<PAGE> 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 September 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)
<TABLE>
<S> <C> <C>
Delaware 6711 71-0673405
- ------------------------------- ---------------------------- -------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
3801 Old Greenwood Road
Fort Smith, Arkansas 72903
(501) 785-6000
-------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of the registrant's principal executive offices)
Not Applicable
- --------------------------------------------------------------------------------
(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 October 30 , 1998
- --------------------------------- ----------------------------------
Common Stock, $.01 par value 19,610,213 shares
<PAGE> 2
ARKANSAS BEST CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30, 1998 and December 31, 1997 .............................................. 3
Consolidated Statements of Operations --
For the Three and Nine Months Ended September 30, 1998 and 1997 ........................ 5
Consolidated Statements of Shareholders' Equity
For the Nine Months Ended September 30, 1998 .......................................... 7
Condensed Consolidated Statements of Cash Flows --
For the Nine Months Ended September 30, 1998 and 1997 .................................. 8
Notes to Consolidated Financial Statements - September 30, 1998 .......................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 27
Item 2. Changes in Securities .................................................................... 27
Item 3. Defaults Upon Senior Securities .......................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 27
Item 5. Other Information ........................................................................ 27
Item 6. Exhibits and Reports on Form 8-K ......................................................... 28
SIGNATURES ..................................................................................... 29
</TABLE>
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------- ---------------
($ THOUSANDS)
(UNAUDITED) NOTE
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................... $ 4,405 $ 7,203
Trade receivables, less allowances
(1998 -- $7,603,000; 1997 -- $7,603,000) ..................... 187,600 175,693
Inventories .................................................. 31,509 30,685
Prepaid expenses ............................................. 14,961 14,456
Deferred Income taxes ........................................ 5,597 5,584
Other ........................................................ 5,406 3,275
--------------- ---------------
TOTAL CURRENT ASSETS ......................................... 249,478 236,896
PROPERTY, PLANT AND EQUIPMENT
Land and structures .......................................... 214,935 212,847
Revenue equipment ............................................ 253,150 207,471
Manufacturing equipment ...................................... 17,334 18,891
Service, office and other equipment .......................... 72,838 64,598
Leasehold improvements ....................................... 7,578 7,281
--------------- ---------------
565,835 511,088
Less allowances for depreciation and amortization ............... (247,046) (225,733)
--------------- ---------------
318,789 285,355
OTHER ASSETS .................................................... 35,340 41,999
ASSETS HELD FOR SALE ............................................ 2,482 3,342
GOODWILL, less amortization (1998 -- $35,259,000
1997 -- $31,867,000) ...................................... 126,166 130,747
--------------- ---------------
$ 732,255 $ 698,339
=============== ===============
</TABLE>
3
<PAGE> 4
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS - Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------- ---------------
($ THOUSANDS)
(UNAUDITED) NOTE
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft .................................................... $ 9,875 $ 13,801
Bank drafts payable .................................................. 1,528 1,172
Trade accounts payable ............................................... 80,626 77,403
Accrued expenses ..................................................... 155,514 157,622
Federal and state income taxes ....................................... 1,200 1,222
Current portion of long-term debt .................................... 17,406 16,484
--------------- ---------------
TOTAL CURRENT LIABILITIES ......................................... 266,149 267,704
LONG-TERM DEBT, less current portion ................................. 224,956 202,604
OTHER LIABILITIES .................................................... 19,625 21,921
DEFERRED INCOME TAXES ................................................ 25,642 24,448
MINORITY INTEREST IN TREADCO, INC .................................... 30,726 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) ....................................... (28,171) (44,059)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY ..................................... 165,157 149,062
COMMITMENTS AND CONTINGENCIES
--------------- ---------------
$ 732,255 $ 698,339
--------------- ---------------
</TABLE>
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
<PAGE> 5
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
------------------------------------------------------------------
($ thousands, except per share data)
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS:
OPERATING REVENUES
LTL motor carrier operations ....................... $ 335,173 $ 328,767 $ 969,458 $ 936,791
Truckload motor carrier operations ................. -- -- -- 39,366
Intermodal operations .............................. 41,089 47,585 121,482 141,003
Tire operations .................................... 51,521 46,169 135,044 119,277
Service and other .................................. 3,742 2,768 10,306 7,145
------------ ------------ ------------ ------------
431,525 425,289 1,236,290 1,243,582
------------ ------------ ------------ ------------
OPERATING EXPENSES AND COSTS
LTL motor carrier operations ....................... 315,044 309,033 919,093 888,298
Truckload motor carrier operations ................. -- -- -- 37,304
Intermodal operations .............................. 42,812 46,420 123,648 138,869
Tire operations .................................... 50,315 45,423 133,242 120,862
Service and other .................................. 3,899 2,766 10,940 7,258
------------ ------------ ------------ ------------
412,070 403,642 1,186,923 1,192,591
------------ ------------ ------------ ------------
OPERATING INCOME ...................................... 19,455 21,647 49,367 50,991
OTHER INCOME (EXPENSE)
Net gains (losses) on sales of property
