<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 March 31, 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
- --------------------------------------------------------------------------------
(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 April 30, 1999
- ---------------------------- -----------------------------
Common Stock, $.01 par value 19,631,733 shares
<PAGE> 2
ARKANSAS BEST CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998 ....................... 3
Consolidated Statements of Operations --
For the Three Months Ended March 31, 1999 and 1998.......... 5
Consolidated Statements of Shareholders' Equity
For the Three Months Ended March 31, 1999 ................. 7
Condensed Consolidated Statements of Cash Flows --
For the Three Months Ended March 31, 1999 and 1998 ......... 8
Notes to Consolidated Financial Statements - March 31, 1999 ... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 16
Item 2a. Quantitative and Qualitative Disclosures About Market Risk..... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 26
Item 2. Changes in Securities ......................................... 26
Item 3. Defaults Upon Senior Securities ............................... 26
Item 4. Submission of Matters to a Vote of Security Holders ........... 26
Item 5. Other Information ............................................. 26
Item 6. Exhibits and Reports on Form 8-K .............................. 26
SIGNATURES ............................................................... 27
</TABLE>
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
-------------- -------------
(UNAUDITED) NOTE
($ thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ....................... $ 4,298 $ 4,543
Trade receivables less allowances
(1999 -- $6,385,000; 1998--$7,051,000) ....... 167,670 166,520
Inventories ..................................... 33,103 33,150
Prepaid expenses ................................ 10,756 12,700
Deferred income taxes ........................... 955 874
Net assets of discontinued operations ........... 3,361 3,546
Other ........................................... 5,335 5,467
- ---------------------------------------------------------------------------------
TOTAL CURRENT ASSETS ......................... 225,478 226,800
PROPERTY, PLANT AND EQUIPMENT
Land and structures ............................. 217,741 218,250
Revenue equipment ............................... 257,882 256,474
Manufacturing equipment ......................... 17,754 17,506
Service, office and other equipment ............. 78,834 73,891
Leasehold improvements .......................... 9,736 9,484
- ---------------------------------------------------------------------------------
581,947 575,605
Less allowances for depreciation and amortization (263,517) (255,732)
- ---------------------------------------------------------------------------------
318,430 319,873
OTHER ASSETS ....................................... 37,302 35,682
GOODWILL, less amortization (1999 - $37,804,000;
1998 -- $36,740,000) ......................... 123,637 124,975
- ---------------------------------------------------------------------------------
$ 704,847 $ 707,330
=================================================================================
</TABLE>
3
<PAGE> 4
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
---------------------------
(UNAUDITED) NOTE
($ thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft and drafts payable ............................ $ 12,081 $ 19,830
Trade accounts payable ....................................... 71,479 69,983
Accrued expenses ............................................. 150,640 145,432
Federal and state income taxes ............................... 6,096 8,179
Current portion of long-term debt ............................ 17,138 17,504
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES ................................. 257,434 260,928
LONG-TERM DEBT, less current portion ............................ 190,168 196,079
OTHER LIABILITIES ............................................... 23,169 20,577
DEFERRED INCOME TAXES ........................................... 21,121 22,319
MINORITY INTEREST IN TREADCO, INC ............................... 33,267 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: 19,615,373 shares;
1998: 19,610,213 shares ................................... 196 196
Additional paid-in capital ................................... 193,150 193,117
Retained earnings (deficit) .................................. (13,673) (19,413)
Accumulated other comprehensive income ....................... -- --
- ----------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY ................................ 179,688 173,915
COMMITMENTS AND CONTINGENCIES
- ----------------------------------------------------------------------------------------------
$ 704,847 $ 707,330
==============================================================================================
</TABLE>
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.
