(Gain) on sale of revenue equipment ................ (48) (57) (54) (62)
------------ ------------ ------------ ------------
33,498 31,159 64,468 59,468
------------ ------------ ------------ ------------
CLIPPER DOMESTIC
Cost of services ................................... $ 22,932 $ 27,400 $ 44,423 $ 53,952
Selling, administrative and general ................ 3,383 4,010 6,715 8,161
(Gain) on sale of revenue equipment ................ (2) (44) (33) (64)
------------ ------------ ------------ ------------
26,313 31,366 51,105 62,049
------------ ------------ ------------ ------------
TREADCO, INC ..........................................
Cost of sales ...................................... 32,562 32,902 61,469 59,917
Selling, administrative and general ................ 13,629 12,691 25,922 23,757
------------ ------------ ------------ ------------
46,191 45,593 87,391 83,674
------------ ------------ ------------ ------------
Other expenses and eliminations ....................... 2,231 1,333 5,158 1,381
------------ ------------ ------------ ------------
Total consolidated operating expenses and costs .... $ 393,600 $ 386,575 $ 770,267 $ 752,202
============ ============ ============ ============
OPERATING INCOME (LOSS)
ABF Freight System, Inc. .............................. $ 23,300 $ 16,708 $ 41,974 $ 28,469
G.I. Trucking Company ................................. 1,415 657 1,979 946
Clipper Domestic ...................................... 497 490 170 52
Treadco, Inc. ......................................... 493 1,501 238 925
Other income (loss) and eliminations .................. (400) (342) (1,348) (60)
------------ ------------ ------------ ------------
Total consolidated operating income ................ $ 25,305 $ 19,014 $ 43,013 $ 30,332
============ ============ ============ ============
15
16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. The Company has restated its prior period segment
information to conform to the current year's segment presentation, which is in
accordance with the requirements of FAS No. 131. Note I to the Consolidated
Financial Statements contains additional information regarding the Company's
operating segments.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED)
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages .......................... 65.3% 67.8% 65.9% 67.9%
Supplies and expenses ....................... 11.2 10.7 10.8 10.8
Operating taxes and licenses ................ 3.0 3.2 3.1 3.3
Insurance ................................... 1.6 1.5 1.6 1.6
Communications and utilities ................ 1.3 1.2 1.2 1.2
Depreciation and amortization ............... 2.4 2.1 2.4 2.1
Rents and purchased transportation .......... 7.5 7.8 7.5 7.9
Other ....................................... 0.3 0.5 0.6 0.5
(Gain) on sale of revenue equipment ......... (0.1) (0.5) -- (0.3)
-------- -------- -------- --------
92.5% 94.3% 93.1% 95.0%
-------- -------- -------- --------
G.I. TRUCKING COMPANY
Salaries and wages .......................... 45.7% 45.7% 46.2% 46.5%
Supplies and expenses ....................... 8.1 8.3 8.1 8.8
Operating taxes and licenses ................ 2.3 1.9 2.4 2.1
Insurance ................................... 2.9 3.8 3.1 3.7
Communications and utilities ................ 1.2 1.3 1.3 1.3
Depreciation and amortization ............... 2.2 2.7 2.3 2.5
Rents and purchased transportation .......... 31.4 31.9 31.3 31.1
Other ....................................... 2.2 2.5 2.4 2.5
(Gain) on sale of revenue equipment ......... (0.1) (0.2) (0.1) (0.1)
-------- -------- -------- --------
95.9% 97.9% 97.0% 98.4%
-------- -------- -------- --------
CLIPPER DOMESTIC
Cost of services ............................ 85.5% 86.0% 86.6% 86.9%
Selling, administrative and general ......... 12.6 12.6 13.2 13.1
(Gain) on sale of revenue equipment ......... -- (0.1) (0.1) (0.1)
-------- -------- -------- --------
98.1% 98.5% 99.7% 99.9%
-------- -------- -------- --------
TREADCO, INC.