and non-revenue equipment ........................ (191) (2,333) 1,156 (4,147)
Gain on sale of Cardinal Freight Carriers .......... -- 8,985 -- 8,985
Interest expense ................................... (4,627) (5,260) (13,636) (19,100)
Minority interest in Treadco, Inc. ................. (341) (228) (471) 826
Other, net ......................................... (579) (2,155) (4,023) (5,255)
------------ ------------ ------------ ------------
(5,738) (991) (16,974) (18,691)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .............................. 13,717 20,656 32,393 32,300
FEDERAL AND STATE INCOME TAXES ........................ 5,624 11,398 13,281 16,185
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS ..................... 8,093 9,258 19,112 16,115
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations (net of tax
benefits of $208 and $1,476 for the three and
nine months ended September 30,1997) .............. -- (363) -- (2,529)
Loss on disposal of discontinued operations
(net of tax benefits of $605 for the three and
nine months ended September 30, 1997) .............. -- (3,093) -- (3,093)
------------ ------------ ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS ..................... -- (3,456) -- (5,622)
------------ ------------ ------------ ------------
NET INCOME ............................................ 8,093 5,802 19,112 10,493
Preferred stock dividends .......................... 1,075 1,075 3,224 3,224
------------ ------------ ------------ ------------
NET INCOME FOR COMMON SHAREHOLDERS .................... $ 7,018 $ 4,727 $ 15,888 $ 7,269
============ ============ ============ ============
</TABLE>
5
<PAGE> 6
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
($ thousands, except per share data)
<S> <C> <C> <C> <C>
EARNINGS (LOSS) PER COMMON SHARE
BASIC:
Continuing operations (1) ........................ $ 0.36 $ 0.42 $ 0.81 $ 0.66
Discontinued operations .......................... -- (0.18) -- (0.29)
--------------- --------------- --------------- ---------------
NET INCOME (1) ................................... $ 0.36 $ 0.24 $ 0.81 $ 0.37
--------------- --------------- --------------- ---------------
AVERAGE COMMON SHARES
OUTSTANDING (BASIC) .............................. 19,610,213 19,556,633 19,608,546 19,521,860
=============== =============== =============== ===============
Diluted:
Continuing operations (2) ........................ $ 0.34 $ 0.39 $ 0.80 $ 0.65
Discontinued operations .......................... -- (0.15) -- (0.28)
--------------- --------------- --------------- ---------------
NET INCOME (2) .................................. $ 0.34 $ 0.24 $ 0.80 $ 0.37
--------------- --------------- --------------- ---------------
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED) ............................ 23,606,484 23,845,064 19,980,164 19,708,418
=============== =============== =============== ===============
CASH DIVIDENDS PAID PER COMMON SHARE ............. $ 0.00 $ 0.00 $ 0.00 $ 0.00
=============== =============== =============== ===============
</TABLE>
(1) Gives consideration to preferred stock dividends of $1.1 million per
quarter.
(2) For the nine months ended September 30, 1998 and 1997, consideration is
given to preferred dividends of $3.2 million. For the three months ended
September 30, 1998 and 1997, conversion of preferred shares into common is
assumed. Conversion of preferred shares would be anti-dilutive for all
other periods presented.
6
<PAGE> 7
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE
STOCK STOCK CAPITAL (DEFICIT) INCOME (NOTE)
- ----------------------------------------------------------------------------------------------------------------------------------
($ thousands)
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1998 ................. $ 15 $ 196 $ 192,910 $ (43,788) $ (271)
Net income .................................. -- -- -- 19,112 --
Issuance of common stock .................... -- -- 89 -- --
Dividends on preferred stock ................ -- -- -- (3,224) --
Tax effect of stock options exercised ....... -- -- 118 -- --
------------ ------------ ------------ ------------ ------------
BALANCES AT SEPTEMBER 30, 1998 .............. $ 15 $ 196 $ 193,117 $ (27,900) $ (271)
============ ============ ============ ============ ============
</TABLE>
NOTE: Included in retained earnings in the accompanying consolidated balance
sheet.
7
<PAGE> 8
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
------------------------------
($ thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities .................... $ 40,555 $ 60,946
INVESTING ACTIVITIES
Purchases of property, plant and equipment
less capitalized leases .................................... (48,472) (9,448)
Purchase of Treadco stock .................................... (1,132) --
Proceeds from asset sales .................................... 14,341 31,781
Net proceeds from the sale of Cardinal Freight Carriers, Inc. -- 36,467
Net proceeds form the sale of The Complete Logistics Company . -- 2,403
------------ ------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES ................ (35,263) 61,203
FINANCING ACTIVITIES
Deferred financing costs and expenses ........................ (731) (1,164)
Borrowings under revolving credit facilities ................. 424,925 328,185
Payments under revolving credit facilities ................... (394,625) (392,985)
Payments on long-term debt ................................... (17,598) (12,525)
Payments under term loan facilities .......................... (13,000) (42,448)
Dividends paid ............................................... (3,224) (3,224)
Other ........................................................ (3,837) 206
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES ........................... (8,090) (123,955)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ....................... (2,798) (1,806)
Cash and cash equivalents at beginning of period ............. 7,203 1,806
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 4,405 $ --
============ ============
</TABLE>
8
<PAGE> 9
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 which began on 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 nine months ended
September 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 nine months
ended September 30, 1998, and the federal statutory rate resulted from state
income taxes, amortization of nondeductible goodwill, minority interest, and
other nondeductible expenses. In addition, for the third quarter and the
nine-month period of 1997, income taxes exceeded the expected amount by an
additional $3.5 million, which is attributable to a lower tax basis than
accounting basis for goodwill related to Cardinal Freight.