4
<PAGE> 5
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
-----------------------------------
(UNAUDITED)
($ thousands, except per share data)
<S> <C> <C>
CONTINUING OPERATIONS:
OPERATING REVENUES
Transportation operations .......... $ 353,914 $ 339,878
Tire operations .................... 40,460 37,067
- --------------------------------------------------------------------
394,374 376,945
- --------------------------------------------------------------------
OPERATING EXPENSES AND COSTS
Transportation operations .......... 335,740 327,948
Tire operations .................... 40,927 37,679
- --------------------------------------------------------------------
376,667 365,627
- --------------------------------------------------------------------
OPERATING INCOME ...................... 17,707 11,318
OTHER INCOME (EXPENSE)
Net gains on sales of property
and non-revenue equipment ....... 496 592
Interest expense ................... (4,543) (4,382)
Minority interest in Treadco, Inc. . 245 341
Other, net ......................... (1,019) (1,464)
- --------------------------------------------------------------------
(4,821) (4,913)
- --------------------------------------------------------------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES .. 12,886 6,405
FEDERAL AND STATE INCOME TAXES (CREDIT)
Current ............................ 6,688 3,909
Deferred ........................... (1,280) (1,262)
- --------------------------------------------------------------------
5,408 2,647
- --------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS ..... $ 7,478 $ 3,758
- --------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS -- Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
-----------------------------------
(UNAUDITED)
($ thousands, except per share data)
<S> <C> <C>
DISCONTINUED OPERATIONS:
Loss from discontinued operations (net of tax benefits of $394
in 1999 and $27 in 1998) .................................. $ (664) $ (140)
- ------------------------------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS ............................... (664) (140)
- ---------------------------------------------------------------------------------------- ------------
NET INCOME ...................................................... 6,814 3,618
Preferred stock dividends .................................... (1,075) (1,075)
- ------------------------------------------------------------------------------------------------------
NET INCOME
FOR COMMON SHAREHOLDERS ...................................... $ 5,739 $ 2,543
======================================================================================================
EARNINGS (LOSS) PER COMMON SHARE
BASIC:
Continuing operations (1) .................................... $ 0.32 $ 0.14
Discontinued operations ...................................... (0.03) (0.01)
- ------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE (1) ........................................ $ 0.29 $ 0.13
- ------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING (BASIC): ...................... 19,613,653 19,605,213
======================================================================================================
DILUTED:
Continuing operations (2) .................................... $ 0.32 $ 0.14
Discontinued operations ...................................... (0.03) (0.01)
- ------------------------------------------------------------------------------------------------------
NET INCOME (2) .................................................. $ 0.29 $ 0.13
- ------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING (DILUTED) ..................... 23,582,137 20,075,081
======================================================================================================
CASH DIVIDENDS PAID PER COMMON SHARE ............................ $ -- $ --
======================================================================================================
</TABLE>
(1) Gives consideration to preferred stock dividends of $1.1 million per
quarter.
(2) For the three months ended March 31, 1998, consideration is given to
preferred dividends of $1.1. Conversion of preferred stock into common
would be antidilutive for the three months ended March 31, 1998. For the
three months ended March 31, 1999, conversion of preferred shares into
common is assumed.
6
<PAGE> 7
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE TOTAL
STOCK STOCK CAPITAL (DEFICIT) INCOME EQUITY
- --------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
($ thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1999 ........... $ 15 $ 196 $ 193,117 $ (19,413) $ - $ 173,915
Net income ............................ - - - 6,814 - 6,814
Issuance of Common Stock............... - - 33 - - 33
Dividends paid on Preferred Stock ..... - - - (1,075) - (1,075)
Other ................................. - - - 1 - 1
- --------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1999 ............ $ 15 $ 196 $ 193,150 $ (13,673) $ - $ 179,688
==========================================================================================================================
</TABLE>
7
<PAGE> 8
ARKANSAS BEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
-------------------------------
(UNAUDITED)
($ thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities ...... $ 22,548 $ 19,519
INVESTING ACTIVITIES
Purchases of property, plant and equipment,
less capitalized leases ...................... (11,243) (16,253)
Proceeds from asset sales ...................... 3,799 1,642
- ------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES ............... (7,444) (14,611)
FINANCING ACTIVITIES
Deferred financing costs and expenses .......... (125) --
Borrowings under revolving credit facilities ... 118,450 143,400
Payments under revolving credit facilities ..... (122,000) (141,400)
Payments on long-term debt ..................... (2,959) (2,844)
Payments under term loan facilities ............ -- (500)
Dividends paid ................................. (1,075) (1,075)
Net decrease in bank overdraft ................. (7,674) (13,801)
Other .......................................... 34 91
- ------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES ............... (15,349) (16,129)
- ------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........... (245) (11,221)
Cash and cash equivalents at
beginning of period........................ 4,543 7,203
- ------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......... $ 4,298 $ (4,018)
====================================================================================
</TABLE>
8
<PAGE> 9
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
- --------------------------------------------------------------------------------
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 months ended March 31, 1999, 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 difference between the effective tax rate for the three months ended March
31, 1999, 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 liquidation value of the remaining Clipper
International assets is estimated to be approximately $5.0 million, which is
approximately equal to the Company's investment in Clipper International.