Cost of sales ............................... 69.7% 69.9% 70.1% 70.8%
Selling, administrative and general ......... 29.2 26.9 29.6 28.1
-------- -------- -------- --------
98.9% 96.8% 99.7% 98.9%
-------- -------- -------- --------
OPERATING INCOME (LOSS)
ABF Freight System ....................... 7.5% 5.7% 6.9% 5.0%
G.I. Trucking Company .................... 4.1% 2.1% 3.0% 1.6%
Clipper Domestic ......................... 1.9% 1.5% 0.3% 0.1%
Treadco, Inc. ............................ 1.1% 3.2% 0.3% 1.1%
16
17
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, 1999, COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1998
Consolidated revenues from continuing operations of the Company for the three
and six months ended June 30, 1999, increased 3.3% and 3.9%, respectively,
compared to the same periods in 1998, due primarily to increases in revenues for
ABF and G.I. Trucking. These increases were offset somewhat by declines in
Clipper Domestic revenues. The Company's operating income from continuing
operations for the three and six months ended June 30, 1999, increased 33.1% and
41.8% compared to the same periods in 1998. Increases in operating income from
continuing operations are attributable to improved operations at ABF and G.I.
Trucking, offset, in part, by a decline in the operating income of Treadco.
Income from continuing operations for the three and six months ended June 30,
1999, increased 43.8% and 61.8% from the same periods in 1998. The improvements
in income from continuing operations reflect primarily the improvements in
operating income. Diluted earnings per share from continuing operations improved
46.8% to $0.47 per share and 71.7% to $0.79 per share for the three and six
months ended June 30, 1999, when compared to the same periods in 1998.
ABF FREIGHT SYSTEM, INC.
Effective January 1, 1999, 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, 1999, increased 5.0% and 5.2% to $308.7 million and $604.1
million, respectively, from $293.8 million and $574.1 million for the same
periods in 1998. ABF generated operating income for the three and six months
ended June 30, 1999, of $23.3 million and $42.0 million compared to $16.7
million and $28.5 million for the three and six months ended June 30, 1998.
ABF's increase in revenue is due primarily to increases in LTL revenue per
hundredweight of 5.6% and 5.4% to $19.28 and $19.23 when the three and six
months ended June 30, 1999, are compared to the same periods in 1998, reflecting
a continuing favorable pricing environment. ABF's LTL tonnage declined slightly,
0.1%, for the three months ended June 30, 1999, compared to the same period in
1998; however, LTL tonnage increased slightly, 0.3%, for the six months ended
June 30, 1999, when compared to the same period in 1998.
ABF's operating ratio improved to 92.5% and 93.1% for the three and six months
ended June 30, 1999, from 94.3% and 95.0% for the same periods in 1998, as a
result of the revenue yield improvements previously described and as a result of
improvements in certain operating expense categories as follows:
Salaries and wages expense decreased as a percent of revenue 2.5% and 2.0% for
the three and six months ended June 30, 1999, compared to the same periods in
1998. This decrease is due in part to lower line-haul costs due to driver
retirements, a lower effective wage rate associated with more new hires and an
increase in rail utilization for freight transportation. Rail usage increased to
16.4% of total miles for both the three and six months ended June 30, 1999,
compared to 15.2% and 14.4% in the same periods of 1998. In addition, a portion
of salaries and wages expense is generally fixed in nature and declines as a
percent of revenue with increases in revenue levels.