NOTE C - DISCONTINUED OPERATIONS
As of June 30, 1997 and prior periods since 1995, the Company was engaged in
providing logistics services, including warehousing and distribution, through
two wholly owned subsidiaries, The Complete Logistics Company ("CLC") and
Integrated Distribution, Inc. ("IDI"). CLC was sold on August 8, 1997. In
September 1997, the Company completed a formal plan to exit the logistics
segment by disposing of IDI. The Company closed the sale of IDI on October 31,
1997.
9
<PAGE> 10
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
- --------------------------------------------------------------------------------
Results of operations of the logistics segment have been reported as
discontinued operations as of September 30, 1997 and the statements of
operations for all prior periods have been restated to remove revenue and
expenses of the logistics segment. Results of the logistics operations segment
included in discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
-----------------------------------------------------------------------------
($ thousands)
<S> <C> <C> <C> <C>
Revenues ............................... $ -- $ 5,587 $ -- $ 29,812
Operating loss ......................... -- (476) -- (3,516)
Pre-tax loss ........................... -- (571) -- (4,005)
</TABLE>
NOTE D - INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------
($ thousands)
<S> <C> <C>
Finished goods ....................................................... $ 23,505 $ 22,392
Materials ............................................................ 5,381 4,934
Repair parts, supplies and other ..................................... 2,623 3,359
------------ ------------
$ 31,509 $ 30,685
============ ============
</TABLE>
10
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)- Continued
- --------------------------------------------------------------------------------
NOTE E - OPERATING EXPENSES AND COSTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
($ THOUSANDS)
<S> <C> <C> <C> <C>
LTL Motor Carrier Operations:
Salaries and wages ................................. $ 215,456 $ 213,122 $ 633,967 $ 615,339
Supplies and expenses .............................. 30,262 30,714 89,287 90,870
Operating taxes and licenses ....................... 9,707 10,781 30,283 31,767
Insurance .......................................... 5,838 6,023 17,546 18,847
Communications and utilities ....................... 7,397 7,385 21,537 21,075
Depreciation and amortization ...................... 8,319 7,632 23,983 25,098
Rents and purchased transportation ................. 35,896 31,518 97,081 81,252
Other .............................................. 2,637 2,350 7,558 6,147
(Gain) on sale of revenue equipment ................ (468) (492) (2,149) (2,097)
----------- ----------- ----------- -----------
315,044 309,033 919,093 888,298
Truckload Motor Carrier Operations:
Salaries and wages ................................. -- -- -- 14,310
Supplies and expenses .............................. -- -- -- 7,257
Operating taxes and licenses ....................... -- -- -- 3,543
Insurance .......................................... -- -- -- 1,677
Communications and utilities ....................... -- -- -- 589
Depreciation and amortization ...................... -- -- -- 1,910
Rents and purchased transportation ................. -- -- -- 7,741
Other .............................................. -- -- -- 275
Loss on sale of revenue equipment .................. -- -- -- 2
----------- ----------- ----------- -----------
-- -- -- 37,304
Intermodal Operations:
Cost of services ................................... 35,901 39,421 103,195 117,894
Selling, administrative and general ................ 6,911 6,999 20,517 20,975
(Gain) on sale of revenue equipment ................ -- -- (64) --
----------- ----------- ----------- -----------
42,812 46,420 123,648 138,869
Tire Operations:
Cost of services ................................... 36,620 33,383 95,813 87,908
Selling, administrative and general ................ 13,695 12,040 37,429 32,954
----------- ----------- ----------- -----------
50,315 45,423 133,242 120,862
Service and other: .................................... 3,899 2,766 10,940 7,258
----------- ----------- ----------- -----------
$ 412,070 $ 403,642 $ 1,186,923 $ 1,192,591
=========== =========== =========== ===========
</TABLE>
11
<PAGE> 12
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)- 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 94 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 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 September 30, 1998, the Company has accrued approximately $3.6 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 .625% as of September 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
<PAGE> 13
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)- 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, and 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 December 31, 1998. 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.
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
13
<PAGE> 14
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
- --------------------------------------------------------------------------------
Company in 2000. The Company is evaluating the impact 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 September 30, 1997 and 1998.