9
<PAGE> 10
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
- -------------------------------------------------------------------------------
Results of operations of the international ocean freight services segment have
been reported as discontinued operations as of March 31, 1999 and the statements
of operations for all periods have been restated to remove revenue and expenses
of this segment. Results of Clipper International included in discontinued
operations are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
----------------------------
($ thousands)
<S> <C> <C>
Revenues ....................... $ 6,777 $ 10,962
Operating loss ................. (1,114) (82)
Pre-tax loss ................... (1,058) (167)
</TABLE>
NOTE D - INVENTORIES
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
----------------------
($ thousands)
<S> <C> <C>
Finished goods ................... $25,470 $25,523
Materials ........................ 4,983 5,147
Repair parts, supplies and other.. 2,650 2,480
- --------------------------------------------------------
$33,103 $33,150
========================================================
</TABLE>
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 87 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 $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.
10
<PAGE> 11
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
- -------------------------------------------------------------------------------
As of March 31, 1999, the Company has accrued approximately $3.7 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-month period
ended March 31, 1999, the Company capitalized $.4 million of software
development costs, which increased net income (basic and diluted) and net income
from continuing operations (basic and diluted) by $.01 per share.
In April 1998, the AcSEC issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities. Under the SOP, certain costs associated with
start-up activities are required to be expensed as incurred. The Company adopted
SOP 98-5 in 1999. The Company has historically expensed start-up costs and,
therefore, there is no impact of adoption on the Company's financial statements
and related disclosures.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If a
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change in fair value
of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The Statement is effective for the Company in 2000. The Company is
evaluating the impact the Statement will have on its financial statements and
related disclosures.
11
<PAGE> 12
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
- -------------------------------------------------------------------------------
NOTE G - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
---------------------------------
(UNAUDITED)
($ thousands, except per share data)
<S> <C> <C>
NUMERATOR:
Numerator for basic earnings per share --
Net income ......................................................... $ 6,814 $ 3,618
Preferred stock dividends .......................................... (1,075) (1,075)
- ----------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share --
Net income available to common shareholders ........................ 5,739 2,543
Effect of dilutive securities (1) ..................................... 1,075 --
- ----------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share --
Net income available to common shareholders ........................ $ 6,814 $ 2,543
================================================================================================================
DENOMINATOR:
Denominator for basic earnings per share -- weighted-average shares ... 19,613,653 19,605,213
Effect of dilutive securities:
Conversion of preferred stock (1) .................................. 3,796,852 --
Stock options ...................................................... 171,632 469,868
- ----------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -- adjusted weighted-average
shares and assumed conversions ..................................... 23,582,137 20,075,081
================================================================================================================
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Continuing operations ................................................. $ 0.32 $ 0.14
Discontinued operations ............................................... (0.03) (0.01)
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE .............................................. $ 0.29 $ 0.13
================================================================================================================
AVERAGE COMMON SHARES OUTSTANDING (BASIC): ............................... 19,613,653 19,605,213
================================================================================================================
DILUTED:
Continuing operations ................................................. $ 0.32 $ 0.14
Discontinued operations ............................................... (0.03) (0.01)
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE .............................................. $ 0.29 $ 0.13
================================================================================================================
AVERAGE COMMON SHARES OUTSTANDING (DILUTED): ............................. 23,582,137 20,075,081
================================================================================================================
CASH DIVIDENDS PAID PER COMMON SHARE ..................................... $ -- $ --
================================================================================================================
</TABLE>
(1) For the three months ended March 31, 1999, conversion of preferred shares
into common is assumed. Conversion of preferred shares would be anti-dilutive
for the three months ended March 31, 1998.