17
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
- -------------------------------------------------------------------------------
Supplies and expenses, as a percent of revenue, remained constant, as a percent
of revenue, for the first six months of 1999, compared to the first six months
of 1998. However, supplies and expenses increased 0.5% of revenue from the
second quarter of 1998 to the second quarter of 1999. This increase is due
primarily to trailer repair costs associated with the installation of
conspicuity tape to road and city trailers, in accordance with Federal
regulations. Such regulations require that the installation process be complete
by June 1, 2001. As of June 30, 1999, the Company has completed the installation
on over 48% of all road trailers and a small number of city trailers. In
addition, fuel costs, as a percent of revenue, were slightly above second
quarter 1998, due to higher diesel prices, which increased 4.5% for the second
quarter of 1999 compared to the second quarter of 1998.
Depreciation and amortization increased 0.3% as a percent of revenue for the
three and six months ended June 30, 1999, compared to the same periods in 1998.
Increases in depreciation resulted from an increase in the number of road
tractors under capital leases. A larger portion of ABF's road tractor fleet was
under operating leases in the first six months of 1998.
Rents and purchased transportation expense decreased 0.3% and 0.4% as a percent
of revenue for the three and six months ended June 30, 1999, compared to same
periods in 1998, due primarily to declines in operating lease expense,
reflecting ABF's replacement of road tractors under operating leases with road
tractors under capital leases. This decrease was offset, in part, by the
increase in rail utilization. As described above, ABF's rail usage increased for
the three and six months ended June 30, 1999, compared to the same periods in
1998.
G.I. TRUCKING
Effective November 1, 1998, G.I. Trucking implemented a general rate increase of
5.5%. Revenues increased 9.7% and 10.0% to $34.9 million and $66.4 million for
the three and six months ended June 30, 1999, compared to $31.8 million and
$60.4 million for the same periods in 1998. The revenue increase resulted from
increases in revenue per hundredweight of 1.8% and 1.5%, to $10.80 and $10.76,
respectively, for the three and six months ended June 30, 1999, compared to the
same periods in 1998. In addition, tonnage increased 7.8% and 8.4% for the three
and six months ended June 30, 1999, compared to the same periods in 1998.
G.I. Trucking's operating ratio improved to 95.9% and 97.0% for the three and
six months ended June 30, 1999, from 97.9% and 98.4% for the same periods in
1998. The improvement results from the revenue yield improvement discussed above
and improvements in certain operating expenses as follows:
Salaries and wages expense declined 0.3% as a percent of revenue during the six
months ended June 30, 1999, as compared to the same period in 1998. This
decrease is due to lower pension costs and improved productivity of the labor
force.
Supplies and expenses decreased 0.2% and 0.7% as a percent of revenue for the
three and six months ended June 30, 1999, as compared to the same periods during
1998. This decrease is due primarily to the fact that repair and maintenance
costs on revenue equipment were lower during the three and six months ended June
30, 1999, compared to the same periods in 1998, reflecting new equipment
purchased during 1998 and 1999 to replace older equipment which required more
maintenance.
18
19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
- -------------------------------------------------------------------------------
Operating taxes and licenses increased 0.4% and 0.3% as a percent of revenue for
the three and six months ended June 30, 1999, compared to the same periods
during 1998. This increase is due primarily to real estate taxes associated with
the six new terminals opened during 1998. In addition, vehicle licenses and
registration fees increased for the three and six months ended June 30, 1999, as
compared to the same periods during 1998, due to G.I. Trucking's increased fleet
size resulting from the purchase of 91 tractors and 145 trailers during the
first six months of 1999. G.I. Trucking expects to dispose of some old equipment
during the last half of 1999.
Insurance expense declined 0.9% and 0.6% as a percent of revenue for the three
and six months ended June 30, 1999, compared to the same periods in 1998. This
improvement was due to favorable claims experience for worker's compensation.
Depreciation and amortization expense decreased 0.5% and 0.2% as a percent of
revenue for the three and six months ended June 30, 1999, compared to the same
periods during 1998 due primarily to several older tractors and trailers
becoming fully depreciated during the first six months of 1999.