14
<PAGE> 15
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
- --------------------------------------------------------------------------------
NOTE J - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic earnings per share --
Net income ................................. $ 8,093 $ 5,802 $ 19,112 $ 10,493
Preferred stock dividends .................. (1,075) (1,075) (3,224) (3,224)
------------ ------------ ------------ ------------
Numerator for basic earnings per share --
Net income available to
common shareholders ........................ 7,018 4,727 15,888 7,269
Effect of dilutive securities (1) ............. 1,075 1,075 -- --
------------ ------------ ------------ ------------
Numerator for diluted earnings per share --
Net income available
to common shareholders ..................... $ 8,093 $ 5,802 $ 15,888 $ 7,269
============ ============ ============ ============
DENOMINATOR:
Denominator for basic earnings
per share -- weighted-average shares ....... 19,610,213 19,556,633 19,608,546 19,521,860
Effect of dilutive securities:
Conversion of preferred stock .............. 3,796,852 3,796,852 -- --
Employee stock options ..................... 199,419 491,579 371,618 186,558
------------ ------------ ------------ ------------
Denominator for diluted earnings
per share -- adjusted weighted-average
shares and assumed conversion .............. 23,606,484 23,845,064 19,980,164 19,708,418
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE
BASIC:
Continuing operations ......................... $ 0.36 $ 0.42 $ 0.81 $ 0.66
Discontinued operations ....................... -- (0.18) -- (0.29)
------------ ------------ ------------ ------------
NET INCOME PER SHARE ............................. $ 0.36 $ 0.24 $ 0.81 $ 0.37
============ ============ ============ ============
AVERAGE COMMON SHARES
OUTSTANDING (BASIC): ............................. 19,610,213 19,556,633 19,608,546 19,521,860
============ ============ ============ ============
DILUTED:
Continuing operations ......................... $ 0.34 $ 0.39 $ 0.80 $ 0.65
Discontinued operations ....................... -- (0.15) -- (0.28)
------------ ------------ ------------ ------------
NET INCOME PER SHARE ............................. $ 0.34 $ 0.24 $ 0.80 $ 0.37
============ ============ ============ ============
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED): ........................... 23,606,484 23,845,064 19,980,164 19,708,418
============ ============ ============ ============
CASH DIVIDENDS PAID
PER COMMON SHARE ................................. $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
(1) For the three months ended September 30, 1998 and 1997, conversion of
preferred shares into common is assumed. Conversion of preferred shares would be
anti-dilutive for all other periods presented.
15
<PAGE> 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.
During the third quarter of 1998, the Company increased its percentage ownership
of Treadco, Inc. approximately 3% to 49%, by purchasing 177,500 shares for
approximately $1.1 million. 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
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OPERATING EXPENSES AND COSTS SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABF FREIGHT SYSTEM, INC ..........................
Salaries and wages ............................... 65.8% 66.1% 67.2% 67.0%
Supplies and expenses ............................ 10.4 10.5 10.7 10.9
Operating taxes and licenses ..................... 2.9 3.4 3.2 3.4
Insurance ........................................ 1.7 1.6 1.7 1.8
Communications and utilities ..................... 1.2 1.2 1.2 1.2
Depreciation and amortization .................... 2.2 1.9 2.1 2.2
Rents and purchased transportation ............... 8.9 8.3 8.2 7.4
Other ............................................ 0.6 0.6 0.4 0.6
(Gain) on sale of revenue equipment .............. (0.2) (0.2) (0.2) (0.2)
------------ ------------ ------------ ------------
93.5% 93.4% 94.5% 94.3%
G.I. TRUCKING COMPANY
Salaries and wages ............................... 47.5% 46.1% 46.9% 47.8%
Supplies and expenses ............................ 8.3 9.1 8.6 9.4
Operating taxes and licenses ..................... 1.8 2.0 2.0 2.0
Insurance ........................................ 1.9 3.8 3.1 3.9
Communications and utilities ..................... 1.4 1.3 1.3 1.4
Depreciation and amortization .................... 2.6 2.9 2.5 3.5
Rents and purchased transportation ............... 32.0 29.5 31.4 28.6
Other ............................................ 2.1 2.2 2.4 2.5
(Gain) on sale of revenue equipment .............. 0.0 0.0 (0.1) 0.0
------------ ------------ ------------ ------------
97.6% 96.9% 98.1% 99.1%
CARDINAL FREIGHT CARRIERS
Salaries and wages ............................... 0.0% 0.0% 0.0% 36.3%
Supplies and expenses ............................ 0.0 0.0 0.0 18.4
Operating taxes and licenses ..................... 0.0 0.0 0.0 9.0
Insurance ........................................ 0.0 0.0 0.0 4.3
Communications and utilities ..................... 0.0 0.0 0.0 1.5
Depreciation and amortization .................... 0.0 0.0 0.0 4.8
Rents and purchased transportation ............... 0.0 0.0 0.0 19.7
Other ............................................ 0.0 0.0 0.0 0.7
------------ ------------ ------------ ------------
0.0% 0.0% 0.0% 94.7%
CLIPPER DOMESTIC
Cost of services ................................. 88.5% 83.5% 87.4% 85.4%
Selling, administrative & general ................ 12.7 11.2 13.0 11.1
(Gain) on sale of revenue equipment .............. 0.0 0.0 (0.1) 0.0
------------ ------------ ------------ ------------
101.2% 94.7% 100.3% 96.5%
CLIPPER INTERNATIONAL
Cost of services ................................. 84.9% 82.8% 79.8% 80.5%
Selling, administrative & general ................ 26.4 22.8 25.2 23.4
(Gain) on sale of revenue equipment .............. 0.0 0.0 0.0 0.0
------------ ------------ ------------ ------------
111.3% 105.6% 105.0% 103.9%
TREADCO, INC .....................................