12
<PAGE> 13
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 31, 1999. 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. Subject to terms of the merger agreement,
shares of common stock not tendered will be converted into the right to receive
$9.00 per share. Pursuant to a second-step merger, Treadco will become a wholly
owned subsidiary of the Company. The merger is anticipated to be completed by
early June 1999. The cost of the Treadco shares and related expenses
(approximately $22.6 million) was funded with the Company's Revolving Credit
Facility.
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.
Results of operations for Clipper International, previously reflected as a
reportable segment, have been reported as discontinued operations for the three
months ended March 31, 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 reclassification of
Clipper International's assets to discontinued operations.
13
<PAGE> 14
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
- -------------------------------------------------------------------------------
At March 31, 1999, the Company's percentage ownership of Treadco was 49%. 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 (see Note H).
The following tables reflect reportable operating segment information for the
Company, as well as a reconciliation of reportable segment information to the
Company's consolidated operating revenues, operating expenses and operating
income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
--------------------------
(UNAUDITED)
($ thousands)
<S> <C> <C>
OPERATING REVENUES
ABF Freight System, Inc. ................. $ 295,452 $ 280,267
G.I. Trucking Company .................... 31,534 $ 28,598
Clipper Domestic ......................... 24,465 30,245
Treadco, Inc. ............................ 40,944 37,505
Other revenues and eliminations .......... 1,979 330
- ------------------------------------------------------------------------
Total consolidated operating revenues.. $ 394,374 $ 376,945
========================================================================
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC
Salaries and wages ....................... $ 196,716 $ 190,744
Supplies and expenses .................... 31,026 30,638
Operating taxes and licenses ............. 9,607 9,487
Insurance ................................ 5,017 5,023
Communications and utilities ............. 3,661 3,325
Depreciation and amortization ............ 6,988 5,866
Rents and purchased transportation ....... 22,441 22,089
Other .................................... 1,362 1,453
(Gain) on sale of revenue equipment ...... (39) (119)
- ------------------------------------------------------------------------
276,779 268,506
- ------------------------------------------------------------------------
G.I. TRUCKING COMPANY
Salaries and wages ....................... 14,784 13,555
Supplies and expenses .................... 2,544 2,653
Operating taxes and licenses ............. 761 646
Insurance ................................ 1,031 1,035
Communications and utilities ............. 428 359
Depreciation and amortization ............ 741 688
Rents and purchased transportation ....... 9,790 8,616
Other .................................... 898 761
(Gain) on sale of revenue equipment ...... (7) (5)
- ------------------------------------------------------------------------
30,970 28,308
- ------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
----------------------
(UNAUDITED)
($ thousands)
<S> <C> <C>
CLIPPER DOMESTIC
Cost of services .............................. 21,491 26,552
Selling, administrative and general ........... 3,332 4,151
(Gain) on sale of revenue equipment ........... (31) (20)
- -------------------------------------------------------------------------------
24,792 30,683
- -------------------------------------------------------------------------------
TREADCO, INC .....................................