Rents and purchased transportation expenses decreased 0.5% as a percent of
revenue from the three months ended June 30, 1998 to the three months ended June
30, 1999, primarily as a result of lower purchased transportation costs, offset
in part by an increase in G.I. Trucking's terminal rent cost, related to the
opening of new terminals during 1998. For the six months ended June 30, 1999,
compared to the six months ended June 30, 1998, rents and purchased
transportation increased 0.2% as a percent of revenue due primarily to an
increase in G.I. Trucking's terminal rent costs, also related to the opening of
new terminals during 1998.
CLIPPER DOMESTIC.
Revenues from Clipper Domestic were $26.8 million and $51.3 million for the
three and six months ended June 30, 1999, representing a decrease of 15.8% and
17.4% from the three and six months ended June 30, 1998, which had revenues of
$31.9 million and $62.1 million, respectively. Beginning in the fourth quarter
of 1997, Clipper Domestic was adversely affected by the service problems with
the U.S. rail system. During the fourth quarter of 1998, Clipper Domestic
experienced some improvements in the on-time service levels of its rail
suppliers. In the first and second quarters of 1999, rail service continued to
improve; however, in certain lanes, rail service remains inconsistent. Clipper
Domestic's intermodal shipments declined 9.3% and 8.6% for the three and six
months ended June 30, 1999, compared to the same periods in 1998. These declines
result primarily from business lost as a result of inconsistent rail service in
1998. Clipper Domestic is aggressively trying to regain this business but is
faced with competition from truckload carriers and other rail service providers.
Clipper Domestic experienced declines of 10.9% and 6.4% in the number of LTL
shipments from the three and six months ended June 30, 1998 to the three and six
months ended June 30, 1999. The declines in LTL shipments resulted from
management's decision to concentrate on metro-to-metro, long-haul lanes,
therefore eliminating certain unprofitable lanes. In addition, LTL business
levels were negatively impacted by the heavy snowfall in the Chicago, Illinois
area in January 1999.
Clipper Domestic's operating ratio improved to 98.1% and 99.7% for the three and
six months ended June 30, 1999, from 98.5% and 99.9% for the three and six
months ended June 30, 1998. Clipper Domestic's operating ratio improvements
result from the elimination of certain unprofitable lanes, higher
19
20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
- -------------------------------------------------------------------------------
percentage of rail utilization of 57.8% and 56.4% for the three and six months
ended June 30, 1999, compared to 48.4% and 49.4% for the same periods during
1998 and cost reductions implemented because of lower revenue levels.
TREADCO, INC.
Revenues for Treadco, Inc. were $46.7 million and $87.6 million for the three
and six months ended June 30, 1999, compared to $47.1 million and $84.6 million
for the same periods in 1998. For the three months ended June 30, 1999, "same
store" sales decreased 1.1% compared to the same period in 1998. For the six
months ended June 30, 1999, "same store" sales increased 2.9% compared to the
same period in 1998. "New store" sales increased 0.2% and 0.7% from the three
and six months ended June 30, 1998. "Same store" sales includes 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 months ended June 30, 1999, were $17.9 million,
representing a decrease of 3.0% from $18.4 million for the three months ended
June 30, 1998. Retread revenues for the six months ended June 30, 1999, were
$34.0 million, which equaled retread revenues for the same period in 1998.
Retread revenues for the three months ended June 30, 1999, were lower due to a
decrease in the volume of units sold of approximately 5.4% from the same period
in 1998. This decrease was offset in part by an increase in the sales price per
unit of approximately 2.4% from the three months ended June 30, 1998. Revenues
from new tire sales decreased slightly, 0.9%, to $23.5 million for the second
quarter 1999, from $23.7 million during the same period in 1998, due to a 3.0%
decrease in the sales price per unit, offset in part by a 2.1% increase in unit
sales from the second quarter 1998. However, revenues from new tire sales
increased 4.2% to $43.7 million for the six months ended June 30, 1999, from
$42.0 million during the same period in 1998, due primarily to a 5.9% increase
in units sold, offset, in part, by a decrease in the sales price per unit of
1.6%. Service revenues for the three and six months ended June 30, 1999, were
$5.3 million and $9.9 million, compared to $5.0 million and $8.7 million during
the same periods in 1998. Service revenues increased due to Treadco's continued
emphasis on its service operations.