Cost of sales .................................... 71.1% 72.4% 70.9% 73.8%
Selling, administrative & general ................ 26.2 25.6 27.4 27.2
------------ ------------ ------------ ------------
97.3% 98.0% 98.3% 101.0%
</TABLE>
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997
Consolidated revenues from continuing operations of the Company for the three
months ended September 30, 1998 increased 1.5% from the same period in 1997,
primarily due to increases in tire operations revenues and LTL operations
revenues offset by decreases in intermodal revenues. For the nine months ended
September 30, 1998, revenues from continuing operations decreased .6%, when
compared to the same period in 1997, due to decreases in intermodal revenues and
the sale of Cardinal Freight Carriers on July 15, 1997, which had 1997 revenues
of $39.4 million. Increases in tire operations revenues and LTL revenues offset
a portion of the decline. The Company's operating income from continuing
operations for the third quarter 1998 declined 10.1%, or $2.2 million. The
decline was caused by intermodal operations which had a decline of $2.8 million.
The Company's operating income from continuing operations for the nine months
ended September 30, 1998, decreased 3.2% when compared to the same period in
1997. This decrease relates to declines due to the sale of Cardinal, which had
$2.0 million of operating income in 1997, and declines in intermodal operating
income offset by significantly improved operating results in tire operations and
LTL operations from the same periods in 1997. The Company's income from
continuing operations for the third quarter of 1998 decreased 12.6% when
compared to the same period in 1997, primarily because of the gain on the sale
of Cardinal reported during the third quarter 1997. The Company's income from
continuing operations for the nine months ended September 30, 1998, increased
18.6% compared to the nine months ended September 30, 1997. This improvement
results primarily from a significant decrease in interest expense for the nine
months ended September 30, 1998, as compared to the same period in 1997, and
gains of $1.2 million on the sale of property in 1998 compared to losses of $4.1
million in 1997, offset in part by the gain on the sale of Cardinal in 1997.
The Company had losses from discontinued operations during the three and nine
months ended September 30, 1997. See Note C - Discontinued Operations.
Overall, the Company had improvements in net income of 39.5% and 82.2%,
respectively, for the three and nine months ended September 30, 1998, compared
to the prior year.
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, 1998 and 1997, ABF implemented overall rate increases
of 5.3% and 5.5% respectively. Revenues for the three and nine months ended
September 30, 1998, were $303.0 million and $877.1 million, respectively,
compared to revenues for the three and nine months ended September 30, 1997, of
$302.3 million and $863.3 million. ABF generated operating income for the three
and nine months ended September 30, 1998, of $19.5 million and $48.0 million
compared to operating income for the three and nine months ended September 30,
1997, of $20.0 million and $48.9 million.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
ABF accounted for 90.4% of LTL revenues for both the three and nine months ended
September 30, 1998. ABF's revenues increased slightly, .2% and 1.6% for the
three and nine months ended September 30, 1998, respectively, compared to the
same periods in 1997. ABF's LTL revenue per hundredweight increased 2.7% and
3.8%, respectively, to $18.24 and $18.24 for the three and nine months ended
September 30, 1998, when compared to the three and nine months ended September
30, 1997. Revenue per hundredweight increases reflect a continuing favorable
pricing environment. ABF's tonnage declined slightly, 2.1% and 1.8%, for the
three and nine months ended September 30, 1998, respectively, compared to the
same periods in 1997. Tonnage declines for the three months ended September 30,
1998, reflect additional business handled during the UPS strike in the third
quarter of 1997. Tonnage declines for the nine months ended September 30, 1998,
when compared to the same period in 1997, reflect some freight diversions caused
by customer concerns regarding labor contract negotiations, as well as UPS
freight handled in the 1997 third quarter.
The IBT voted in favor of a new labor contract on April 9, 1998. The contract is
for a five-year term and results in an average annual wage and benefit increases
of approximately 2.3% including a lump-sum payment of $750 for the first
contract year for all active employees who are IBT members. 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 93.5% and 94.5% for the three
and nine months ended September 30, 1998, respectively, compared to 93.4% and
94.3% for the same periods in 1997.
Salaries and wages expense decreased .3% as a percent of revenue for the three
months ended September 30, 1998, when compared to the same period in 1997.
Salaries and wages increased due to a $750 lump-sum payment made to the
non-contractual employees of ABF, which is being amortized monthly over the
contract period. This increase is offset by lower costs for labor and paid time
off for vacations and holidays, due, in part, to an increase in utilization of
rail for freight transportation. Rail usage increased to 20.1% and 16.4% of
total miles, respectively, during the three months and nine months ended
September 30, 1998, as compared to 15.4% and 12.3% for the same periods in 1997.
Decreases in operating taxes and licenses of .5% as a percent of revenue for the
three months ended September 30, 1998, primarily reflect a decrease in fuel
taxes. Fuel tax expense has declined because of higher utilization of rail, as
well as reduced consumption of fuel due to better average tractor miles per
gallon.