Cost of sales ................................. 28,908 27,015
Selling, administrative and general ........... 12,291 11,066
- -------------------------------------------------------------------------------
41,199 38,081
- -------------------------------------------------------------------------------
Other expenses and eliminations .................. 2,927 49
- -------------------------------------------------------------------------------
Total consolidated operating
expenses and costs.......................... $ 376,667 $ 365,627
===============================================================================
OPERATING INCOME (LOSS)
ABF Freight System, Inc. ......................... $ 18,673 $ 11,761
G.I. Trucking Company ............................ 564 290
Clipper Domestic ................................. (327) (438)
Treadco, Inc. .................................... (255) (576)
Other income (loss) and eliminations ............. (948) 281
- -------------------------------------------------------------------------------
Total consolidated operating income ........... 17,707 11,318
===============================================================================
</TABLE>
15
<PAGE> 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 first quarter 1998 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
---------------------
(UNAUDITED)
<S> <C> <C>
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages .................... 66.6% 68.1%
Supplies and expenses ................. 10.5 10.9
Operating taxes and licenses .......... 3.3 3.4
Insurance ............................. 1.7 1.8
Communications and utilities .......... 1.2 1.2
Depreciation and amortization ......... 2.4 2.1
Rents and purchased transportation .... 7.6 7.9
Other ................................. 0.4 0.4
- -----------------------------------------------------------
93.7% 95.8%
- -----------------------------------------------------------
G.I. TRUCKING COMPANY
Salaries and wages .................... 46.9% 47.4%
Supplies and expenses ................. 8.1 9.3
Operating taxes and licenses .......... 2.4 2.3
Insurance ............................. 3.3 3.6
Communications and utilities .......... 1.4 1.3
Depreciation and amortization ......... 2.3 2.4
Rents and purchased transportation .... 31.0 30.1
Other ................................. 2.8 2.6
- -----------------------------------------------------------
98.2% 99.0%
- -----------------------------------------------------------
CLIPPER DOMESTIC
Cost of services ...................... 87.8% 87.8%
Selling, administrative and general ... 13.6% 13.7
(Gain) on sale of revenue equipment ... (0.1) (0.1)
- -----------------------------------------------------------
101.3% 101.4%
- -----------------------------------------------------------
TREADCO, INC ..........................
Cost of sales ......................... 70.6% 72.0%
Selling, administrative and general ... 30.0 29.5
- -----------------------------------------------------------
100.6% 101.5%
- -----------------------------------------------------------
OPERATING INCOME (LOSS)
ABF Freight System, Inc. .............. 6.3 % 4.2 %
G.I. Trucking Company ................. 1.8 1.0
Clipper Domestic ...................... (1.3) (1.4)
Treadco, Inc. ......................... (0.6) (1.5)
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998
Consolidated revenues from continuing operations of the Company for the three
months ended March 31, 1999 were $394.4 million compared to $376.9 million for
the three months ended March 31, 1998, representing an increase of 4.6%
primarily due to increases in revenues for ABF, G.I. Trucking and Treadco. These
increases were offset somewhat by declines in Clipper Domestic revenues. The
Company's operating income from continuing operations increased 56.4% to $17.7
million for the three months ended March 31, 1999 compared to $11.3 million for
the three months ended March 31, 1998. Increases in operating income from
continuing operations are attributable to improved operations at ABF, G.I.
Trucking and Treadco. Income from continuing operations for the three months
ended March 31, 1999 increased 97.3% to $7.5 million, or $0.32 per share (basic
and diluted), compared to $3.8 million, or $0.14 per share (basic and diluted)
for the three months ended March 31, 1998. Net income for the three months ended
March 31, 1999 was $6.8 million, or $0.29 per share (basic and diluted),
compared to $3.6 million, or $0.13 per share (basic and diluted). The
improvements in income from continuing operations and net income reflect,
primarily, the improvement in operating income from continuing operations.
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 months ended
March 31, 1999 increased 5.4% to $295.5 million from $280.3 million for the
three months ended March 31, 1998. Operating income for the three months ended
March 31, 1999 improved to $18.7 million from $11.8 million for the three months
ended March 31, 1998.
ABF's revenue for the three months ended March 31, 1999 increased due to an
increase in LTL revenue per hundredweight of 5.3% to $19.18 from $18.22 for the
three months ended March 31, 1998, reflecting a continuing favorable pricing
environment. In addition, first quarter 1999 LTL tonnage increased slightly,
0.7%, from the first quarter of 1998.