Treadco's operating ratio increased to 98.9% and 99.7% for the three and six
months ended June 30, 1999, from 96.8% and 98.9% during the same periods in
1998. The decrease in cost of sales of 0.2% and 0.7% of revenue for the three
and six months ended June 30, 1999, resulted primarily from improvements in
retread margins, offset, in part, by lower new tire margins. The increase in
selling, administrative, and general expenses of 2.3% and 1.5% for the three and
six months ended June 30, 1999, from the same periods in 1998 resulted primarily
from higher salaries and wages as a percent of revenue due to increased service
and inventory control personnel. In addition, during the second quarter of 1999,
Treadco incurred $.4 million in costs associated with stock option and
performance plan payments made as a result of the Company's purchase of the
non-ABC-owned shares of Treadco. These increases were offset in part by
decreases in legal fees due to the settlement of the litigation with Bandag,
Inc. in the fourth quarter of 1998. In addition, bad debt expense was lower as
the result of improved aging and collection of accounts receivable.
INTEREST EXPENSE. Interest expense increased $0.4 million and $0.5 million for
the three and six months ended June 30, 1999, due primarily to the purchase of
the non-ABC-owned shares of Treadco (see Note H).
INCOME TAXES. The differences between the effective tax rates for the three and
six month periods ended June 30, 1999, and the federal statutory rate resulted
from state income taxes, amortization of
20
21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
- -------------------------------------------------------------------------------
nondeductible goodwill, minority interest, nondeductible tender offer response
costs incurred by Treadco and other nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June 30,
1999, was $54.0 million compared to $26.9 million for the six months ended June
30, 1998. The increase is due primarily to the improvement in operating results
and net income, as well as increases in accrued expenses including income taxes
for the six months ended June 30, 1999, compared to the same periods during
1998. Cash provided by operations, proceeds from asset sales of $9.1 million and
borrowings were used to purchase revenue equipment and other property and
equipment in the amount of $28.7 million, to purchase the non-ABC-owned shares
of Treadco for $23.7 million and to pay down outstanding debt during the six
months ended June 30, 1999. During the six months ended June 30, 1998, cash
provided by operations, proceeds from the sale of assets of $9.5 million and
borrowings were used to purchase operating assets of $39.7 million.
The Company is party to a five-year, $250 million credit agreement (the "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. The Credit Agreement provides for up
to $250 million of revolving credit loans (including letters of credit) and
extends through 2003.
At June 30, 1999, there were $129.6 million of Revolver Advances and
approximately $38.2 million of letters of credit outstanding. At June 30, 1999,
the Company had approximately $82.2 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, and require the Company to meet certain quarterly
financial ratio tests. As of June 30, 1999, the Company was in compliance with
the covenants.
The Company is party to an interest rate swap on a notional amount of $110
million. The purpose of the swap is 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 is fixed at
5.845% plus the Credit Agreement margin, which was .625% at June 30, 1999.
The Company borrowed $17.8 million under capital lease obligations for the six
months ended June 30, 1999. Funds from these borrowings were used to purchase
revenue equipment.
Treadco was a party to a revolving credit facility with Societe Generale (the
"Treadco Credit Agreement"), providing for borrowings up to the lesser of $20
million or the applicable borrowing base. The Treadco Credit Agreement was
terminated on June 25, 1999.
Management believes, based upon the Company's current levels of operations, that
the Company's cash, capital resources, borrowings available under the Credit
Agreement and cash flow from operations will be sufficient to finance current
and future operations and meet all present and future debt service requirements.