Depreciation and amortization increased .3% as a percent of revenue for the
third quarter 1998 as compared to the third quarter 1997. A part of ABF's road
tractor fleet was under operating leases in the third quarter of 1997. Certain
of these leased tractors were replaced with tractors acquired under capital
leases in the second quarter of 1998.
As described above, ABF's rail usage increased in the three and nine months
ended September 30, 1998, compared to the same periods in 1997. Rents and
purchased transportation expenses increased .6% and .8% as a percent of revenue
for the three and nine months ended September 30, 1998, over the same periods in
1997, primarily due to the increase in rail usage. This increase was offset, in
part, by declines in operating lease expense reflecting ABF's reduction in
leased road and city tractors.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
G.I. Trucking. Revenues increased 21.4% and 25.3%, respectively, to $32.3
million and $92.7 million, for the three and nine months ended September 30,
1998, compared to $26.6 million and $74.0 million, respectively, for the three
and nine months ended September 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 21.1% and 23.3%, respectively, for the three and
nine months ended September 30, 1998, from the same periods in 1997.
G.I.'s operating ratio increased to 97.6% for the three months ended September
30, 1998, compared to 96.9% for the third quarter 1997. For the nine months
ended September 30, 1998, G.I.'s operating ratio improved to 98.1%, compared to
99.1% for the nine months ended September 30, 1997.
Salaries and wages expense increased 1.4% as a percent of revenue for the three
months ended September 30, 1998, when compared to the same period in 1997. This
increase is due primarily to increases in labor costs related to the opening of
five new terminals and poor experience with health claims offset, in part, by
lower pension costs. For the nine months ended September 30, 1998, salaries and
wages expense declined .9% as a percent of revenue, when compared to the same
period in 1997. This decline reflects 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.
Supplies and expenses decreased .8% as a percent of revenue for both the three
and nine months ended September 30, 1998, when compared to the same periods in
1997. This decrease relates to lower repair and maintenance costs on revenue
equipment. Equipment purchased in 1998 to replace some older equipment accounted
for a portion of the lower repair and maintenance costs.
Insurance expense declined 1.9% and .8% as a percent of revenue for the three
and nine months ended September 30, 1998, when compared to the same periods in
1997. This improvement is due primarily to a decrease in liability insurance
rates and better claims experience for workers' compensation claims.
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 2.5% and 2.8% as a percent
of revenue for the three and nine months ended September 30, 1998, compared to
the same periods in 1997. Depreciation and amortization decreased .3% and 1% as
a percent of revenue for the three and nine months ended September 30, 1998,
compared to the same periods in 1997. This change is attributable to the fact
that G.I. Trucking's growth in revenues, through the nine-month period ended
September 30, 1998, utilizes higher levels of purchased transportation,
resulting in a decrease in depreciation expense. This decrease is offset, in
part, by added depreciation related to current year capital expenditures. As of
September 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
$31.6 million and $93.7 million for the three and nine months ended September
30, 1998, respectively, representing decreases of 14.1% and 13.0%, respectively,
from the three and nine months ended September 30, 1997, which were $36.8
million and $107.6 million, respectively.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
Since the fourth quarter of 1997, Clipper Group's domestic operations have been
adversely affected by the service problems with the U.S. rail system. This trend
continued in the third quarter of 1998, causing decreases in the number of LTL
shipments by 6.7% and 5.4% and intermodal shipments by 47.6% and 45.5% for the
three and nine months ended September 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 at least 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 101.2% and 100.3% for the three
and nine months ended September 30, 1998, compared to 94.7% and 96.5% for the
three and nine months ended September 30, 1997. This increase reflects an
increase in cost of services of 5% and 2% as a percent of revenue for the three
and nine months ended September 30, 1998, as compared to the same periods in
1997. Clipper Domestic has experienced an increase in cost of services from
utilizing higher cost modes of transportation (primarily trucks) because of rail
service problems as well as increases in rail service costs. Clipper Domestic's
operating ratio also reflects increased selling, administrative and general
costs of 1.4% and 1.9% as a percent of revenue for the three and nine months
ended September 30, 1998 as compared to the same periods in 1997. Selling,
administrative and general costs are primarily fixed in nature and increase as a
percentage of revenue with a decline in revenue levels.
Clipper International. Clipper International's revenue declined 12.2% and 13.6%
to $11.1 million and $33.3 million, respectively, for the three and nine months
ended September 30, 1998, compared to $12.7 million and $38.6 million,
respectively, for the three and nine months ended September 30, 1997. Declines
in revenues result from a decrease in exports to Asia and a focus on account
profitability, as well as adverse pricing trends, especially in South America.
Clipper International reported operating ratios of 111.3% and 105.0% for the
three and nine months ended September 30, 1998, compared to 105.6% and 103.9%
for the three and nine months ended September 30, 1997. This increase results
primarily from an increase in selling, administrative and general costs of 3.4%
and 1.7% as a percent of revenue for the three and nine months ended September
30, 1998 as compared to the same periods in 1997. The selling, administrative
and general category of expense includes fixed costs, which increase as a
percent of revenue, when revenue declines. Cost of services for the quarter
ended September 30, 1998 increased 2.1% as a percent of revenue when compared to
third quarter 1997. The increase is due to a decline in revenue, without a
corresponding decline in the costs of inland transportation. Clipper
International's cost of sales for the nine months ended September 30, 1998,
improved when compared to the same period in 1997. This improvement is
attributable to Clipper International's focus on account profitability, and
lower year-to-date costs of transportation in some ocean lanes.