ABF's operating ratio improved to 93.7% for the three months ended March 31,
1999 from 95.8% for the three months ended March 31, 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 1.5% as a percent of revenue from the first
quarter of 1998 to the first quarter of 1999. This decrease is due in part to
lower linehaul costs due to driver retirements and an increase in rail
utilization for freight transportation. Rail usage increased to 16.5% of total
miles during the first quarter of 1999 from 13.5% during the first quarter 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
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
- --------------------------------------------------------------------------------
The decrease in operating supplies and expenses of 0.4% of revenue, from the
first quarter of 1998 to the first quarter of 1999 is primarily due to lower
fuel costs, which were below first quarter 1998 by approximately 14.5%, or
$953,000.
Depreciation and amortization increased 0.3% as a percent of revenue for the
first quarter of 1999 as compared to the first quarter of 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 quarter of 1998.
Rents and purchased transportation expense decreased 0.3% as a percent of
revenue for the three months ended March 31, 1999 compared to the three months
ended March 31, 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 purchased transportation for rail. As described above, ABF's rail
usage increased for the three months ended March 31, 1999, compared to the same
period in 1998.
G.I. TRUCKING
Effective November 1, 1998, G.I. Trucking implemented a general rate increase of
5.5%. Revenues increased 10.3% to $31.5 million for the first quarter of 1999
compared to $28.6 million for the first quarter of 1998. The revenue increase
resulted from an increase of 1.2% in G.I. Trucking's revenue per hundredweight
to $10.73 and tonnage increases of 9.0% compared to the same period in 1998.
G.I. Trucking's operating ratio improved to 98.2% for the first quarter of 1999
from 99.0% for the first quarter of 1998. The improvement results from the
revenue yield improvement discussed above and improvements in certain operating
expenses as follows:
Salaries and wages expense declined 0.5% as a percent of revenue during the
first quarter of 1999 as compared to the first quarter of 1998. This decrease is
due to lower pension costs and improved productivity of the labor force.
Operating supplies and expenses decreased 1.2% as a percent of revenue for the
three months ended March 31, 1999 as compared to the three months ended March
31, 1998 due primarily to declines in fuel prices from the first quarter of
1998. In addition, repair and maintenance costs on revenue equipment were lower
during the first quarter of 1999, reflecting new equipment purchased during 1998
to replace older equipment which requires more maintenance.
Insurance expense declined 0.3% as a percent of revenues from the first quarter
of 1998 to the first quarter of 1999. This improvement was due to favorable
claims experience for worker's compensation claims and lower costs for
insurance, offset in part by unfavorable cargo claims experience.
A 0.9% increase in rents and purchased transportation reflects an increase in
G.I. Trucking's terminal rent costs due to six new terminals opened during 1998.
In addition, purchased transportation costs associated with G. I. Trucking's
revenue increased slightly.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
- --------------------------------------------------------------------------------
CLIPPER DOMESTIC.
Revenues from Clipper Domestic were $24.5 million for the three months ended
March 31, 1999, a decrease of 19.1% from the three months ended March 31, 1998,
which had revenues of $30.2 million. 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 quarter of 1999, rail service continued to improve; however, in certain
lanes, rail service remains inconsistent. Clipper Domestic's intermodal
shipments declined 7.9% for the first quarter of 1999 compared to the first
quarter of 1998. This decline results 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 a decline of 1.5% in
the number of LTL shipments from the first quarter of 1998 to the first quarter
of 1999. The decline 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.
TREADCO, INC.
Revenues for the three months ended March 31, 1999 increased 9.2% to $40.9
million from $37.5 million for the three months ended March 31, 1998. For the
first quarter of 1999, "same store" sales increased 7.9% and "new store" sales
accounted for 1.3% of the increase from the 1998 first quarter. "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 one
new sales location. Revenues from retreading for the three months ended March
31, 1999 were $16.1 million, a 4% increase from $15.5 million during the three
months ended March 31, 1998. Retread revenues for the 1999 first quarter were
higher due to increased volume of units sold of approximately 2.0% from first
quarter 1998 and an increase in the sales price per unit of approximately 2.0%
from first quarter 1998. Revenues from new tire sales increased 10.8% to $20.3
million for the first quarter 1999, from $18.3 million during the same period in
1998, due to increased unit sales of 10.8% from first quarter 1998. Service
revenues for the 1999 first quarter were $4.6 million, an increase of 22.9%,
from $3.7 million during the 1998 first quarter. Service revenues increased due
to Treadco's continued emphasis on its service operations.