21
22
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
- -------------------------------------------------------------------------------
YEAR 2000
The Year 2000 issue derives from computer programs being written using two
digits rather than four to determine the applicable year. The Company recognizes
that the approach of the Year 2000 brings a unique challenge to the ability of
computer systems to recognize the date change from December 31, 1999, to January
1, 2000. As a result, the arrival of the Year 2000 could result in system
failures or miscalculations, causing disruption of operations, including, among
other things, a temporary inability to process transactions or to conduct other
normal business activity.
Management of the Company began addressing the impact of the Year 2000 on its
business operations in 1996. The Company concluded that the Year 2000 would
impact its internal information technology (IT) and non-information technology
(non-IT) systems. In addition, the Company believes that the Year 2000 will
impact its supplier chain environment and electronic data-interchange
environment. Beginning in 1996, and continuing since that time, the Company has
designated a group of personnel, who work primarily for the Company's computer
information services subsidiary, Data-Tronics Corp., to manage the conversion
process for its own internal systems, including purchased software, and to
monitor the conversion process for supplier chain environment systems and
effects, as well as for the Company's data-interchange environment.
Internal IT and Non-IT Systems
Year 2000 conversions within the Company's mainframe environment have been
completed. The mainframe environment, which is Year 2000 ready and operational,
includes the Company's computer hardware and operating system, its customized
application software, and its purchased software. The Year 2000 readiness of
computer mainframe hardware, operating systems, and system utilities has been
verified by vendors and tested by Data-Tronics Corp. The Company's customized
application software required renovation and regression testing and the revised
Year 2000 ready software was installed and operational by the end of 1998.
Purchased software has been upgraded to a vendor defined Year 2000 ready
version, or replaced by another vendors' Year 2000 ready version. The carrying
value of software systems that were replaced for Year 2000 compliance is
nominal.
The Year 2000 readiness upgrades and testing of the numerous PC servers is
complete for all PC servers significant to the Company's business. Server
hardware has been tested and is Year 2000 ready. All operating systems have been
converted and upgraded with Year 2000 ready upgrades. From time to time, vendors
release new Year 2000 upgrades. The Company will continually monitor various
vendor resources for Year 2000-related compliance and install new upgrade
packages as necessary.
The Company's desktop PC hardware, operating systems, and applications have been
tested for Year 2000 readiness. All desktop PC environments that are significant
to the Company's business have been upgraded and are Year 2000 ready.
The Company's embedded systems are those that are automated with embedded
computerized microprocessor chips. The Company's evaluation of embedded systems
has revealed that all affected systems are Year 2000 ready.
The Company has completed Year 2000 conversions of its electronic
data-interchange software.
22
23
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
- -------------------------------------------------------------------------------
External IT and Non-IT Systems
The Company has completed the process of identifying critical exposures arising
from the Company's suppliers. The Company's list of critical suppliers includes
financial institutions, telecommunications providers, utility companies, and
insurance providers, as well as basic suppliers critical to the operations of
the Company's subsidiaries and to the Company. The Company has sent and is
continuing to send questionnaires to suppliers considered to be significant to
operations to determine their status with respect to Year 2000 issues. The
Company continually updates its list of critical exposures.
The Company does not have any single customer that would be material to the
Company as a whole. However, the Company has some customers who, in the
aggregate, are significant to the Company's operations and financial results.
Year 2000 Costs
The Company is using existing personnel who work primarily for Data-Tronics
Corp., to perform Year 2000 conversions and evaluations of third-party systems.
Since the beginning of the process, the Company estimates its expenditures at
approximately $1.4 million, including labor costs and costs that relate to
equipment and software purchases. Since 1996, Year 2000 costs have been absorbed
in the Company's normal operating expenses, which are funded with the Company's
internally generated funds or its revolving credit facility. The Company's cash
flows have not been adversely impacted to a material degree by Year 2000 costs.