TIRE OPERATIONS
Treadco, Inc. Revenues for the three and nine months ended September 30, 1998
increased 11.5% and 12.9%, respectively, to $52.1 million and $136.7 million
from $46.8 million and $121.1 million, respectively, for the three and nine
months ended September 30, 1997. For the three and nine months ended September
30, 1998, "same store" sales increased 9.3% and 11.5% and "new store" sales
increased 2.2% and 1.4% 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 nine months
ended September 30, 1998 increased 6.4% and 9.4%, respectively, compared to the
same periods in 1997. Retread revenue increases resulted primarily from a 5.8%
increase in units sold and a
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
slight increase in the sales price per retread for the three months ended
September 30, 1998, and an 8.4% increase in units sold for the nine months ended
September 30, 1998, compared to the same period in 1997. Revenues from new tire
sales increased 13.1% and 13.2%, respectively, for the three and nine months
ended September 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 15.7% and 15.2%, respectively, for the three and nine months ended
September 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 and an increase
in national account sales. Service revenues for the three and nine months ended
September 30, 1998, were up 24.1% and 26.6%, respectively, compared to the same
periods in 1997. The increase in service revenues results from Treadco's
continued emphasis on service operations.
Treadco's operating ratio improved to 97.3% and 98.3%, respectively, for the
three and nine months ended September 30, 1998, from 98.0% and 101.0%,
respectively, for the three and nine months ended September 30, 1997. The
decrease in cost of sales of 1.3% and 2.9% of revenue for the three and nine
months ended September 30, 1998, resulted primarily from lower new tire costs
and improved retread casing costs and controls. The increase in selling,
administrative and general expense of .6% and .1% percent of revenue for the
three and nine months ended September 30, 1998, resulted from Treadco's
implementation of a gross profit-based commission plan for its salesmen
effective January 1, 1998.
INTEREST
Interest expense was $4.6 million and $13.6 million for three months and nine
months ended September 30, 1998, compared to $5.2 million and $19.1 million for
the three months and nine months ended September 30, 1997. Interest expense
declined primarily due to a reduction of outstanding debt and lower interest
rates, compared to the same periods in 1997.
INCOME TAXES
The differences between the effective tax rate for the three and nine months
ended September 30, 1998, and the federal statutory rate resulted from state
income taxes, amortization of nondeductible goodwill, minority interest, and
other nondeductible expenses. In addition, for the third quarter and the
nine-month period of 1997, income taxes exceeded the expected amount by an
additional $3.5 million, which is attributable to a lower tax basis than
accounting basis for goodwill related to Cardinal Freight.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended September
30, 1998 was $40.6 million compared to net cash provided by operations of $60.9
million for the nine months ended September 30, 1997. Cash provided by net
income plus depreciation and amortization for the nine months ended September
30, 1998, was $54.7 million compared to $52.7 million for the same period in
1997. However, cash provided by operating activities for the nine months ended
September 30, 1998, decreased because 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 $14.3 million and borrowings were used to purchase revenue equipment
and other assets in the amount of $49.6 million during the nine months ended
September 30, 1998. During the nine months ended September 30, 1997, cash
provided by the sale of assets was $32.0 million. In addition, the sale of
Cardinal Freight and Complete Logistics provided cash of $38.9 million, and
asset purchases were $9.5 million.
22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
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 September 30, 1998, there were $136.0 million of Revolver Advances and
approximately $39.2 million of letters of credit outstanding. At September 30,
1998, the Company had approximately $74.8 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 0.625% at September 30, 1998.
Since January 1, 1998, a subsidiary of the Company, ABF, has entered into
approximately $25 million in capital lease obligations for the purchase of
revenue equipment.
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
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.
23
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
Management of the Company began addressing the impact of the Year 2000 on its
business operations and cash flows during 1996. The Company concluded that the
Year 2000 would impact its internal information technology and non-information
technology 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
data-processing subsidiary, Data-Tronics Corp. to manage the conversion process
for its own internal systems, including purchased software, and to coordinate
the conversion process for supplier chain environment systems and effects, as
well as for the Company's data-interchange environment. A discussion of the
status of each of these areas follows:
Internal IT and Non-IT Systems
Year 2000 conversions within the Company's mainframe environment are in process.
Mainframe environment conversions include the Company's hardware and operating
systems, its customized applications, and its purchased software. The Company
has completed the Year 2000 conversion of its hardware and operating systems
within its mainframe environment. Year 2000 conversions for customized
applications within the mainframe environment include renovation and regression
testing of twenty million lines of code. The Year 2000 conversion for customized
applications is 99% complete and operational at the present time. However,
testing is still in process. Customized applications are expected to be Year
2000 compliant by December 31, 1998. The Company will retain certain purchased
software systems and replace certain purchased software systems. Installation of
Year 2000 compliant versions of retained systems software is in progress and is
expected to be completed by December 31, 1998. The Company is negotiating the
replacement of certain purchased software packages for Year 2000 compliant
software. Negotiations should be complete and the software replaced by March 31,
1999. The carrying value of software systems to be replaced for Year 2000
compliance is nominal.
Year 2000 conversions of the Company's desk-top environment, which includes
network hardware and operating systems software, as well as the networked PC
hardware operating systems and applications inventory, are in process and should
be completed by March 31, 1999.
The Company's embedded systems are those that are automated with embedded
computerized microprocessor chips. The Company has completed its conversion of
its general office embedded systems. The Company will be performing an inventory
of embedded systems in its field and subsidiary locations to determine necessary
Year 2000 conversions. This inventory should be complete by December 31, 1998.
The Company expects to complete all conversions of embedded systems by March 31,
1999.
The Company has completed its Year 2000 conversions of its electronic
data-interchange software.
External IT and Non-IT Systems
The Company is in the process of obtaining an inventory of critical exposure
arising from the Company's suppliers. The Company's list of 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 is continually updating its list of critical exposures.
24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
The Company has completed an inventory of Year 2000 exposure with respect to
data interchange business partners. The Company has scheduled negotiations
during the fourth quarter of 1998 with data-interchange partners for the purpose
of eliminating Year 2000 exposure.
The Company does not have any single customer that would be material to the
Company as a whole. However, the Company has some customers which, in the
aggregate, are significant to the Company's operations and financial results.
The Company is in the process of developing guidelines for surveying significant
customers' readiness for Year 2000. The Company presently expects that the
guidelines will be completed and customer contacts initiated by March 31, 1999.
The information provided by significant customers with respect to their Year
2000 readiness will be considered in the development of the Company's
contingency plan.
Year 2000 Costs
The Company is using existing personnel who work primarily for its data
processing subsidiary, 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 $600,000. Approximately
$500,000 of these costs relate to Year 2000 conversion programming, including
labor costs, and approximately $100,000 of these costs relate to equipment and
software purchases. For the period of time 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 Year 2000
conversion represent less than 3% of the total forecasted data processing costs
for 1999, and less than 6% of total forecasted 1999 programming costs.
The Company is in the process of determining its estimate of the remaining Year
2000 conversion costs. The Company expects to continue to expend these costs in
normal operations and to fund them by utilizing the Company's internally
generated funds or its revolving credit facility.
Contingency Planning
The Company is in the process of developing an assessment of its most reasonably
likely worst case Year 2000 scenario and its Year 2000 contingency plan. The
responses the Company receives from suppliers regarding their Year 2000
readiness will play a critical role in these determinations. The Company
currently plans to have made an assessment of its most reasonably likely worst
case Year 2000 scenario by March 31, 1999. This and other relevant information
will be utilized to develop the Company's contingency plan. It is presently
expected that the contingency plan will be developed by June 30, 1999.
Like virtually all other public and private companies, the Company's day-to-day
business is 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, like the Company, still involved in the
process of attempting to become Year 2000 compliant. The Company plans to
attempt to obtain written assurance of Year 2000 compliance from all entities
which management considers critical to operations of the Company and its
subsidiaries. However, it is likely that some critical suppliers will not give
written assurance as to Year 2000 compliance because of concerns as to legal
liability.
25
<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
- --------------------------------------------------------------------------------
Even where written assurance is provided by critical suppliers and a contingency
plan is developed by the Company 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 will have an impact on the Company that could be material.
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; the timing and amount of capital
expenditures and the accuracy of assessments and estimates relating to Year 2000
issues.
26
<PAGE> 27
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.
None.
ITEM 5. OTHER INFORMATION.
None.
27
<PAGE> 28
PART II.
OTHER INFORMATION
ARKANSAS BEST CORPORATION - Continued
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None.
28
<PAGE> 29
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: November 12, 1998 /s/ David E. Loeffler
-------------------------------------------------
David E. Loeffler
Vice President-Treasurer, Chief Financial Officer
and Principal Accounting Officer
29
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Arkansas
Best Corporation Quarterly Report on Form 10-Q for the nine months ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,405
<SECURITIES> 0
<RECEIVABLES> 187,600
<ALLOWANCES> 7,603
<INVENTORY> 31,509
<CURRENT-ASSETS> 249,478
<PP&E> 565,835
<DEPRECIATION> 247,046
<TOTAL-ASSETS> 732,255
<CURRENT-LIABILITIES> 266,149
<BONDS> 224,956
0
15
<COMMON> 196
<OTHER-SE> 164,946
<TOTAL-LIABILITY-AND-EQUITY> 732,255
<SALES> 135,044
<TOTAL-REVENUES> 1,236,290
<CGS> 95,813
<TOTAL-COSTS> 1,186,923
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,899
<INTEREST-EXPENSE> 13,636
<INCOME-PRETAX> 32,393
<INCOME-TAX> 13,281
<INCOME-CONTINUING> 19,112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,112
<EPS-PRIMARY> .81
<EPS-DILUTED> .80
</TABLE>