Treadco's operating ratio improved to 100.6% during the first quarter of 1999
from 101.5% during the first quarter of 1998. The decrease in cost of sales of
1.4% of revenue resulted primarily from lower new-tire costs and slightly
improved production efficiency. The increase in selling, administrative, and
general expenses of 0.5% resulted primarily from higher salaries and wages as a
percent of revenue due to increased service and inventory control personnel.
This increase was 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.
INCOME TAXES. The difference between the effective tax rate for 1999 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.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the three months ended March 31,
1999 was $22.5 million compared to net cash provided by operations of $19.5
million for the three months ended March 31, 1998. The increase is due primarily
to the improvement in operating results and net income for the first quarter of
1999 compared to the first quarter of 1998. Cash provided by operations and
proceeds from asset sales of $3.8 million were used to purchase revenue
equipment and other assets in the amount of $11.2 million and to pay down the
Company's outstanding debt in the first quarter of 1999. During the first
quarter of 1998, cash provided by operations and the sale of assets of $1.6
million were used to purchase assets of $16.3 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 which became effective June 12, 1998.
The Credit Agreement provides for up to $250 million of revolving credit loans
(including letters of credit).
At March 31, 1999, there were $110.0 million of Revolver Advances and
approximately $36.5 million of letters of credit outstanding. At March 31, 1999,
the Company had approximately $103.5 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 March 31, 1999, the Company was in compliance with
the covenants.
The Company is party to an interest rate swap on a notional amount of $110.0
million. The purpose of the swap is to limit the Company's exposure to increases
in interest rates from current levels on $110.0 million of bank borrowings over
the seven-year term of the swap. The interest rate under the swap is fixed at
5.845% plus the Credit Agreement margin, which was .625% at March 31, 1999.
Treadco is 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. Borrowings under the Treadco Credit
Agreement are collateralized by accounts receivable and inventories of Treadco.
Borrowings under the agreement bear interest at variable rates. At March 31,
1999, Treadco had $7.3 million outstanding under the Revolving Credit Agreement.
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. As of March 31, 1999,
Treadco was in compliance with the covenants.
Management believes, based upon the Company's current levels of operations, the
Company's cash, capital resources, borrowings available under the Credit
Agreement and cash flow from operations will be sufficient to finance current
and future operations and meet all present and future debt service requirements,
as well as fund the acquisition of 2,575,055 shares of Treadco (see Note H).
20
<PAGE> 21
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 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 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. 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, except for
certain purchased software, are Year 2000 ready and operational at the present
time. Mainframe environment conversions which are Year 2000 ready include the
Company's hardware and operating systems, its customized applications, and most
of its purchased software. Year 2000 conversions for customized applications
which are Year 2000 ready within the mainframe environment included renovation
and regression testing of twenty million lines of code. The Company has retained
certain purchased software systems. The Company has replaced certain other
purchased software systems and will continue to replace others by June 30, 1999.
The carrying value of software systems replaced and to be replaced for Year 2000
compliance is nominal.
Year 2000 conversions of the Company's desktop PC hardware, operating systems
and applications have been completed for most desktop environments. All desktop
PC environments which are critical to the Company's business are Year 2000
ready. The network hardware and operating systems software will be Year 2000
ready by July 31, 1999.
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.
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
- --------------------------------------------------------------------------------
External IT and Non-IT Systems
The Company is continuing its 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 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 which, 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 its computer
information services 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 $1.0 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 Year 2000 conversion represent less than 6% of total forecasted
1999 information services costs. 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 $.8 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
Company's internal and external IT systems and non-IT systems. As noted above,
the Company has completed Year 2000 conversions within the Company's mainframe
environment, certain purchased software systems and its critical desktop
environment. The primary risk that 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, including certain fuel vendors,
communications vendors and tire and rubber products vendors. The Company has
experienced a good response rate with respect to its questionnaires. However, if
the Company assumes that the fuel, communications and tire and rubber products
vendors which have not responded to its questionnaires will not be Year 2000
compliant and that their businesses would be adversely affected, the Company's
freight transportation operations and tire business would be intermittently
disrupted. These disruptions could include a temporary inability to take or fill
customer orders, to communicate regarding shipment status and to deliver
freight. This could result in lost revenues and in an increase in operating
costs if fuel,
22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
- --------------------------------------------------------------------------------
communications and tire and rubber products costs rise as a result of shortages.