Costs incurred through the current date for the Year 2000 conversion represent
less than 7% of the Company's budgeted information services costs for 1999. It
is management's conclusion that there have been no significant projects deferred
as a result of Year 2000 efforts.
The Company estimates it will spend an additional $0.4 million in Year 2000
related costs. The Company expects to continue to expend these costs in normal
operations and to fund them with internally generated funds or its revolving
credit facility.
Contingency Planning
Management of the Company has assessed its most reasonably likely worst case
scenario using currently available information regarding the status of the
internal and external IT systems and non-IT systems. As described above, the
Company has completed Year 2000 conversions within the Company's mainframe
environment, certain purchased software and its critical PC server and desktop
environments. The primary risk the Company faces is with third-party suppliers
and vendors not becoming Year 2000 compliant. The Company is still in the
process of receiving and in some cases sending follow-up questionnaires to
critical suppliers of its subsidiaries. The Company mailed more than 10,000 Year
2000 readiness questionnaires in order to assess Year 2000 readiness of vendors,
suppliers and other third parties. To date, the Company has received the
following response rates with respect to its questionnaires: 65.3% for fuel
vendors, 82.8% for communications suppliers, 70.1% for utility suppliers and
54.6% of its other suppliers. Substantially all responses received have
indicated that Year 2000 issues are being addressed and that the respondents
plan to achieve Year 2000 readiness. The Company continues to monitor and assess
questionnaires received and to follow up where considered necessary.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
- -------------------------------------------------------------------------------
The Company has a written contingency plan that outlines procedures to deal with
Year 2000 risks and uncertainties that do not rise to the level of a most
reasonably likely worst case scenario. The Company's contingency plan includes
plans to assess the need to increase fuel inventories in late 1999,
identification of alternate fuel suppliers, identification of substitute data
collection points for localized power shortages, adjustments to staffing as
required for changing business levels, dynamic adjustments to freight routes to
bypass temporarily bottlenecked distribution centers, and stockpiles of freight
forms and reference lists for manual workarounds. The Company's contingency plan
also includes additional staffing levels to test certain critical systems
immediately after the Year 2000 rollover on January 1, 2000. Management of the
Company intends to continually monitor and update its Year 2000 contingency plan
as appropriate.
Based on responses contained in the questionnaires and other available
information, the Company believes that fuel supply shortages, widespread
communications systems interruptions, widespread utility systems interruptions
and tire and rubber products shortages (which would most affect Treadco) are not
most reasonably likely occurrences. The Company believes the most reasonably
likely worst case scenario is that some smaller customers will experience data
processing system problems because of non Year 2000 compliant software or
hardware and that the flow of freight from these customers could be disrupted as
a result. Such an event would impact the Company to a limited degree, resulting
in lower revenue in the early part of Year 2000. The Company also believes that
there could be spot shortages of fuel as a result of the Year 2000 issue,
primarily as a result of stockpiling by fuel users. The result of stockpiling of
fuel and other supplies by companies attempting to prepare for Year 2000 could
result in short-term increases in the cost of such products to the Company.
Although the Company has fuel surcharge provisions in its freight contracts, it
is uncertain that the Company would be able to increase prices to its customers
to cover all the additional costs the Company would incur in such a scenario.
With respect to the Company's primary business of freight transportation, if
stockpiling of industrial and other supplies by businesses and by consumers of
consumer goods is widespread in the fourth quarter of 1999, such stockpiling
would most likely decrease freight volumes in the first quarter of Year 2000 as
stockpiles are used. The most likely result of this combination of factors is
that the Company will experience lower freight volumes and higher costs in the
first quarter of Year 2000 and that operating results will be adversely
impacted. Management does not presently believe that any individual factor
described or the combination of factors described will likely have a material
long-term impact on the Company, although there can be no assurance in this
regard.