Lost revenues and increases in operating costs resulting from these shortages
cannot reasonably be estimated at this time.
The Company could also be materially, adversely impacted by disruptions in the
economy generally resulting from Year 2000 issues. The Company could 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 or lost revenue cannot be reasonably estimated at
this time.
The Company's most reasonably likely worst case scenario will continually be
updated, and it will be used to develop the Company's contingency plan which it
is presently expected to be completed by June 30, 1999. As a part of this
process, the Company plans to increase the level of follow-up on critical
suppliers' progress in completing year 2000 conversions and testing.
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 still engaged 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.
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 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
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
23
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
- --------------------------------------------------------------------------------
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.
24
<PAGE> 25
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 March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Notional Rate Rate Fair
Amount Maturity Paid Received Value (2)
------- -------- ---- -------- ---------
<S> <C> <C> <C> <C>
$110.0 million April 1, 2005 5.845% Plus Credit Agreement LIBOR rate (1) $(1.1) 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 paid at March
31, 1999, to terminate the agreement.
</TABLE>
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.
25
<PAGE> 26
PART II.
OTHER INFORMATION
ARKANSAS BEST CORPORATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is named as a defendant in legal
actions, the majority of which arise out of the normal course of its business.
The Company is not a party to any pending legal proceeding which the Company's
management believes to be material to the financial condition of the Company.
The Company maintains liability insurance in excess of self-retention levels 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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARKANSAS BEST CORPORATION
(Registrant)
Date: May 12, 1999 /s/ David E. Loeffler
------------------------------------------
David E. Loeffler
Vice President-Treasurer, Chief Financial
Officer and Principal Accounting Officer
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule for 1st Quarter 1998
27.2 Financial Data Schedule for 1st Quarter 1999
</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 THREE MONTHS ENDED MARCH
31, 1998 AS RESTATED FOR DISCONTINUED OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> (4,018)
<SECURITIES> 0
<RECEIVABLES> 160,315
<ALLOWANCES> 6,849
<INVENTORY> 31,195
<CURRENT-ASSETS> 216,753
<PP&E> 521,282
<DEPRECIATION> 230,807
<TOTAL-ASSETS> 680,446
<CURRENT-LIABILITIES> 249,139
<BONDS> 200,424
0
15
<COMMON> 196
<OTHER-SE> 151,601
<TOTAL-LIABILITY-AND-EQUITY> 680,446
<SALES> 37,067
<TOTAL-REVENUES> 376,945
<CGS> 27,015
<TOTAL-COSTS> 365,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 893
<INTEREST-EXPENSE> 4,382
<INCOME-PRETAX> 6,405
<INCOME-TAX> 2,647
<INCOME-CONTINUING> 3,758
<DISCONTINUED> (140)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,618
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</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 THREE MONTHS ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,298
<SECURITIES> 0
<RECEIVABLES> 167,670
<ALLOWANCES> 6,385
<INVENTORY> 33,103
<CURRENT-ASSETS> 225,478
<PP&E> 581,947
<DEPRECIATION> 263,517
<TOTAL-ASSETS> 704,847
<CURRENT-LIABILITIES> 257,434
<BONDS> 190,168
0
15
<COMMON> 196
<OTHER-SE> 179,477
<TOTAL-LIABILITY-AND-EQUITY> 704,847
<SALES> 40,460
<TOTAL-REVENUES> 394,374
<CGS> 28,908
<TOTAL-COSTS> 376,667
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 698
<INTEREST-EXPENSE> 4,543
<INCOME-PRETAX> 12,886
<INCOME-TAX> 5,408
<INCOME-CONTINUING> 7,478
<DISCONTINUED> (664)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,814
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