If there are any major disruptions to the overall economy or business levels
resulting from Year 2000 issues, the Company could be materially adversely
impacted. The Company could also be the subject of litigation for computer
systems products failure such as, for example, equipment shutdown or failure to
properly date business records. The amount of potential liability, increased
costs or lost revenue from any Year 2000 issue cannot be predicted at this time.
Like virtually all other public and private companies, the Company and its
suppliers and customers are dependent on telecommunications services, banking
services, and utility services provided by a large number of entities. At this
time, the Company is not aware of any of these entities or of any significant
supplier that has disclosed that it will not be Year 2000 compliant by January
1, 2000. However, many of these entities are still engaged in the process of
attempting to become Year 2000 compliant. As described previously, the Company
has attempted to and continues to attempt to obtain written assurance of Year
2000 compliance from all entities which management considers critical to the
operations of the Company and its subsidiaries. However, it is likely that some
critical suppliers will not give written assurance as to
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
- -------------------------------------------------------------------------------
Year 2000 compliance because of concerns as to legal liability. Even where
written assurance is provided by critical suppliers and even if the Company has
a contingency plan in place to deal with possible non-compliance by other
critical suppliers, the Year 2000 conversion process will continue to create
risk to the Company which is outside the control of the Company. There can be no
assurance that a major Year 2000 disruption will not occur in a critical
supplier which would have an impact on the Company that could be material.
SEASONALITY
ABF and G.I. Trucking are affected by seasonal fluctuations, which affect
tonnage to be transported. Freight shipments, operating costs and earnings are
also affected adversely by inclement weather conditions. The third calendar
quarter of each year usually has the highest tonnage levels while the first
quarter has the lowest. Clipper Domestic's 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
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," "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 risk, 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; the accuracy of assessments and
estimates relating to Year 2000 computer issues; 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
SEC public filings.
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ITEM 2a - 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 floating 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 .625%). This instrument is
not recorded on the balance sheet of the Company. Details regarding the swap, as
of June 30, 1999 are as follows:
Notional Rate Rate Fair
Amount Maturity Paid Received Value (2)
------- -------- ---- -------- ---------
$110.0 million April 1, 2005 5.845% Plus Credit Agreement LIBOR rate (1) $2.0 million
Margin (currently .625%) Plus Credit Agreement
Margin (currently .625%)
(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 estimated amount the Company would have received
at June 30, 1999, to terminate the agreement.
OTHER MARKET RISKS
Since December 31, 1998, there have been no significant changes in the Company's
other market risks, as reported in the Company's Form 10-K Annual Report.
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PART II.
OTHER INFORMATION
ARKANSAS BEST CORPORATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is named as a defendant in legal
actions, the majority of which arise out of the normal course of its business.
The Company is not a party to any pending legal proceeding which the Company's
management believes to be material to the financial condition of the Company.
The Company maintains liability insurance in excess of self-retention levels of
certain risks arising out of the normal course of its business (see Note E 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 6, 1999.
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
William A. Marquard 16,278,320 216,257
Alan J. Zakon 16,331,151 163,426
The second proposal was to ratify the appointment of Ernst & Young LLP
as independent auditors for the fiscal year 1999. This proposal
received 16,417,868 votes for adoption, 59,990 against adoption, 16,719
abstentions and -0- broker non-votes.
ITEM 5. OTHER INFORMATION.
Effective April 16, 1999, the Company entered into a three-year, $13.2
million capital lease agreement with Mercedes-Benz Credit Corporation
for the purchase of 250 tractors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.2 Three-year, $13.2 million capital lease agreement with
Mercedes-Benz Credit Corporation effective April 16, 1999.
Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None.
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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 11, 1999 /s/ David E. Loeffler
-------------------------------------------------
David E. Loeffler
Vice President-Treasurer, Chief Financial Officer
and Principal Accounting Officer
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INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
10.2 Three-year, $13.2 million capital lease agreement
with Mercedes-Benz Credit Corporation effective
April 16, 1999.
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule