-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mk/KWyZKNNSwo1cIFFzb0Mot2UR6PKzkCiRDwroaDi8saEtlqEJFRHjZY2o5qgMR JeoaFURY7pPi2XDyfAEVLw== 0000894405-97-000006.txt : 19970326 0000894405-97-000006.hdr.sgml : 19970326 ACCESSION NUMBER: 0000894405-97-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARKANSAS BEST CORP /DE/ CENTRAL INDEX KEY: 0000894405 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 710673405 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19969 FILM NUMBER: 97562029 BUSINESS ADDRESS: STREET 1: 3801 OLD GREENWOOD RD CITY: FORT SMITH STATE: AR ZIP: 72903 BUSINESS PHONE: 5017856000 MAIL ADDRESS: STREET 1: P O BOX 48 CITY: FORT SMITH STATE: AR ZIP: 72902 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year December 31, 1996. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ---------- to ----------. Commission file number 0-19969 ARKANSAS BEST CORPORATION (Exact name of registrant as specified in its charter) Delaware 71-0673405 - ---------------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3801 Old Greenwood Road, Fort Smith, Arkansas 72903 - ---------------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 501-785-6000 ------------ Securities registered pursuant to Section 12(b) of the Act: None ---------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each class on which registered - -------------------------------------- ----------------------- Common Stock, $.01 Par Value Nasdaq Stock Market/NMS $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock, $.01 Par Value Nasdaq Stock Market/NMS Indicate by check mark whether the registrant (1) has 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 shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X]. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 10, 1997, was $88,818,440. The number of shares of Common Stock, $.01 par value, outstanding as of March 10, 1997, was 19,504,473. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement for the Arkansas Best Corporation annual shareholders' meeting to be held May 8, 1997 are incorporated by reference into Part III. ARKANSAS BEST CORPORATION FORM 10-K TABLE OF CONTENTS ITEM PAGE NUMBER NUMBER PART I Item 1. Business 2 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31 PART III Item 10. Directors and Executive Officers of the Registrant 32 Item 11. Executive Compensation 32 Item 12. Security Ownership of Certain Beneficial Owners and Management 32 Item 13. Certain Relationships and Related Transactions 32 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 33 PART I ITEM 1. BUSINESS (a) General Development of Business Corporate Profile Arkansas Best Corporation (the "Company") is a diversified holding company located in Fort Smith, Arkansas. The Company is engaged through its motor carrier subsidiaries in less-than-truckload ("LTL") and truckload shipments of general commodities, through its intermodal and logistics subsidiaries in intermodal marketing and freight logistics services and through its 46%-owned subsidiary, Treadco, Inc. ("Treadco") in truck tire retreading and new truck tire sales. Historical Background In 1988, the Company was acquired in a leveraged buyout by a corporation organized by Kelso & Company, L.P. ("Kelso"). In 1992, the Company completed an initial public offering of Common Stock par value $.01 (the "Common Stock") by the Company. The Company also repurchased substantially all the remaining shares of Common Stock beneficially owned by Kelso, thus ending Kelso's investment in the Company. In 1993, the Company completed a public offering of 1,495,000 shares of preferred stock ("Preferred Stock"). (b) Financial Information about Industry Segments The response to this portion of Item 1 is included in "Note M - Business Segment Data" of the notes to the Company's consolidated financial statements for the year ended December 31, 1996, which is submitted as a separate section of this report. (c) Narrative Description of Business The Company Acquisition On July 14, 1995, ABC Acquisition Corporation (the "Purchaser"), a wholly owned subsidiary of the Company, commenced a tender offer (the "Offer") to purchase all outstanding shares of common stock of WorldWay Corporation ("WorldWay"), at a purchase price of $11 per share (the "Acquisition"). Pursuant to the Offer, on August 11, 1995, the Purchaser accepted for payment shares of WorldWay validly tendered, representing approximately 91% of the shares outstanding. On October 12, 1995, the remaining shares of WorldWay's common stock were converted into the right to receive $11 per share in cash. Principal subsidiaries of WorldWay included Carolina Freight Carriers Corp. ("Carolina Freight") and Red Arrow Freight Lines, Inc. ("Red Arrow"), which were merged into the Company's subsidiary, ABF Freight System, Inc. ("ABF") on September 24, 1995, Cardinal Freight Carriers, Inc. ("Cardinal"), G.I. Trucking Company ("G.I. Trucking"), CaroTrans International, Inc. ("CaroTrans"), The Complete Logistics Company ("Complete Logistics"), Motor Carrier Insurance, Ltd., and Carolina Breakdown Service, Inc. ("Carolina Breakdown"). Employees At December 31, 1996, the Company had a total of 16,328 employees of which 67% are members of a labor union. Less-Than-Truckload Motor Carrier Operations General The Company's LTL motor carrier operations are conducted through ABF, ABF Freight System (B.C.), Ltd. ("ABF-BC"), ABF Freight System Canada, Ltd. ("ABF- Canada"), ABF Cartage, Inc. ("Cartage"), and Land-Marine Cargo, Inc. ("Land- Marine")(collectively the "ABF Group") and G.I. Trucking Company. LTL carriers offer services to shippers which are tailored to the need to transport a wide variety of large and small shipments to geographically dispersed destinations. LTL carriers pick up small shipments throughout the vicinity of a local terminal with local trucks and consolidate them at each terminal according to destination for transportation by intercity units to their destination cities or to distribution centers, where shipments from various locations can be reconsolidated for transportation to distant destinations, other distribution centers or local terminals. Once delivered to a local terminal, a shipment is delivered to the customer by local trucks operating from such terminal. In some cases, when a sufficient number of different shipments at one origin terminal are going to a common destination, they can be combined to make a full trailerload. A trailer then is dispatched to that destination without the freight having to be rehandled. Competition, Pricing and Industry Factors The trucking industry is highly competitive. The Company's LTL motor carrier subsidiaries actively compete for freight business with other national, regional and local motor carriers and, to a lesser extent, with private carriage, freight forwarders, railroads and airlines. Competition is based primarily on personal relationships, price and service. In general, most of the principal motor carriers use similar tariffs to rate interstate shipments. Competition for freight revenue, however, has resulted in discounting which effectively reduces prices paid by shippers. In an effort to maintain and improve its market share, the Company's LTL motor carrier subsidiaries offer and negotiate various discounts. The trucking industry, including the Company's LTL motor carrier subsidiaries, is affected directly by the state of the overall economy. In addition, seasonal fluctuations also affect tonnage to be transported. Freight shipments, operating costs and earnings also are affected adversely by inclement weather conditions. ABF Freight System, Inc. The largest subsidiary of the Company, ABF currently accounts for approximately 65% of the Company's consolidated revenues and 92% of LTL operations revenue. ABF is the fourth largest LTL motor carrier in the United States, based on revenues for 1996 as reported to the U.S. Department of Transportation ("D.O.T."). ABF provides direct service to over 98.5% of the cities in the United States having a population of 25,000 or more. The ABF Group provides interstate and intrastate direct service to more than 40,000 points through 317 terminals in all 50 states, Canada and Puerto Rico. Through an alliance and relationships with trucking companies in Mexico, ABF provides motor carrier services to customers in that country as well. ABF was incorporated in Delaware in 1982 and is the successor to Arkansas Motor Freight, a business originally organized in 1935. ABF concentrates on long-haul transportation of general commodities freight, involving primarily LTL shipments. General commodities include all freight except hazardous waste, dangerous explosives, commodities of exceptionally high value, commodities in bulk and those requiring special equipment. ABF's general commodities shipments differ from shipments of bulk raw materials which are commonly transported by railroad, pipeline and water carrier. General commodities transported by ABF include, among other things, food, textiles, apparel, furniture, appliances, chemicals, non-bulk petroleum products, rubber, plastics, metal and metal products, wood, glass, automotive parts, machinery and miscellaneous manufactured products. During the year ended December 31, 1996, no single customer accounted for more than 3% of ABF's revenues, and the ten largest customers accounted for less than 8% of ABF's revenues. Employees At December 31, 1996, ABF employed 12,362 persons. Employee compensation and related costs are the largest components of LTL motor carrier operating expenses. In 1996, such costs amounted to 69.4% of LTL operations revenues. ABF is a signatory with the International Brotherhood of Teamsters ("Teamsters") to the National Master Freight Agreement (the "National Agreement") which became effective April 1, 1994, and expires March 31, 1998. Under the National Agreement, employee wages and benefits increased an average of 2.7%, 3.3% and 3.8% annually during 1994, 1995 and 1996, respectively, and will increase an average of 3.9% on April 1, 1997. Under the terms of the National Agreement, ABF is required to contribute to various multiemployer pension plans maintained for the benefit of its employees who are members of the Teamsters. Amendments to the Employee Retirement Income Security Act of 1974 ("ERISA") pursuant to the Multiemployer Pension Plan Amendments Act of 1980 (the "MPPA Act") substantially expanded the potential liabilities of employers who participate in such plans. Under ERISA, as amended by the MPPA Act, an employer who contributes to a multiemployer pension plan and the members of such employer's controlled group are jointly and severally liable for their proportionate share of the plan's unfunded liabilities in the event the employer ceases to have an obligation to contribute to the plan or substantially reduces its contributions to the plan (i.e., in the event of plan termination or withdrawal by the Company from the multiemployer plans). Although the Company has no current information regarding its potential liability under ERISA in the event it wholly or partially ceases to have an obligation to contribute or substantially reduces its contributions to the multiemployer plans to which it currently contributes, management believes that such liability would be material. The Company has no intention of ceasing to contribute or of substantially reducing its contributions to such multiemployer plans. ABF is also a party to several smaller union contracts. Approximately 88% of ABF's employees are unionized, of whom approximately 1% are members of unions other than the Teamsters. Four of the five largest LTL carriers are unionized and generally pay comparable wages. Non-union companies typically pay employees less than union companies. Due to its national reputation and its high pay scale, ABF has not historically experienced any significant difficulty in attracting or retaining qualified drivers. Insurance and Safety Generally, claims exposure in the motor carrier industry consists of cargo loss and damage, auto liability, property damage and bodily injury and workers' compensation. The Company's motor carrier subsidiaries are effectively self-insured for the first $100,000 of each cargo loss, $300,000 of each workers' compensation loss and $200,000 of each general and auto liability loss, plus an aggregate of $750,000 of auto liability losses between $200,000 and $500,000. The Company maintains insurance contracts covering the excess of such losses in amounts it believes are adequate. While insurance for motor carriers has become increasingly more expensive and more difficult to obtain, it remains essential to the continuing operations of a motor carrier. The Company has been able to obtain adequate coverage and is not aware of problems in the foreseeable future which would significantly impair its ability to obtain adequate coverage at comparable rates. G.I. Trucking Company Headquartered in La Mirada, California, G.I. Trucking is a non-union regional LTL motor carrier. G.I. Trucking provides transportation services and coverage throughout 13 Western states and the Western Canadian provinces of Alberta and British Columbia, as well as service to Hawaii and Alaska. One- to three-day regional service is provided through 70 service centers. Transcontinental service is facilitated through a partnership with three other regional carriers providing service through six major hub terminals located throughout the Midwest and East Coast. Customer service is enhanced through EDI communications between partners, allowing for single pro tracing, invoicing and a full range of other EDI and information management services. G.I. Trucking's Hawaiian container operation, located in La Mirada, provides excellent transit times to the Islands. Service to points in Alaska and Western Canada is provided through the company's service center in Seattle, Washington. G.I. Trucking's linehaul structure utilizes company solo drivers, company sleeper teams, contract power and one-way carriers, providing total flexibility in maintaining superior service and lane balance. Truckload Operations Cardinal Freight Carriers, Inc. Cardinal is an irregular route carrier providing dry van and flatbed service throughout the eastern two-thirds of the United States and Canada. Headquartered in Concord, North Carolina, Cardinal operates via a central dispatch system utilizing a state-of-the-art computer system. Cardinal has grown from 14 company-owned power units in 1981 to more than 400 tractors in the van division and over 100 tractors in the flatbed division. The trailer fleet consists of 1,307 vans and 150 aluminum flatbeds. Cardinal's services, both van and flatbed, can be labeled as interregional. Cardinal's system averages 530 miles per trip, providing next day, on-time service that patterns today's manufacturing and distribution system of closer proximity to their customer base. With the flexibility for both longhaul and shorthaul, Cardinal offers one-thousand-mile plus service, along with regional length of haul, including intrastate service, in 11 states. Cardinal has a facility network consisting of 6 locations to perform timely preventive maintenance to better ensure safety in the community and equipment reliability. Cardinal operates in a competitive and highly service-sensitive market and, therefore, is committed to providing its customers with premier quality service. Cardinal's customers have defined a premier quality service as on- time, claim-free pickups and deliveries, accurately invoiced, and thorough communications, along with information support technology. During 1996, Cardinal's largest customer accounted for 10% of Cardinal's revenue and the ten largest customers accounted for 41% of Cardinal's revenue. Intermodal Operations Clipper WorldWide During 1996, CaroTrans joined the Clipper Group to form Clipper WorldWide, a new business unit which will focus on worldwide logistics, transportation and trade facilitation. The Clipper Group consists of Clipper Exxpress Company ("Clipper"), Agricultural Express of America, Inc. ("AXXA"), and Agile Freight System, Inc. ("Agile"). Clipper WorldWide will link the Clipper Group's domestic rail intermodal network with CaroTrans' strong ocean intermodal network. Clipper Exxpress Company Clipper, the largest of the three Clipper Group companies, accounted for approximately 60% of the Company's intermodal operations revenues during 1996. Clipper is a non-asset, non-labor intensive, knowledge-based provider of contract freight management and LTL intermodal services to its customers. Clipper is the largest consolidator and forwarder of LTL shipments and one of the largest intermodal marketing companies ("IMC") in the United States. Through its contract freight management business unit, Clipper provides logistics and transportation services, including intermodal and truck brokerage, warehousing, consolidation, transloading, repacking, and other ancillary services. As an IMC, Clipper arranges for loads to be picked up by a drayage company, tenders them to a railroad, and then arranges for a drayage company to deliver the shipment on the other end of the move. Clipper's role in this process is to select the most cost-effective means to provide quality service, and to expedite movement of the loads at various interface points to ensure seamless door-to-door transportation. Clipper's LTL collection and distribution network consists of 38 geographically dispersed locations throughout the United States. Selection of markets depends on size (lane density), availability of quality rail service and truck line-haul service, length of haul and competitor profile. Traffic moving between its ten most significant market pairs generates approximately 34% of Clipper's LTL revenue. Virtually all of Clipper's LTL revenue is derived from long-haul, metro area-to-metro area transportation. Although pickup and delivery and terminal handling is performed by agents, Clipper has an operations and customer service staff located at or near the agent's terminal to monitor service levels and provide an interface between customers and agents. Agricultural Express of America, Inc. (D/B/A Clipper Controlled Logistics) AXXA provides high quality, temperature-controlled intermodal service to fruit and produce brokers, growers, shippers and receivers and supermarket chains, primarily from the West to the Midwest, Canada, and the eastern United States. AXXA owns 425 temperature-controlled trailers that it deploys in the seasonal fruit and vegetable markets. These markets are carefully selected in order to take advantage of various seasonally high rates which peak at different times of the year. By focusing on the spot market for produce transport, AXXA is able to generate on average, a higher revenue per load compared to standard temperature-controlled carriers that pursue more stable year-round temperature-controlled freight. AXXA and Clipper are closely integrated, with Clipper relying on AXXA equipment to move its westbound freight, particularly during the winter months. Agile Freight System, Inc. (D/B/A Clipper Highway Services) Agile is a non-asset intensive, premium service, long-haul truckload carrier that utilizes two-person driver teams provided primarily by owner-operators. Agile provides "near airfreight" truckload service in tightly focused long- haul lanes that originate or terminate near a Clipper market. Much of Agile's value to the Clipper Group is that it can be relied upon if other carriers are not available to move full truckloads of consolidated LTL shipments by Clipper. During 1996, Agile began a local drayage operation. CaroTrans International, Inc. CaroTrans is a neutral, non-vessel operating common carrier ("NVOCC"), providing import and export, door-to-door and door-to-port service to more than 140 countries with 225 ports of discharge. Headquartered in Cherryville, North Carolina, CaroTrans is one of the largest NVOCC's in the world, offering more destinations by a "master loader" than any other NVOCC. Overseas, CaroTrans is recognized as a leader in international shipping between North America and many worldwide destinations. CaroTrans maintains offices in Rotterdam, Holland; London and Liverpool, United Kingdom; Singapore and San Juan. These strategically located offices direct the operations and sales activities of the carefully selected agents within its geographic region. Logistics Operations The Complete Logistics Company The Complete Logistics Company is a logistics organization dedicated to providing supply chain management to its customers, including such services as equipment leasing, logistics modeling, communications networks, warehouse management, consolidation and cross-dock facilities, computerized routing, and experienced drivers, dock workers, supervisors, and clerical staff. All services are controlled through an integrated computer system which allows Complete Logistics to administer all services provided in a seamless manner. As an asset-based, third-party, single-source logistics company, Complete Logistics has the capability to manage and coordinate a customer's logistics resources to meet their competitive requirements. Complete Logistics listens carefully to a customer's needs and then offers a range of customized options designed to give the customer control over their costs and performance. Ongoing success is ensured by maintaining constant communication and a close working partnership with the customer. Integrated Distribution, Inc. Integrated Distribution is a logistics company that manages the flow of goods and related information. Integrated Distribution's services include truckload and large LTL transportation, customized handling, freight consolidation, contract and public warehousing, and logistics. Transportation services are aimed at pickup and delivery of truckload and large LTL shipments. Integrated's trucks are equipped with satellite tracking and communications so that a customer always knows the location of their product. An in-house licensed brokerage service supplements the carrier operations. Through its customized handling of a customer's product, Integrated Distribution adds value by cross-docking, building store-ready displays, making final assemblies, applying bar code and price labels, and packaging. Integrated Distribution offers freight consolidation for membership clubs, grocery chains and distributors, and mass merchandisers. Integrated's program offers scheduled deliveries of LTL shipments with the economy of truckload rates. Logistics services include development and implementation of the optimal solution for a customer's distribution requirements, using owned or subcontracted assets. Tire Operations Treadco, Inc. Treadco is the nation's largest independent tire retreader for the trucking industry and the third largest commercial truck tire dealer. Treadco's revenues currently account for approximately 9% of the Company's consolidated revenues and are divided approximately 41%, 51% and 8% between retread sales, new tire sales and service revenues, respectively. In 1996, Treadco sold approximately 568,000 retreaded truck tires and approximately 399,000 new tires. Treadco has a total of 54 locations positioned across the South, Southwest, lower Midwest and West. Treadco retreads and sells truck tires at 26 production facilities located in Arizona, Arkansas, California, Florida, Georgia, Louisiana, Missouri, Nevada, Ohio, Oklahoma and Texas. The remaining 28 locations are sales facilities located in the states listed above, as well as Kansas, Kentucky, Mississippi and Tennessee. Precure Retread Process In August 1995, Bandag, Inc. ("Bandag"), Treadco's tread rubber supplier and franchiser of the retreading process used by substantially all of Treadco's locations, advised Treadco that certain franchise agreements would not be renewed upon expiration in 1996. Bandag subsequently advised Treadco that unless Treadco used the Bandag process exclusively, Bandag would not renew any of Treadco's franchise agreements when they expired. In October 1995, Treadco reached an agreement with Oliver Rubber Company ("Oliver") to be a supplier of equipment and related materials for Treadco's truck tire precure retreading business. Oliver agreed to supply Treadco with retreading equipment and related materials for all production facilities which ceased being Bandag franchised locations. During the first three quarters of 1996, Treadco converted its production facilities that were under Bandag retread franchises to Oliver licensed facilities. Under the Oliver license agreements, Treadco purchases from Oliver precured tread rubber and bonding cushion gum and PNEUFLEX tread rubber (collectively "Rubber Products"). Treadco's obligation to purchase Rubber Products from Oliver is subject to (i) Oliver's continuing to produce Rubber Products of no less quality and durability than it presently produces, and (ii) Oliver's overall pricing program for Treadco. Mold Cure Retread Process On February 1, 1996, Treadco gained Bridgestone certification to produce and sell ONCOR remanu-factured tires at its St. Louis (MO) production facility. This is the first plant in the United States using Bridgestone's "ONCOR Tread Renewal System." However, the Bridgestone mold cure process has been used for many years outside the United States, predominately in Japan. Sales and Marketing Treadco's sales and marketing strategy is based on its service strengths, network of production and sales facilities and strong regional reputation. In addition to excellent service, Treadco offers broad geographical coverage across the South, Southwest, lower Midwest and West. This coverage is important for customers because they are able to establish uniform pricing, utilize national account billing processes similar to those used by major new tire suppliers, and generally reduce the risk of price fluctuations when service is needed. None of Treadco's customers for retreads and new tires, including ABF or other affiliates, represented more than 2% of Treadco's revenues for 1996. ABF accounted for approximately $2.5 million of Treadco's revenues in 1996 (1.8%), and has not accounted for more than 3% of Treadco's revenues in any of the last ten years. Treadco's customers are primarily mid-sized companies that maintain in-house trucking operations and rely on Treadco's expertise in servicing their tire management programs. Treadco markets its products through sales personnel located at each of its 54 locations. The sales locations are supplied with retreads from nearby Treadco production facilities. Treadco locates its facilities in close proximity to interstate highways and operates mobile service trucks to provide ready accessibility and convenience to its customers, particularly fleet owners. Ownership As of December 31, 1996, the Company's percentage ownership of Treadco was 45.7%. Treadco is consolidated with the Company for financial reporting purposes, with the ownership interest of the other stockholders reflected as a minority interest. Carolina Breakdown Service, Inc. Carolina Breakdown Service, Inc., ("CBS") is a third-party vehicle maintenance logistics company operating from a Cherryville, North Carolina base, with service capabilities in the 48 contiguous states, and Central and Eastern Canada. The CBS nationwide operation provides any and all necessary scheduled and unscheduled vehicle repairs and driver assistance to all classes and types of trucks, trailers, and combination units 24 hours a day, 7 days a week. In-house maintenance expertise and regimentation also allows for additional business as a technical assistance provider to the original equipment manufacturer community, and through the use of strategic outsourcing via a qualified vendor network of over 53,000 vendors nationwide, CBS handles over 100 service and technical calls a day from its client base of approximately 700 trucking and OEM accounts compared to 492 at the end of 1995. Carolina Breakdown Service, Inc., was incorporated in 1993 but derives its professional training from over four decades of experience, having serviced equipment for Carolina Freight. Environmental and Other Government Regulations The Company is subject to federal, state and local environmental laws and regulations relating to, among other things, contingency planning for spills of petroleum products, and its disposal of waste oil. Additionally, the Company is subject to significant regulations dealing with underground fuel storage tanks. The Company's subsidiaries store some of its fuel for its trucks and tractors in approximately 148 underground tanks located in 33 states. The Company believes that it is in substantial compliance with all such environmental laws and regulations and is not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on the Company's competitive position, operations or financial condition. The Company has in place policies and methods designed to conform with these regulations. The Company estimates that capital expenditures for upgrading underground tank systems and costs associated with cleaning activities for 1997 will not be material. 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 had 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. Treadco is affected by a number of governmental regulations relating to the development, production and sale of retreaded and new tires, the raw materials used to manufacture such products (including petroleum, styrene and butadiene), and to environmental, tax and safety matters. In addition, the retreading process creates rubber particulate, or "dust," which requires gathering and disposal, and Treadco disposes of used and nonretreadable tire casings, both of which require compliance with environmental and disposal laws. In some situations, Treadco could be liable for disposal problems, even if the situation resulted from previous conduct of Treadco that was lawful at the time or from improper conduct of, or conditions caused by, persons engaged by Treadco to dispose of particulate and discarded casings. Such cleanup costs or costs associated with compliance with environmental laws applicable to the tire retreading process could be substantial and have a material adverse effect on Treadco's financial condition. Treadco believes that it is in substantial compliance with all laws applicable to such operations, however, and is not aware of any situation or condition that could reasonably be expected to have a material adverse effect on Treadco's financial condition. As of December 31, 1996, the Company has accrued approximately $3.1 million to provide for environmental-related liabilities. The Company's environmental accrual is based on management's best estimate of the actual liability. The Company's estimate is founded on management's experience in dealing with similar environmental matters and on actual testing performed at some sites. Management believes that the accrual is adequate to cover environmental liabilities based on the present environmental regulations. ITEM 2. PROPERTIES The Company owns its executive offices in Fort Smith, Arkansas. LTL Motor Carrier Operations Segment The ABF Group currently operates out of 317 terminal facilities of which it owns 82, leases 59 from an affiliate and leases the remainder from non- affiliates. ABF's principal terminal facilities are as follows: No. of Doors Square Footage Owned: Dayton, Ohio 315 218,000 Ellenwood, Georgia 228 109,845 South Chicago, Illinois 228 109,650 Winston-Salem, North Carolina 150 95,700 Carlisle, Pennsylvania (two structures) 241 82,960 Dallas, Texas 108 72,500 Leased from affiliate, Transport Realty: North Little Rock, Arkansas 195 82,050 Pico Rivera, California 94 22,500 G.I. Trucking currently operates out of 70 service centers of which it owns 10 facilities, leases two facilities from an affiliate and leases the remainder from agents or non-affiliates. Tire Operations Segment Treadco currently operates from 54 locations. Treadco owns 13 production and 4 sales facilities and leases the remainder from non-affiliates. ITEM 3. LEGAL PROCEEDINGS Various legal actions, the majority of which arise in the normal course of business, are pending. None of these legal actions is expected to have a material adverse effect on the Company's financial condition or results of operations. The Company maintains liability insurance against most risks arising out of the normal course of its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during the fourth quarter ended December 31, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market and Dividend Information The Company's Common Stock trades on The Nasdaq Stock Market under the symbol "ABFS." The following table sets forth the high and low recorded last sale prices of the Common Stock during the periods indicated as reported by Nasdaq and the cash dividends declared: Cash High Low Dividend 1996 First quarter $9.375 $5.000 $.01 Second quarter 9.250 6.875 - Third quarter 7.688 5.125 - Fourth quarter 7.375 4.125 - 1995 First quarter $13.000 $10.500 $.01 Second quarter 11.500 7.938 .01 Third quarter 13.875 8.500 .01 Fourth quarter 11.875 6.625 .01 At March 10, 1997, there were 19,504,473 shares of the Company's stock outstanding which were held by 959 shareholders of record and through approximately 7,000 nominee or street name accounts with brokers. The Company's Board of Directors suspended payment of dividends on the Company's Common Stock during the second quarter of 1996. The declaration and payment of, and the timing, amount and form of future dividends on the Common Stock will be determined based on the Company's results of operations, financial condition, cash requirements, certain corporate law requirements and other factors deemed relevant by the Board of Directors. The Company's credit agreement limits the total amount of "restricted payments" that the Company may make, including dividends on its capital stock, to $6.5 million in any one calendar year. The annual dividend requirements on the Company's preferred stock totals approximately $4.3 million. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data - Five-Year Summary Arkansas Best Corporation
Year Ended December 31 1996 1995 (6) 1994 1993 1992 ($ in thousands except per share amounts) Statement of Operations Data: Operating revenues $1,659,184 $1,437,279 $1,098,421 $1,009,918 $ 959,949 Operating income (loss) (22,328) (23,459) 48,115 51,369 57,255 Minority interest in subsidiary (1,768) 1,297 3,523 3,140 2,825 Other expenses, net 4,309 5,185 968 731 1,496 Interest expense 31,869 17,046 6,985 7,248 17,285 Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change (56,738) (46,987) 36,639 40,250 35,649 Provisions (credit) for income taxes (20,135) (14,195) 17,932 19,278 16,894 Income (loss) before extraordinary item and cumulative effect of accounting change (36,603) (32,792) 18,707 20,972 18,755 Extraordinary item (1) - - - - (661) (15,975) Cumulative effect on prior years of change in revenue recognition method (2) - - - - (3,363) Net income (loss) (36,603) (32,792) 18,707 20,311 (583) Income (loss) per common share before extraordinary item and cumulativeeffect of accounting change (2.10) (1.90) .74 .89 .99 Net income (loss) per common share (2.10) (1.90) .74 .85 (.03) Cash dividends paid per common share (3) .01 .04 .04 .04 .02 Pro Forma Data (4): Income (loss) before extraordinary item $ (36,603) $ (32,792) $ 18,707 $ 20,972 $ 18,755 Income (loss) before extraordinary item per common share (2.10) (1.90) .74 .89 .99 Net income (loss) (36,603) (32,792) 18,707 20,311 2,780 Net income (loss) per common share (2.10) (1.90) .74 .85 .15 Balance Sheet Data (as of the end of the period): Total assets $ 843,200 $ 985,837 $ 569,045 $ 447,733 $ 428,345 Current portion of long-term debt 39,082 26,634 65,161 15,239 28,348 Long-term debt (including capital leases and excluding current portion) 326,950 399,144 59,295 43,731 107,075 Other Data Capital expenditures (5) $ 41,599 $ 74,808 $ 64,098 $ 33,160 $ 26,596 Depreciation and amortization 56,389 46,627 28,087 28,266 34,473 Goodwill amortization 4,609 5,135 3,527 3,064 3,034 Other amortization 3,740 1,044 501 319 755 ITEM 6. SELECTED FINANCIAL DATA -- Continued (1)For 1993, represents an extraordinary charge of $661,000 (net of tax of $413,000) from the loss on extinguishment of debt. For 1992, represents an extraordinary charge of $15,975,000 (net of tax of $9,700,000) from the loss on extinguishment of debt in May 1992. (2)Represents a charge of $3,363,000 (net of tax of $2,100,000) to reflect the cumulative effect on prior years of the change in method of accounting for the recognition of revenue as required under the Financial Accounting Standards Board's Emerging Issues Task Force Ruling 91-9 ("EITF 91-9"). (3)Cash dividends on the Company's Common Stock were indefinitely suspended by the Company as of the second quarter of 1996. No cash dividends were paid by the Company during the first three quarter of 1992. (4)Assumes the change in accounting method for recognition of revenue as required under EITF 91-9 occurred January 1, 1992. (5)Net of equipment trade-ins. Does not include revenue equipment placed in service under operating leases, which amounted to $24.6 million in 1995, $24.8 million in 1993 and $25.5 million in 1992. There were no operating leases for revenue equipment entered into for 1996 and 1994. See "Management's Discussion and Analysis-Liquidity and Capital Resources." (6)1995 selected financial data is not comparative to the prior years' information due to the WorldWay acquisition effective August 12, 1995. In conjunction with the WorldWay acquisition, assets with a fair value of $313 million were acquired and liabilities of approximately $252 million were assumed. Approximately $134 million in revenues for the period from August 12, 1995 to December 31, 1995, are included in the 1995 consolidated statement of operations generated by subsidiaries acquired as part of the WorldWay acquisition.
ITEM 7. 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 less-than-truckload ("LTL") and truckload motor carrier operations, logistics and freight intermodal operations and truck tire retreading and new tire sales. Principal subsidiaries owned are ABF Freight System, Inc. ("ABF"), Treadco, Inc. ("Treadco"), and, effective September 30, 1994, Clipper Exxpress Company ("Clipper"). Also, effective August 12, 1995, pursuant to its acquisition of WorldWay Corporation ("WorldWay"), the Company owns Cardinal Freight Carriers, Inc. ("Cardinal"), G.I. Trucking Company ("G.I. Trucking"), CaroTrans International, Inc. ("CaroTrans"), and The Complete Logistics Company ("Complete Logistics"). (See discussion below.) The Company in 1991 reduced its ownership in Treadco, through an initial public offering of Treadco common stock, to approximately 46%, while retaining control of Treadco by reason of its stock ownership, board representation and provision of management services. As a result, Treadco is consolidated with the Company for financial reporting purposes, with the ownership interests of the other stockholders reflected as minority interest. On September 30, 1994, the Company consummated the purchase of all outstanding stock of the Clipper Group. Assets of approximately $26.2 million were acquired and liabilities of approximately $14.7 million were assumed. The Company's total purchase price was $60.9 million. The Clipper acquisition was accounted for under the purchase method, effective September 30, 1994. The purchase price was allocated to assets and liabilities based on their estimated fair values as of the date of acquisition. Approximately $49.4 million of goodwill was recorded as a result of the purchase allocation and is being amortized over a 30-year period. On July 14, 1995, ABC Acquisition Corporation (the "Purchaser"), a wholly owned subsidiary of the Company, commenced a tender offer (the "Offer") to purchase all outstanding shares of common stock of WorldWay Corporation at a purchase price of $11 per share. Pursuant to the Offer, on August 11, 1995, the Purchaser accepted for payment shares of WorldWay validly tendered, representing approximately 91% of the shares outstanding. On October 12, 1995, the remaining shares of WorldWay's common stock were converted into the right to receive $11 per share in cash. For financial statement purposes, the WorldWay acquisition has been accounted for under the purchase method effective August 12, 1995. Consequently, the accompanying financial statements include the results of operations for WorldWay and its subsidiaries since August 12, 1995. During 1996, the Company finalized the allocation of the purchase cost which resulted in an increase in goodwill of $13 million from the preliminary allocation. Assets with a fair value of approximately $313 million were acquired and liabilities with a fair value of approximately $252 million were assumed. The Company's total purchase price was $76 million. Approximately $15 million of goodwill was recorded as a result of the purchase allocation and is being amortized over a 30-year period. Segment Data The following tables reflect information prepared on a business segment basis, which includes reclassification of certain expenses and costs between the Company and its subsidiaries and elimination of the effects of intercompany transactions. Operating profit on a business segment basis differs from operating income as reported in the Company's Consolidated Financial Statements. Other income and other expenses (which include amortization expense), except for interest expense and minority interest, which appear below the operating income line in the Company's Statement of Operations, have been allocated to individual segments for the purpose of calculating operating profit on a segment basis. During 1996, the Company changed the name of its Forwarding Operations Segment to the Intermodal Operations Segment. The segment information for 1994 has been restated to reflect the Company's current reported business segments. For 1995 and subsequent periods, information that was previously reported in the service and other business segment will be reported in the logistics operations segment.
Year Ended December 31 1996 1995 1994 ($ thousands) OPERATING REVENUES LTL motor carrier operations $ 1,199,437 $1,088,416 $ 918,663 Intermodal operations 180,619 140,691 31,468 Truckload motor carrier operations 74,623 27,992 - Logistics operations 54,849 31,699 7,514 Tire operations 141,613 145,127 138,665 Other 8,043 3,354 2,111 ----------- ---------- ---------- $ 1,659,184 $1,437,279 $1,098,421 =========== ========== ========== OPERATING EXPENSES AND COSTS LTL MOTOR CARRIER OPERATIONS Salaries and wages $ 832,474 $ 779,453 $ 613,187 Supplies and expenses 130,330 120,439 96,210 Operating taxes and licenses 47,552 45,906 35,928 Insurance 28,393 24,122 18,237 Communications and utilities 29,897 26,776 22,639 Depreciation and amortization 41,755 37,822 24,302 Rents and purchased transportation 95,169 76,823 67,550 Other 12,296 8,219 4,298 Other non-operating (net) (269) 1,771 690 ----------- ---------- ---------- 1,217,597 1,121,331 883,041 INTERMODAL OPERATIONS Cost of services 151,799 117,455 26,817 Selling, administrative and general 27,658 18,711 3,542 Other non-operating (net) 1,708 1,705 414 ---------- ---------- ---------- 181,165 137,871 30,773 Year Ended December 31 1996 1995 1994 ($ thousands) TRUCKLOAD MOTOR CARRIER OPERATIONS Salaries and wages $ 27,483 $ 9,746 $ - Supplies and expenses 13,552 4,530 - Operating taxes and licenses 7,060 2,571 - Insurance 2,208 980 - Communications and utilities 1,038 420 - Depreciation and amortization 3,580 1,249 - Rents and purchased transportation 14,880 5,348 - Other 434 108 - Other non-operating (net) 17 9 - ---------- ---------- ---------- 70,252 24,961 - LOGISTICS OPERATIONS Cost of services 50,612 30,588 7,100 Selling, administrative and general 7,081 3,711 1,388 Other non-operating (net) (62) 11 (6) ---------- ---------- ---------- 57,631 34,310 8,482 TIRE OPERATIONS Cost of sales 109,673 108,686 100,909 Selling, administrative and general 37,491 31,642 26,206 Other non-operating (net) (730) 375 471 ---------- ---------- ---------- 146,434 140,703 127,586 SERVICE AND OTHER 12,742 6,747 1,392 ---------- ---------- ---------- $1,685,821 $1,465,923 $1,051,274 ========== ========== ========== OPERATING PROFIT (LOSS) LTL motor carrier operations $ (18,160) $ (32,915) $ 35,622 Intermodal operations (546) 2,820 695 Truckload motor carrier operations 4,371 3,031 - Logistics operations (2,782) (2,611) (968) Tire operations (4,821) 4,424 11,079 Other (4,699) (3,393) 719 ---------- ---------- ---------- TOTAL OPERATING PROFIT (LOSS) (26,637) (28,644) 47,147 INTEREST EXPENSE 31,869 17,046 6,985 MINORITY INTEREST (1,768) 1,297 3,523 ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES $ (56,738) $ (46,987) $ 36,639 ========== ========== ==========
The following table sets forth for the periods indicated a summary of the Company's operations as a percentage of revenues presented on a business segment basis as shown in the table on the preceding page. The basis of presentation for business segment data differs from the basis of presentation for data the Company provides to the Department of Transportation ("D.O.T.").
Year Ended December 31 1996 1995 1994 LTL MOTOR CARRIER OPERATIONS Salaries and wages 69.4% 71.6% 66.7% Supplies and expenses 10.9 11.1 10.5 Operating taxes and licenses 4.0 4.2 3.9 Insurance 2.4 2.2 2.0 Communications and utilities 2.5 2.5 2.5 Depreciation and amortization 3.5 3.5 2.6 Rents and purchased transportation 7.9 7.1 7.4 Other 1.0 0.7 0.4 Other non-operating (net) (0.1) 0.1 0.1 ------ ------ ------ Total LTL Motor Carrier Operations 101.5% 103.0% 96.1% ====== ====== ====== INTERMODAL OPERATIONS Cost of services 84.0% 83.5% 85.2% Selling, administrative and general 15.3 13.3 11.3 Other non-operating (net) 1.0 1.2 1.3 ------ ------ ------ Total Intermodal Operations 100.3% 98.0% 97.8% ====== ====== ====== TRUCKLOAD MOTOR CARRIER OPERATIONS Salaries and wages 36.8% 34.8% - Supplies and expenses 18.2 16.2 - Operating taxes and licenses 9.5 9.2 - Insurance 3.0 3.5 - Communications and utilities 1.4 1.5 - Depreciation and amortization 4.8 4.5 - Rents and purchased transportation 19.9 19.1 - Other 0.6 0.4 - Other non-operating (net) (0.1) - - ------ ------ ------ Total Truckload Motor Carrier Operations 94.1% 89.2% - ====== ====== ====== Year Ended December 31 1996 1995 1994 LOGISTICS OPERATIONS Cost of sales 92.3% 96.5% 94.5% Selling, administrative and general 12.9 11.7 18.5 Other non-operating (net) (0.1) - (0.1) ------ ------ ------ Total Logistics Operations 105.1% 108.2% 112.9% ====== ====== ====== TIRE OPERATIONS Cost of sales 77.4% 74.9% 72.8% Selling, administrative and general 26.5 21.8 18.9 Other non-operating (net) (0.5) 0.3 0.3 ------ ------ ------ Total Tire Operations 103.4% 97.0% 92.0% ====== ====== ====== OPERATING PROFIT LTL motor carrier operations (1.5)% (3.0)% 3.9% Intermodal operations (0.3) 2.0 2.2 Truckload motor carrier operations 5.9 10.8 - Logistics operations (5.1) (8.2) (12.9) Tire operations (3.4) 3.0 8.0
Results of Operations 1996 as Compared to 1995 Consolidated revenues for 1996 increased 15.4% due to the subsidiaries acquired in the WorldWay acquisition being included for all of 1996 versus 4 1/2 months of 1995. Earnings per common share for 1996 and 1995 give consideration to preferred stock dividends of $4.3 million. Outstanding shares for 1996 and 1995 do not assume conversion of preferred stock to common shares, because conversion would be anti-dilutive for these periods. The Company had an operating loss of $26.6 million in 1996 compared to an operating loss of $28.6 million for 1995. Less-Than-Truckload Motor Carrier Operations Segment. The Company's LTL motor carrier operations are conducted primarily through ABF and effective August 12, 1995, through G.I. Trucking. Revenues from the LTL motor carrier operations segment for 1996 increased 10.2% over 1995. In 1996, ABF accounted for 92% of the LTL segment revenues. The increase in revenues was due in part because ABF was more successful in retaining its January 1, 1996 rate increase of 5.8% than it had been in recent years. ABF's total tonnage increased 4.3% which consisted of a 5.9% increase in LTL tonnage offset in part by a 1.5% decrease in truckload tonnage. ABF's tonnage increased primarily as a result of including a full year of business retained from the merger of the operations of Carolina Freight Carriers ("Carolina Freight") and Red Arrow Freight Lines ("Red Arrow") into ABF in September 1995. On January 1, 1997, ABF implemented an overall rate increase of 5.9%. The LTL segment revenues also increased as a result of including a full year of G.I. Trucking's operations for 1996. During 1996, G.I. Trucking continued to replace revenues lost as a result of the ABF/Carolina merger. G.I. had served Carolina Freight customers with deliveries to western states where Carolina Freight did not have terminal operations. ABF serves ABF and former Carolina Freight customers coast-to-coast. Fourth quarter 1996 revenues were 44% higher than the fourth quarter of 1995, which reflected the substantial decrease in revenue caused by the merger. Effective with the ABF/Carolina merger, ABF inherited Carolina Freight's regional distribution terminal operations which reconfigured the way freight flowed through ABF's terminal system. This reconfiguration created many operating inefficiencies in ABF's system. Labor dollars as a percent of revenue increased, empty miles increased and weight per trailer decreased, which all had an adverse impact on expenses. During 1996, ABF discontinued twelve of the inherited regional distribution terminal operations. These closings, which occurred during the first two quarters, returned ABF to its normal terminal system configuration. This reconfiguration allowed ABF to gradually improve its direct labor costs, improve its weight per trailer and reduce its empty miles. ABF's operating ratio as reported to the D.O.T. was 99.3% in the fourth quarter of 1996 compared to 109.3% in the fourth quarter of 1995. Salaries, wages and benefits increased 3.8% annually effective April 1, 1996, pursuant to ABF's collective bargaining agreement with its Teamsters employees. Effective April 1, 1997, for the final year of the Teamsters' agreement, ABF's salaries, wages and benefits will increase 3.9%. Intermodal Operations Segment. The Company's intermodal operations are conducted primarily through the Clipper Group and effective August 12, 1995, CaroTrans. Comparisons for 1996 were affected by the WorldWay acquisition in August 1995. Therefore, certain comparisons of the results of operations for the intermodal operations segment are not meaningful and are not presented. Revenues for the intermodal operations segment increased 28.4% in 1996, resulting primarily from the inclusion of CaroTrans for the full year and a 6% increase in revenues for the Clipper Group. Effective January 1, 1997, Clipper implemented a 5.9% rate increase, with an effective rate of 4% on LTL revenues. During 1996, Clipper experienced an increase in the weight per shipment, resulting in a decline in revenue per hundredweight without a proportionate reduction in cost per hundredweight with a resulting decline in margins on the higher revenue. CaroTrans expanded into some higher cost markets during 1996 and also experienced a shift in market mix to more full container-load freight. Also, ocean container costs increased. Both of these factors negatively impacted operating results. Truckload Motor Carrier Operations Segment. Effective August 12, 1995, with the WorldWay acquisition, the Company began reporting a new business segment, truckload motor carrier operations.The Company's truckload motor carrier operations are conducted through Cardinal. Cardinal's revenues increased over 1995 primarily from the inclusion of a full year of operations in 1996. However, revenues were lower than expected in 1996 due to the continuing driver shortage in the truckload transportation industry. Higher fuel prices per gallon resulted in higher-than-expected fuel costs which were only partially recovered by fuel surcharges. Cardinal also experienced higher-than-normal maintenance costs due to aging of revenue equipment. Cardinal anticipates replacing some of its older equipment in 1997. Logistics Operations Segment. Effective August 12, 1995, with the WorldWay acquisition, the Company began reporting a new business segment, logistics operations. The Company's logistics operations are conducted through Integrated Distribution, Inc. and effective August 12, 1995, through Complete Logistics and Innovative Logistics. During the 1996 fourth quarter, the operations of Innovative Logistics were merged with and into Complete Logistics and the Clipper Group. Innovative's non-asset intensive customer accounts and operations were merged into the Clipper Group with the remaining accounts absorbed by Complete Logistics. Comparisons for 1996 were affected by the WorldWay acquisition in August 1995. Therefore, comparisons of the results of operations for the intermodal operations segment are not meaningful and are not presented. The increase in logistics operations revenues in 1996 resulted primarily from the inclusion of Complete Logistics and Innovative Logistics for the full year and a 14% increase in revenues at Integrated Distribution. Tire Operations Segment. Treadco's revenues for 1996 decreased 2.4% to $141.6 million from $145.1 million for 1995. For 1996, "same store" sales decreased 9.2%, offset in part by a 6.7% increase in "new store" sales. "Same store" sales include both production locations and satellite sales locations that have been in existence for all of 1996 and 1995. Revenues from retreading for 1996 decreased 9.4% to $69.2 million from $76.4 million for 1995. Revenues from new tire sales increased 5.3% to $72.4 million for 1996 from $68.7 million for 1995. As previously disclosed in 1995, Treadco's longtime tread rubber supplier, Bandag Incorporated ("Bandag"), advised Treadco that certain franchises expiring in 1996 would not be renewed. Bandag subsequently advised the Company that unless the Company used the Bandag process exclusively, Bandag would not renew any of the Company's franchise agreements when they expired. The Company's remaining Bandag franchise agreements had expiration dates in 1997 and 1998. Subsequently, Treadco management made the decision to convert all of its Bandag franchise locations to Oliver Rubber Company ("Oliver") licensed facilities. During September 1996, Treadco completed the conversion of its production facilities to Oliver licensed facilities. The conversion was completed in phases throughout the first three quarters of 1996 with approximately one- third of its production facilities converted each quarter. The conversion resulted in up to two lost production days during each conversion, some short-term operational inefficiencies and time lost as production employees familiarized themselves with the new equipment. Also, management has been required to spend time with the conversion at the expense of normal daily operations. Treadco has seen increased competition as Bandag has granted additional franchises in some locations currently being served by Treadco. The new competition has led to increased pricing pressures in the marketplace. As anticipated, Bandag continues to target Treadco's customers which has caused the loss of a substantial amount of national account business. In addition, in many cases, the business retained is at lower profit margins. Costs of sales for the tire operations segment as a percent of revenue increased primarily due to expenses incurred during the conversion and because tire margins are less as a result of increased pricing pressures. Selling, administrative and general expenses as a percent of revenue increased as a result of several factors including costs associated with the conversion from Bandag, higher self-insurance costs, expenses associated with employee medical benefits and legal costs. Other non-operating items for 1996 include a $1 million gain on the sale of assets related to the conversion from Bandag to Oliver. Interest. Interest expense was $31.9 million for 1996 compared to $17.0 million for 1995, primarily due to a higher level of outstanding debt. The increase in long-term debt consisted primarily of debt incurred in the WorldWay acquisition and debt incurred for working capital requirements during the fourth quarter of 1995. Income Taxes. The difference between the effective tax rate for 1996 and the federal statutory rate resulted primarily from state income taxes, amortization of goodwill, minority interest, and other nondeductible expenses (see Note G to the consolidated financial statements). At December 31, 1996, the Company had deferred tax assets of $48.2 million, net of a valuation allowance of $1.2 million, and deferred tax liabilities of $54.2 million. The Company believes that the benefits of the deferred tax assets of $48.2 million will be realized through the reduction of future taxable income. Management has considered appropriate factors in assessing the probability of realizing these deferred tax assets. These factors include the deferred tax liabilities of $54.2 million and the presence of significant taxable income in 1994 and the extended carryforward period for net operating losses included in deferred tax assets. The valuation allowance has been provided for the benefit of net operating loss carryovers in certain states with relatively short carryover periods. Management intends to evaluate the realizability of deferred tax assets on a quarterly basis by assessing the need for any additional valuation allowance. 1995 as Compared to 1994 Consolidated revenues of the Company for 1995 were $1.4 billion compared to $1.1 billion for 1994. The Company had an operating loss of $28.6 million for 1995 compared to operating profit of $47.1 million for 1994. For 1995, the Company had a net loss of $32.8 million, or a loss of $1.90 per common share, compared to net income of $18.7 million, or $.74 per common share for 1994. Revenues for 1995 increased due to the acquisition of WorldWay and the acquisition adversely impacted operating results for the same period. For the period from August 12 to September 30, 1995, WorldWay incurred a consolidated after-tax net loss of $13.6 million and a pre-tax loss from operations of $20.4 million. The WorldWay loss is attributable to Carolina Freight and Red Arrow which as of September 24, 1995 were merged into ABF. Consolidated revenues and income for 1994 were adversely affected by the 24-day labor strike by the Teamsters' union employees of ABF in April 1994. Earnings per common share for 1995 and 1994 give consideration to preferred stock dividends of $4.3 million. Average common shares outstanding for 1995 were 19.5 million shares compared to 19.4 million shares for 1994. Outstanding shares for 1995 and 1994 do not assume conversion of preferred stock to common shares, because conversion would be anti-dilutive for these periods. Less-Than-Truckload Motor Carrier Operations Segment. The Company's LTL motor carrier operations are conducted primarily through ABF and effective August 12, 1995, through G.I. Trucking. Comparisons for 1995 were affected by the acquisition of WorldWay in August 1995 and by the ABF Teamsters' employees strike in April 1994 (see discussion above). Therefore, comparisons of the results of operations for the LTL motor carrier operations segment are not meaningful and are not presented. As a result of the acquisition of WorldWay, LTL motor carrier operations segment includes the results of Carolina Freight and Red Arrow for the period from August 12, 1995 to their merger into ABF on September 24, 1995. Revenues from the LTL motor carrier operations segment for 1995 were $1.1 billion, with an operating loss of $32.9 million. Earnings at ABF were negatively affected by a slowing economy and increased pricing pressure which resulted in tonnage levels below Company expectations for 1995. ABF retained less revenue from the merger of Carolina Freight and Red Arrow than was originally estimated, resulting in over-staffing and excess equipment. This shortfall in revenue was compounded by weakened shipper demand and continued price competition during the fourth quarter. The over- staffing resulted in increased salaries and wages expense while depreciation expense was higher because of the excess revenue equipment. Effective with the merger, ABF inherited Carolina Freight's regional distribution terminal operations, which reconfigured the way freight flowed through ABF's terminal system. This reconfiguration created many operating inefficiencies in ABF's system. Labor dollars as a percent of revenue increased, empty miles increased and weight per trailer decreased, all of which had an adverse impact on expenses. ABF has implemented a combination of cost-cutting and revenue-raising measures to stem its operating losses. ABF has closed a number of regional distribution terminal operations which it inherited when Carolina Freight and Red Arrow were merged into ABF. These closings will realign ABF to its normal terminal system configuration. ABF implemented a 5.8% freight rate increase on January 1, 1996 and is in the process of selling excess real estate and revenue equipment resulting from the Carolina Freight and Red Arrow merger. Salaries, wages and benefits increased 3.3% annually effective April 1, 1995, pursuant to ABF's collective bargaining agreement with its Teamsters' employees and will increase 3.8% annually effective April 1, 1996. Intermodal Operations Segment. Effective September 30, 1994, with the purchase of the Clipper Group, the Company began reporting a new business segment, intermodal operations. The Company's intermodal operations are conducted primarily through the Clipper Group, effective September 30, 1994, and CaroTrans, effective August 12, 1995. Comparisons for 1995 were affected by the WorldWay acquisition in August 1995 and by the acquisition of the Clipper Group in September 1994. Therefore, comparisons of the results of operations for the intermodal operations segment are not meaningful and are not presented. For 1995, the intermodal operations segment had revenues of $140.7 million with an operating profit of $2.8 million. Intermodal operations were adversely affected during 1995 by soft economic conditions. Truckload Motor Carrier Operations Segment. Effective August 12, 1995, with the WorldWay acquisition, the Company began reporting a new business segment, truckload motor carrier operations. The Company's truckload motor carrier operations are conducted through Cardinal. From August 12, 1995 to December 31, 1995, Cardinal had revenues of $28.0 million with an operating profit of $3.0 million. Cardinal's operations were adversely affected during 1995 by soft economic conditions. Logistics Operations Segment. Effective August 12, 1995, with the acquisition of WorldWay, the Company began reporting a new business segment, logistics operations. The Company's logistics operations are conducted through Integrated Distribution, Inc. and effective August 12, 1995, through Complete Logistics and Innovative Logistics. For 1995, the logistics operations segment had operating revenues of $31.7 million with an operating loss of $2.6 million. Tire Operations Segment. Treadco's revenues for 1995 increased 4.7% to $145.1 million from $138.7 million for 1994. For 1995, "same store" sales increased 2.4% and "new store" sales accounted for 2.7% of the increase from 1994. "Same store" sales include both production locations and satellite sales locations that have been in existence for all of 1995 and 1994. Although a softer economy during the quarter slowed demand for both new replacement and retreaded truck tires, "same store" sales were higher primarily as a result of an increase in market share in the areas served. Treadco has seen increased competition as Bandag Incorporated ("Bandag") has granted additional franchises in some locations currently being served by Treadco. Revenues from retreading for 1995 increased 1.6% to $76.4 million from $75.2 million for 1994. Revenues from new tire sales increased 8.3% to $68.7 million for 1995 from $63.5 million for 1994. Tire operations segment operating expenses as a percent of revenues were 97.0% for 1995 compared to 92.0% for 1994. Cost of sales for the tire operations segment as a percent of revenues increased to 74.9% for 1995 from 72.8% for 1994. Bandag, Treadco's tread rubber supplier, implemented three price increases, totaling 9.6%, during 1994 and the beginning of 1995 which Treadco was unsuccessful in fully passing along to customers. Selling, administrative and general expenses for the tire operations segment increased to 21.8% for 1995 from 18.9% for 1994. The increase resulted primarily from costs resulting from Bandag's termination of the Company's franchises, an increase in bad debt expense, costs associated with employee medical benefits and data processing costs associated with the installation of a production and inventory control system. In August 1995, Bandag, Treadco's tread rubber supplier and franchiser of the retreading process used by substantially all of Treadco's locations, announced that certain franchise agreements would not be renewed upon expiration in 1996. Bandag subsequently advised Treadco that unless Treadco used the Bandag process exclusively, Bandag would not renew any of Treadco's franchise agreements when they expired. In October 1995, Treadco announced it had reached an agreement for the Oliver Rubber Company ("Oliver") to be a supplier of equipment and related materials for Treadco's truck tire precure retreading business. The agreement provides that Oliver will supply Treadco with retreading equipment and related materials for any Treadco facilities which ceased being a Bandag franchised location. Interest. Interest expense was $17.0 million for 1995 compared to $7.0 million for 1994, primarily due to a higher level of outstanding debt. The increase in long-term debt consisted primarily of debt incurred in the acquisition of WorldWay and debt incurred for working capital requirements during the fourth quarter of 1995. Also, the Company incurred additional debt in the latter part of 1994 in the acquisition of the Clipper Group and a term loan used to finance construction of the Company's corporate office building which was completed in 1995. Income Taxes. The difference between the effective tax rate for 1995 and the federal statutory rate resulted primarily from state income taxes, amortization of goodwill, minority interest, and other nondeductible expenses (see Note G to the consolidated financial statements). At December 31, 1995, the Company had deferred tax assets of $45.6 million, net of a valuation allowance of $1.2 million, and deferred tax liabilities of $62.0 million. The Company believes that the benefits of the deferred tax assets of $45.6 million will be realized through the reduction of future taxable income. Management considered appropriate factors in assessing the probability of realizing these deferred tax assets. These factors include the deferred tax liabilities of $62.0 million and the presence of significant taxable income in 1993 and 1994 and the extended carryforward period for net operating losses included in deferred tax assets. The valuation allowance has been provided for the benefits of net operating loss carryovers in certain states where operations were affected by the merger of Carolina Freight into ABF. Liquidity and Capital Resources The ratio of current assets to current liabilities was .86:1 at December 31, 1996 compared to 1.06:1 at December 31, 1995. Net cash provided by operating activities for 1996 was $30.2 million compared to net cash used of $66.2 million in 1995. The increase is due primarily to the reductions in receivables, other assets and income tax refunds on loss carrybacks. The Company is a party to a $347 million credit agreement (the "Credit Agreement") with Societe Generale, Southwest Agency as Managing and Administrative Agent and NationsBank of Texas, N.A., as Documentation Agent, and with 14 other participating banks. The Credit Agreement included a $72 million term loan and provides for up to $275 million of revolving credit loans (including letters of credit). At December 31, 1996, there were $187 million of Revolver Advances, $40.9 million of Term Advances and approximately $71.9 million of letters of credit outstanding. The Revolver Advances are payable on August 11, 1998. The Term Loan is payable in installments through August 1998. The Credit Agreement requires that net proceeds received from certain asset sales be applied against the Term Loan balance. Outstanding revolving credit advances may not exceed a borrowing base calculated using the Company's equipment and real estate, the Treadco common stock owned by the Company, and eligible receivables. The Company has pledged on the Credit Agreement substantially all revenue equipment and real property not already pledged under other debt obligations. The Credit Agreement contains various covenants which limit, among other things, indebtedness, distributions, capital expenditures, asset sales, restricted payments, investments, loans and advances, as well as requiring the Company to meet certain financial tests. As of December 31, 1996, the Company was not in compliance with certain covenants relating to financial tests, and the Company obtained a waiver through January 31, 1997. On January 31, 1997, the Company obtained an amendment to the Credit Agreement which included revised financial covenants with which the Company is in compliance. The Credit Agreement had previously been amended in February, 1996, including a revision of term and financial covenants. As a part of the February, 1996 amendment, the Company obtained an additional credit agreement which provides for borrowings of up to $30 million. Borrowings under this agreement bear interest at either an adjusted prime rate plus 2% or a maximum rate as defined in the agreement, or the Eurodollar rate plus 3% or a maximum rate as defined in the agreement. The maturity date of this agreement is March 31, 1997. In connection with the January, 1997 amendment, the available borrowings were reduced to $15 million, and by March 31, 1997, the Company may, at its option, extend the maturity date to September 30, 1997. As of December 31, 1996, and during the year then ended, there were no borrowings under this additional credit agreement. This agreement contains covenants that are substantially the same as the covenants contained in the primary Credit Agreement. The Company assumed the Subordinated Debentures of WorldWay which were issued in April 1986. The debentures bear interest at 6.25% per annum, payable semi- annually, on a par value of $50,000,000. The debentures are payable April 15, 2011. The Company may redeem the debentures at a price of 100%. The Company is required to redeem through a mandatory sinking fund commencing before April 15, in each of the years from 1997 to 2010, an amount in cash sufficient to redeem $2,500,000 annually of the aggregate principal amount of the debentures issued. Treadco is a party to a revolving credit facility with Societe Generale (the "Treadco Credit Agreement"), providing for borrowings of up to the lesser of $20 million or the applicable borrowing base. Borrowings under the Treadco Credit Agreement are collateralized by accounts receivable and inventory. Borrowings under the agreement bear interest, at Treadco's option, at 3/4% above the bank's LIBOR rate, or at the higher of the bank's prime rate or the "federal funds rate" plus 1/2%. At December 31, 1995, the interest rate was 7.1%. At December 31, 1995, Treadco had $10 million outstanding under the Revolving Credit Agreement. The Treadco Credit Agreement is payable in September 1998. Treadco pays a commitment fee of 3/8% on the unused amount under the Treadco 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. The Treadco Credit Agreement was amended in June 1996, restating certain financial test requirements through December 31, 1996. The Company is a party to an interest rate cap arrangement to reduce the impact of increases in interest rates on its floating-rate long-term debt. The Company will be reimbursed for the difference in interest rates if the LIBOR rate exceeds a fixed rate of 9 3/4% applied to notional amounts, as defined in the contract, ranging from $40 million as of December 31, 1995 to $2.5 million as of October 1999. As of December 31, 1995 and 1994, the LIBOR rate was 5.5% and 6.5%, respectively; therefore, no amounts were due to the Company under this arrangement. In the event that amounts are due under this agreement in the future, the payments to be received would be recognized as a reduction of interest expense (the accrual accounting method). Fees totaling $385,000 were paid in 1994 to enter into this arrangement. These fees are included in other assets and are being amortized to interest expense over the life of the contract. The following table sets forth the Company's historical capital expenditures (net of equipment trade-ins) for the periods indicated below:
Year Ended December 31 1996 1995 1994 ($ millions) LTL motor carrier operations $ 13.0 $ 75.0 $ 44.2 Intermodal operations 0.4 0.4 - Truckload motor carrier operations 0.8 2.1 - Logistics operations 3.1 5.3 - Tire operations 23.0 4.5 4.3 Service and other 1.3 12.1 15.6 41.6 99.4 64.1 Less: Operating leases - (24.6) - -------- -------- -------- Total $ 41.6 $ 74.8 $ 64.1 ======== ======== ========
The amounts presented in the table under operating leases reflect the estimated purchase price of the equipment had the Company purchased the equipment versus financing through operating lease transactions. In 1997, the Company anticipates spending approximately $49 million in total capital expenditures net of proceeds from equipment sales. Of the $49 million, ABF is budgeted for approximately $24.5 million to be used primarily for revenue equipment. Treadco is budgeted for $7.1 million of expenditures for retreading and service equipment and facilities, and Cardinal has $7.3 million budgeted for revenue equipment purchases. Cash from operations and the sale of assets resulted in reduction of debt of approximately $70 million in 1996. At December 31, 1996, the Company had approximately $16 million of availability under the Credit Agreement as well as $15 million under the additional credit agreement. 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 present and future debt service requirements. Seasonality The LTL and truckload motor carrier segments 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 the LTL and truckload segments 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 six months of the calendar year generally having the highest levels of sales. Environmental Matters The Company's subsidiaries store some fuel for its tractors and trucks in approximately 148 underground tanks located in 33 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 process, 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 December 31, 1996, the Company has accrued approximately $3,100,000 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. Forward-Looking Statements The Management's Discussion and Analysis Section of this report contains forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from current expectations due to a number of factors, including general economic conditions; competitive initiatives and pricing pressures; union relations; availability and cost of capital; shifts in market demand; weather conditions; the performance and needs of industries served by the Company's businesses; actual future costs of operating expenses such as fuel and related taxes; self-insurance claims and employee wages and benefits; actual costs of continuing investments in technology; and the timing and amount of capital expenditures. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response of this item is submitted in a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections entitled "Election of Directors," "Directors of the Company," "Board of Directors and Committees," "Executive Officers of the Company" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's proxy statement for the annual meeting of stockholders to be held on May 8, 1997, set forth certain information with respect to the directors, nominees for election as directors and executive officers of the Company and are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Executive Compensation," "Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values," "Options/SAR Grants Table," "Executive Compensation and Development Committee Interlocks and Insider Participation," "Retirement and Savings Plan," "Employment Contracts and Termination of Employment and Change in Control Arrangements" and the paragraph concerning directors' compensation in the section entitled "Board of Directors and Committees" in the Company's proxy statement for the annual meeting of stockholders to be held on May 8, 1997, set forth certain information with respect to compensation of management of the Company and are incorporated herein by reference, provided, however, the information contained in the sections entitled "Report on Executive Compensation by the Executive Compensation and Development Committee and Stock Option Committee" and "Stock Performance Graph" are not incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Principal Shareholders and Management Ownership" in the Company's proxy statement for the annual meeting of stockholders to be held on May 8, 1997, sets forth certain information with respect to the ownership of the Company's voting securities and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Transactions and Relationships" in the Company's proxy statement for the annual meeting of stockholders to be held on May 8, 1997, sets forth certain information with respect to relations of and transactions by management of the Company and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements The response to this portion of Item 14 is submitted as a separate section of this report. (a)(2) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. (a)(3) Exhibits The exhibits filed with this report are listed in the Exhibit Index which is submitted as a separate section of this report. (b) Reports on Form 8-K Form 8-K dated February 27, 1997 Item 5. On January 31, 1997, Arkansas Best Corporation's (the "Company") existing $346,971,312 Amended and Restated Credit Agreement with Societe Generale, Southwest Agency as Managing Agent and Administrative Agent, NationsBank of Texas, N.A., as Documentation Agent, and certain other banks was amended. Also, on January 31, 1997, the Company's existing $30,000,000 Credit Agreement with Societe Generale, Southwest Agency as Agent and certain other banks was amended. (c) Exhibits See Item 14(a)(3) above. (d) Financial Statements Schedules The response to this portion of Item 14 is submitted as a separate section of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARKANSAS BEST CORPORATION By: /s/Donald L. Neal ---------------------------- Donald L. Neal Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ----- /s/William A. Marquard Chairman of the Board, Director 3/18/97 - ------------------------ ------- William A. Marquard /s/Robert A. Young, III Director, Chief Executive Officer 3/19/97 - ------------------------ ------- Robert A. Young, III and President (Principal Executive Officer) /s/Donald L. Neal Senior Vice President - Chief 3/19/97 - ------------------------ Financial Officer (Principal ------- Donald L. Neal Financial and Accounting Officer) /s/Frank Edelstein Director 3/19/97 - ------------------------ ------- Frank Edelstein /s/Arthur J. Fritz Director 3/18/97 - ------------------------ ------- Arthur J. Fritz /s/John H. Morris Director 3/19/97 - ------------------------ ------- John H. Morris /s/Alan J. Zakon Director 3/17/97 - ------------------------ ------- Alan J. Zakon ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1996 ARKANSAS BEST CORPORATION FORT SMITH, ARKANSAS FORM 10-K -- ITEM 14(a)(1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ARKANSAS BEST CORPORATION The following consolidated financial statements of Arkansas Best Corporation are included in Item 8: Consolidated Balance Sheets -- December 31, 1996 and 1995 Consolidated Statements of Operations -- Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity -- Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows -- Years ended December 31, 1996, 1995 and 1994 The following consolidated financial statement schedule of Arkansas Best Corporation is included in Item 14(d): Schedule II -- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Shareholders and Board of Directors Arkansas Best Corporation We have audited the accompanying consolidated balance sheets of Arkansas Best Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arkansas Best Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Little Rock, Arkansas January 31, 1997 ARKANSAS BEST CORPORATION CONSOLIDATED BALANCE SHEETS
December 31 1996 1995 ($ thousands) ASSETS CURRENT ASSETS Cash and cash equivalents -- Note N $ 1,806 $ 16,945 Receivables -- Note E Trade, less allowances for doubtful accounts (1996 -- $6,118,000; 1995 -- $19,403,000) 186,065 205,196 Inventories -- Notes D and E 33,831 36,850 Prepaid expenses 13,593 13,927 Deferred income taxes -- Note G 16,490 32,080 Federal and state income taxes refundable -- Note G 7,320 17,489 -------- -------- TOTAL CURRENT ASSETS 259,105 322,487 PROPERTY, PLANT AND EQUIPMENT -- Note E Land and structures 228,051 228,706 Revenue equipment 268,270 285,045 Manufacturing equipment 18,815 8,289 Service, office and other equipment 65,532 65,458 Leasehold improvements 9,273 10,675 -------- -------- 589,941 598,173 Less allowances for depreciation and amortization (222,308) (190,690) -------- -------- 367,633 407,483 OTHER ASSETS 57,160 70,452 NET ASSETS HELD FOR SALE -- Note C 9,148 39,937 GOODWILL, less amortization (1996 -- $28,006,000; 1995 -- $24,027,000) -- Notes B and C 150,154 145,478 -------- -------- $843,200 $985,837 ======== ======== ARKANSAS BEST CORPORATION CONSOLIDATED BALANCE SHEETS December 31 1996 1995 ($ thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank drafts payable $ 646 $ 12,999 Trade accounts payable 79,140 74,998 Accrued expenses -- Note F 182,011 188,708 Current portion of long-term debt -- Note E 39,082 26,634 -------- -------- TOTAL CURRENT LIABILITIES 300,879 303,339 LONG-TERM DEBT, less current portion -- Notes E and N 326,950 399,144 OTHER LIABILITIES 21,416 18,665 DEFERRED INCOME TAXES -- Note G 22,505 48,560 MINORITY INTEREST -- Note A 34,020 38,265 SHAREHOLDERS' EQUITY -- Notes A and H 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 1996: 19,504,473 shares; 1995: 19,519,061 shares 195 195 Additional paid-in capital -- Note H 192,328 192,436 Retained earnings (deficit) (55,108) (14,782) -------- -------- TOTAL SHAREHOLDERS' EQUITY 137,430 177,864 COMMITMENTS AND CONTINGENCIES -- Notes I, J and K -------- -------- $843,200 $985,837 ======== ======== See notes to consolidated financial statements.
ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31 1996 1995 1994 ($ thousands, except share and per share data) OPERATING REVENUES -- Note B Less than truckload motor carrier operations $1,199,437 $1,088,416 $ 918,663 Truckload motor carrier operations 74,623 27,992 - Intermodal operations 180,619 140,691 31,468 Logistics operations 54,849 31,699 7,514 Tire operations 141,613 145,127 138,665 Service and other 8,043 3,354 2,111 --------- --------- --------- 1,659,184 1,437,279 1,098,421 OPERATING EXPENSES AND COSTS -- Notes B and L Less than truckload motor carrier operations 1,217,866 1,119,560 882,351 Truckload motor carrier operations 70,235 24,952 - Intermodal operations 179,457 136,166 30,359 Logistics operations 57,693 34,299 8,488 Tire operations 147,164 140,328 127,115 Service and other 9,097 5,433 1,993 --------- --------- --------- 1,681,512 1,460,738 1,050,306 --------- --------- --------- OPERATING INCOME (LOSS) (22,328) (23,459) 48,115 OTHER INCOME (EXPENSE) Gains on asset sales 3,334 3,194 2,168 Interest (31,869) (17,046) (6,985) Minority interest in subsidiary -- Note A 1,768 (1,297) (3,523) Other, net (7,643) (8,379) (3,136) --------- --------- --------- (34,410) (23,528) (11,476) --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (56,738) (46,987) 36,639 FEDERAL AND STATE INCOME TAXES (CREDIT) -- Note G Current (16,400) (5,200) 14,743 Deferred (3,735) (8,995) 3,189 --------- --------- --------- (20,135) (14,195) 17,932 --------- --------- --------- NET INCOME (LOSS) $ (36,603) $ (32,792) $ 18,707 ========= ========= ========= ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) Year Ended December 31 1996 1995 1994 ($ thousands, except share and per share data) INCOME (LOSS) PER COMMON SHARE -- Notes C and H NET INCOME (LOSS) $ (2.10) $ (1.90) $ 0.74 ========= ========= ========= CASH DIVIDENDS PAID PER COMMON SHARE $ 0.01 $ 0.04 $ 0.04 ========= ========= ========= AVERAGE COMMON SHARES OUTSTANDING -- Note C 19,510,589 19,520,756 19,351,796 ========== ========== ========== See notes to consolidated financial statements.
ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Paid-In Stock Payable Retained Preferred Common Capital -- to Employee Earnings Stock Stock Note H Benefit Plans (Deficit) ($ thousands) Balances at January 1, 1994 $15 $ 192 $ 191,086 $ 205 $ 10,492 Net income - - - - 18,707 Issuance of common stock to employee benefit plans - - 205 (205) Stock options exercised - - 36 - Acquisition of Traveller Group -- Note B - 3 938 - Dividends paid (5,069) --- ---- -------- ------ -------- Balances at December 31, 1994 15 195 192,265 - 24,130 Net loss - - - - (32,792) Stock options exercised - - 171 - - Dividends paid - - - - (5,079) Adjustment to recognize minimum pension liability -- Note K - - - - (1,041) --- ---- -------- ------ -------- Balances at December 31, 1995 15 195 192,436 - (14,782) Net loss - - - - (36,603) Dividends paid - - - - (4,493) Adjustment to recognize minimum pension liability -- Note K - - - - 770 Retirement of common stock - - (108) - - --- ---- -------- ------ -------- Balances at December 31, 1996 $15 $ 195 $ 192,328 $ - $ (55,108) === ==== ======== ====== ======== See notes to consolidated financial statements.
ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 1996 1995 1994 ($ thousands) OPERATING ACTIVITIES Net income (loss) $(36,603) $(32,792) $ 18,707 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 56,389 46,627 28,087 Amortization of intangibles 4,609 5,135 3,527 Other amortization 3,740 1,044 501 Provision for losses on accounts receivable 9,489 4,185 2,070 Provision (credit) for deferred income taxes (3,735) (8,995) 3,189 Gains on asset sales (3,334) (3,194) (2,168) Minority interest in subsidiary (1,768) 1,297 3,773 Changes in operating assets and liabilities, net of acquisitions: Receivables 13,540 (23,795) (15,312) Inventories and prepaid expenses 3,165 3,529 (6,428) Other assets 9,203 (11,751) (1,566) Accounts payable, bank drafts payable, taxes payable, accrued expenses and other liabilities (24,499) (47,514) 14,373 -------- -------- -------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 30,196 (66,224) 48,753 INVESTING ACTIVITIES Purchases of property, plant and equipment, less capitalized leases (27,747) (49,690) (47,298) Proceeds from asset sales 65,313 15,748 7,841 Acquisition of the Clipper Group, net of cash acquired -- Note B - (84) (49,556) Acquisition of WorldWay Corporation, net of cash acquired -- Note B - (81,482) - -------- -------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 37,566 (115,508) (89,013) ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Year Ended December 31 1996 1995 1994 ($ thousands) FINANCING ACTIVITIES Deferred financing costs and expenses incurred in borrowing activities $ (3,512) $ (4,578) $ (147) Proceeds from receivables purchase agreement - - 56,000 Payments under receivables purchase agreement - (40,000) (16,000) Borrowings under revolving credit facilities 272,585 238,275 34,000 Borrowings under term loan facilities - 75,000 20,000 Principal payments under revolving credit facilities (288,285) (30,275) (39,000) Principal payments under term loan facility (34,052) - - Net proceeds from the issuance of common stock - 171 37 Principal payments on other long-term debt and capital leases (24,704) (31,844) (18,616) Dividends paid to minority shareholders of subsidiary (440) (462) (438) Dividends paid (4,493) (5,079) (5,069) Net increase (decrease) in bank overdraft - (5,989) 5,989 -------- -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (82,901) 195,219 36,756 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,139) 13,487 (3,504) Cash and cash equivalents at beginning of year 16,945 3,458 6,962 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,806 $ 16,945 $ 3,458 ======== ======== ======== See notes to consolidated financial statements.
ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 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, intermodal operations and truck tire retreading and sales (see Note M). Principal subsidiaries are ABF Freight System, Inc., ("ABF"), Treadco, Inc. ("Treadco"), and Clipper Exxpress Company and related companies (the "Clipper Group") and, effective August 12, 1995, WorldWay Corporation ("WorldWay") (see Note B). The principal subsidiaries of WorldWay included Carolina Freight Carriers Corp., which was merged into ABF on September 24, 1995, Cardinal Freight Carriers, Inc. ("Cardinal"), G.I. Trucking Company ("G.I. Trucking"), CaroTrans International, Inc. ("CaroTrans"), and The Complete Logistics Company ("Complete Logistics"). As of December 31, 1996, the Company's percentage ownership of Treadco was 46%. The Company's consolidated financial statements reflect full consolidation of the accounts of Treadco, with the ownership interests of the other stockholders reflected as minority interest, because the Company controls Treadco through stock ownership, board representation and management services provided under a transition services agreement. Summarized condensed financial information for Treadco is as follows: TREADCO, INC.
December 31 1996 1995 ($ thousands) Current assets $ 57,829 $ 61,615 Property, plant and equipment, net 33,186 16,339 Other assets 14,401 15,081 -------- -------- Total assets $ 105,416 $ 93,035 ======== ======== Current liabilities $ 23,786 $ 16,737 Long-term debt and other 19,682 10,280 Stockholders' equity 61,948 66,018 -------- -------- Total liabilities and stockholders' equity $ 105,416 $ 93,035 ======== ========
1996 1995 1994 ($ thousands) Sales $ 144,154 $ 147,906 $ 140,678 Operating expenses and costs 149,799 143,382 129,625 Interest expense 899 510 270 Other (income) expense (1,192) (88) 9 Income taxes (2,093) 1,711 4,265 -------- -------- -------- Net income (loss) $ (3,259) $ 2,391 $ 6,509 ======== ======== ========
NOTE B - ACQUISITIONS On July 14, 1995, ABC Acquisition Corporation (the "Purchaser"), a wholly owned subsidiary of the Company, commenced a tender offer (the "Offer") to purchase all outstanding shares of common stock of WorldWay Corporation ("WorldWay"), at a purchase price of $11 per share (the "Acquisition"). Pursuant to the Offer, on August 11, 1995, the Purchaser accepted for payment shares of WorldWay validly tendered, representing approximately 91% of the shares outstanding. On October 12, 1995, the remaining shares of WorldWay's common stock were converted into the right to receive $11 per share in cash. For financial statement purposes, the WorldWay acquisition has been accounted for under the purchase method effective August 12, 1995. The accompanying financial statements include the results of operations for WorldWay and its subsidiaries since August 12, 1995. Because of the decentralized accounting functions of WorldWay's subsidiaries, the purchase allocation was finalized in 1996 after completing the comprehensive determination of WorldWay's asset values and liabilities. The Company's allocation of the purchase cost resulted in an increase in goodwill of $13 million from the preliminary allocation. Assets with a fair value of approximately $313 million were acquired and liabilities with a fair value of approximately $252 million were assumed. The Company's total purchase price was $76 million. Approximately $15 million of goodwill was recorded as a result of the purchase allocation and is being amortized over a 30-year period. On September 30, 1994, the Company consummated the purchase of all outstanding stock of the Clipper Group pursuant to a stock purchase agreement entered into on August 18, 1994. Assets of approximately $26.2 million were acquired and liabilities of approximately $14.7 million were assumed. The Company's total purchase price was $60.9 million. The Clipper acquisition has been accounted for under the purchase method, effective September 30, 1994. The accompanying financial statements include the results of operations of Clipper since September 30, 1994. The purchase price has been allocated to assets and liabilities based on their estimated fair values as of the date of acquisition. Approximately $49.4 million of goodwill was recorded as a result of the purchase allocation and is being amortized over a 30-year period. On October 12, 1994, the Company issued 310,191 shares of common stock for all of the outstanding stock of Traveller Enterprises and subsidiaries and Commercial Warehouse Company, collectively (the "Traveller Group"). The acquisition of the Traveller Group has been accounted for as a pooling of interests. The Traveller Group's operations are not material to the Company's consolidated financial statements for any period; therefore, financial statements for periods prior to the merger have not been restated, and the financial statements include operations of the Traveller Group from the date of the combination. Operating results for 1996 and pro forma unaudited information (as if the Clipper Group, Traveller Group and the WorldWay acquisitions were completed at the beginning of 1994) for 1995 and 1994 is as follows:
1996 1995 1994 (thousands, except per share data) Operating revenues $1,659,184 $1,921,432 $2,144,994 Operating expenses 1,681,512 2,007,421 2,059,351 ---------- ---------- --------- (22,328) (85,989) 85,643 Interest expense, net 31,869 24,769 21,451 Minority interest in subsidiary (1,768) 1,297 3,523 Other expense, net 4,309 24,069 8,687 Provision for income taxes (credit) (20,135) (46,879) 24,960 ----------- ---------- ---------- Net Income (loss) $ (36,603) $ (89,245) $ 27,022 =========== ========== ========== Earnings (loss) per common share $ (2.10) $ (4.79) $ 1.16 =========== ========== ========== Average common shares outstanding 19,511 19,544 19,662 =========== ========== ========== The above pro forma unaudited information does not purport to be indicative of the results which actually would have occurred had the acquisitions been made at the beginning of the respective periods.
NOTE C - ACCOUNTING POLICIES Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Cash and Cash Equivalents: Short term investments which have a maturity of ninety days or less when purchased are considered cash equivalents. Concentration of Credit Risk: The Company's services are provided primarily to customers throughout the United States and Canada, with additional customers in foreign countries served by CaroTrans International, Inc. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Historically, credit losses have been within management's expectations. Inventories: Inventories, which consist primarily of new tires and retread tires and supplies used in Treadco's business, are stated at the lower of cost (first-in, first-out basis) or market. Property, Plant and Equipment: Purchases of property, plant and equipment are recorded at cost. For financial reporting purposes, such property is depreciated principally by the straight-line method, using the following lives: structures -- 15 to 30 years; revenue equipment -- 3 to 7 years; manufacturing equipment -- 5 to 8 years; other equipment -- 3 to 10 years; and leasehold improvements -- 4 to 10 years. For tax reporting purposes, accelerated depreciation or cost recovery methods are used. Gains and losses on asset sales are reflected in the year of disposal. Trade-in allowances in excess of the book value of revenue equipment traded are accounted for by adjusting the cost of assets acquired. Tires purchased with revenue equipment are capitalized as a part of the cost of such equipment, with replacement tires being expensed when placed in service. Assets Held for Sale: Assets held for sale represents primarily non-operating freight terminals and other properties, a portion of which were acquired as a result of the WorldWay acquisition (Note B), which are carried at the lower of net book value or estimated net realizable value. Also included in assets held for sale are properties of the Company which are being replaced by WorldWay facilities. The Company recorded writedowns of $1.5 million in 1996 and $2.1 million in 1995 to net realizable value for the Company properties being replaced. The writedown is included with gains on assets sales. Assets held for sale at December 31, 1996 includes $2.0 million in goodwill that was specifically identifiable to certain properties being sold. Total assets held for sale at December 31, 1995 amounted to $39.9 million of which $36.9 million were sold in 1996, resulting in net gains on sales of $3.1 million. Also, in 1996, additional excess assets amounting to $6.8 million were identified and reclassified to assets held for sale. Of the 1996 additions, $3.2 million were sold, resulting in net losses on sales of $300,000. Management estimates that remaining assets held for sale will be sold prior to December 31, 1997. Goodwill: Excess cost over fair value of net assets acquired (goodwill) is amortized on a straight-line basis over 15 to 40 years. The carrying value of goodwill will be reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows over the remaining amortization period, the Company's carrying value of the goodwill would be reduced. Income Taxes: Deferred income taxes are accounted for under the liability method. Deferred income taxes relate principally to asset and liability basis differences arising from a 1988 purchase transaction and from the WorldWay acquisition, as well as the timing of the depreciation and cost recovery deductions previously described and to temporary differences in the recognition of certain revenues and expenses of carrier operations. Revenue Recognition: Motor carrier revenue is recognized based on relative transit time in each reporting period with expenses recognized as incurred. Revenue for other segments is recognized generally at the point when goods or services are provided to the customers. Earnings (Loss) Per Share: The calculation of earnings (loss) per share is based on the weighted average number of common and common equivalent shares outstanding during the applicable period. The calculation reduces income available to common shareholders by preferred stock dividends paid or accrued during the period. Compensation to Employees: Stock-based compensation to employees is accounted for based on the intrinsic value method under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Accounting for Sales of Stock by Subsidiaries: It is the Company's policy to recognize gains and losses on sales of subsidiary stock when incurred. Claims Liabilities: The Company is self-insured up to certain limits for workers' compensation, cargo loss and damage and certain property damage and liability claims. Provision has been made for the estimated liabilities for such claims based on historical trends, claims frequency, severity and other factors. Environmental Matters: The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site-by-site basis with actual testing at some sites, and records a liability at the time when it is probable and can be reasonably estimated. The estimated liability of the Company is not discounted or reduced for possible recoveries from insurance carriers. (See Note J) Derivative Financial Instruments: The Company enters into interest-rate swap agreements and interest-rate cap agreements that are designed to modify the interest characteristic of outstanding debt or limit exposure to increasing interest rates. 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 accrued liabilities or other receivables. Reclassifications: Certain reclassifications have been made to the prior year financial statements to conform to the current year's presentation. Recent Accounting Pronouncement: The Company adopted Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective January 1, 1996. Under SFAS No. 121, impairment losses are recognized when information indicates the carrying amount of long-lived assets, identifiable intangibles and goodwill related to those assets will not be recovered through future operations or sale. Impairment losses for assets to be held or used in operations are based on the excess of the carrying amount of the asset over the asset's fair value. Assets held for disposal are carried at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 has been applied prospectively from the date of adoption and the effect of adoption was not material. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE D - INVENTORIES
December 31 1996 1995 ($ thousands) Finished goods $ 24,029 $ 25,579 Materials 6,267 7,621 Repair parts, supplies and other 3,535 3,650 -------- -------- $ 33,831 $ 36,850 ======== ========
NOTE E - LONG-TERM DEBT AND CREDIT AGREEMENTS
December 31 1996 1995 ($ thousands) Revolving Credit and Term Loan Facility (1) $ 227,948 $ 278,000 Subordinated Debentures (2) 44,855 47,016 General Office Agreement (3) 15,000 17,000 Treadco Credit Agreement (4) 10,300 10,000 Capitalized lease obligations (5) 57,962 68,303 Other 9,967 5,459 -------- -------- 366,032 425,778 Less current portion 39,082 26,634 -------- -------- $ 326,950 $ 399,144 ======== ========
(1)The Company is party to a $347 million credit agreement (the "Credit Agreement") with Societe Generale, Southwest Agency as Managing and Administrative Agent and NationsBank of Texas, N.A., as Documentation Agent, and with 14 other participating banks. The Credit Agreement included a $72 million term loan and provides for up to $275 million of revolving credit loans (including letters of credit). Term Loan and Revolving Credit advances bear interest at one of the following rates, at the Company's option: (a) Prime Rate advance or (b) Eurodollar Rate advance. A Prime Rate advance bears an interest rate equal to the lesser of (i) the Adjusted Prime Rate plus the Applicable Margin and (ii) the maximum nonusurious interest rate under applicable law. The Adjusted Prime Rate is equal to the greater of the prime rate offered by Societe Generale or the Federal Funds Rate plus 1/2%. The Applicable Margin is determined as a function of the ratio of the Company's consolidated indebtedness to its consolidated earnings before interest, taxes, depreciation and amortization. Eurodollar Rate advances shall bear an interest rate per annum equal to the lesser of (i) the Eurodollar Rate offered by Societe Generale plus the Applicable Margin and (ii) the maximum nonusurious interest rate under applicable law. The Company has paid and will continue to pay certain customary fees for such commitments and advances. At December 31, 1996, the average interest rate on the Credit Agreement was 8.2%. There were $187 million of Revolver Advances, $40.9 million of Term Advances and approximately $71.9 million of letters of credit outstanding at December 31, 1996. The Revolver Advances are payable on August 11, 1998. The Term Loan is payable in installments through August 1998. The Credit Agreement requires that net proceeds received from certain asset sales be applied against the Term Loan balance. Outstanding revolving credit advances may not exceed a borrowing base calculated using the Company's equipment and real estate, the Treadco common stock owned by the Company, and eligible receivables. The Company has pledged substantially all revenue equipment and real property not already pledged under other debt obligations. The Credit Agreement contains various covenants which limit, among other things, indebtedness, distributions, capital expenditures, asset sales, restricted payments, investments, loans and advances, as well as requiring the Company to meet certain financial tests. As of December 31, 1996, the Company was not in compliance with certain covenants relating to financial tests, and the Company obtained a waiver through January 31, 1997. On January 31, 1997, the Company obtained an amendment to the Credit Agreement which included revised financial covenants with which the Company is in compliance. The Credit Agreement had previously been amended in February 1996, including a revision of terms and financial covenants. In February 1996, the Company obtained an additional credit agreement which provided for borrowings of up to $30 million. Borrowings under this agreement bear interest at either an adjusted prime rate plus 2% or a maximum rate as defined in the agreement or the Eurodollar rate plus 3% or a maximum rate as defined in the agreement. The maturity date of this agreement is March 31, 1997. In connection with the January, 1997 amendment, the available borrowings were reduced to $15 million and the Company obtained an option through March 31, 1997 to extend the maturity date to September 30, 1997. As of December 31, 1996, and during the year then ended, there were no borrowings outstanding under the additional credit agreement. This agreement contains covenants that are substantially the same as the covenants contained in the Credit Agreement. (2)The Subordinated Debentures were issued in April 1986 by WorldWay. The debentures bear interest at 6.25% per annum, payable semi-annually, on a par value of $47,364,000 at December 31, 1996. The debentures are payable April 15, 2011. The Company may redeem the debentures at 100%. The Company is required to redeem through a mandatory sinking fund commencing before April 15, in each of the years from 1997 to 2010, an amount in cash sufficient to redeem $2,500,000 of the aggregate principal amount of the debentures issued. On November 21, 1996, the Company purchased debentures with a par value of $2,630,000 at a price of $1,735,800, plus accrued interest. These debentures were transferred to the Trustee to satisfy the mandatory sinking fund payment due by April 15, 1997. (3)The Company entered into a ten-year, $20 million general office term loan agreement dated as of April 25, 1994 with NationsBank of Texas, N.A., as agent, and Societe Generale, Southwest Agency. The proceeds from the agreement were used to finance the construction of the Company's corporate office building which was completed in February 1995. Amounts borrowed under the agreement bear interest at 8.07% quarterly, with installments of $500,000 plus interest due through July 2004. The agreement contains covenants similar to those in the latest amendment to the Credit Agreement. (4)Treadco is a party to a revolving credit facility with Societe Generale (the "Treadco Credit Agreement"), providing for borrowings of up to the lesser of $20 million or the applicable borrowing base. Borrowings under the Treadco Credit Agreement are collateralized by accounts receivable and inventory. Borrowings under the agreement bear interest, at Treadco's option, at 3/4% above the bank's LIBOR rate, or at the higher of the bank's prime rate or the "federal funds rate" plus 1/2%. At December 31, 1996, the interest rate was 6.5%. At December 31, 1996, Treadco had $10.3 million outstanding under the Revolving Credit Agreement. The Treadco Credit Agreement is payable in September 1998. Treadco pays a commitment fee of 3/8% on the unused amount under the Treadco 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. The Treadco Credit Agreement was amended in June 1996 restating certain financial test requirements through December 31, 1996. (5)Includes approximately $47,626,000 relative to leases of carrier revenue equipment with an aggregate net book value of approximately $47,459,000 at December 31, 1996. These leases have a weighted average interest rate of approximately 6.7%. Also includes approximately $10,335,000 relative to leases of computer equipment, various terminals financed by Industrial Revenue Bond Issues, and Treadco delivery and service trucks, with a weighted average interest rate of approximately 6.7%. The net book value of the related assets was approximately $10,856,000 at December 31, 1996. Annual maturities on long-term debt, excluding capitalized lease obligations (see Note I), in 1997 through 2001 aggregate approximately $25,892,000; $222,586,000; $5,943,000; $6,023,000; and $5,762,000, respectively. Interest paid, net of interest capitalized, was $32,174,000 in 1996, $21,986,000 in 1995, and $6,656,000 in 1994. Interest capitalized totaled $487,000, $230,000 and $582,000 in 1996, 1995 and 1994, respectively. The Company is a party to an interest rate cap arrangement to reduce the impact of increases in interest rates on its floating-rate long-term debt. The Company will be reimbursed for the difference in interest rates if the LIBOR rate exceeds a fixed rate of 9% applied to notional amounts, as defined in the contract, ranging from $30 million as of December 31, 1996 to $2.5 million as of October 1999. As of December 31, 1996 and 1995, the LIBOR rate was 5.5%; therefore, no amounts were due to the Company under this arrangement. In the event that amounts are due under this agreement in the future, the payments to be received would be recognized as a reduction of interest expense (the accrual accounting method). Fees totaling $385,000 were paid in 1994 to enter into this arrangement. These fees are included in other assets and are being amortized to interest expense over the life of the contract. NOTE F - ACCRUED EXPENSES
December 31 1996 1995 ($ thousands) Accrued salaries, wages and incentive plans $ 17,560 $ 17,232 Accrued vacation pay 31,490 32,905 Accrued interest 3,154 2,972 Taxes other than income 8,679 10,475 Loss, injury, damage and workers' compensation claims reserves 102,822 101,917 Pension costs 5,851 11,628 Other 12,455 11,579 -------- -------- $ 182,011 $ 188,708 ======== ========
NOTE G - FEDERAL AND STATE INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
December 31 1996 1995 ($ thousands) Deferred tax liabilities: Depreciation and basis differences for property, plant and equipment $ 44,058 $ 52,834 Revenue recognition 1,405 837 Basis difference on asset and stock sale 3,281 3,190 Prepaid expenses 4,135 3,050 Other 1,356 2,087 -------- -------- Total deferred tax liabilities 54,235 61,998 Deferred tax assets: Accrued expenses 19,946 25,619 Uniform capitalization of inventories 188 204 Postretirement benefits other than pensions 1,663 1,151 Net operating loss carryovers 21,597 13,985 Alternative minimum tax credit carryovers 5,629 4,900 Other 370 832 -------- -------- Total deferred tax assets 49,393 46,691 Valuation allowance for deferred tax assets (1,173) (1,173) -------- -------- Net deferred tax assets 48,220 45,518 -------- -------- Net deferred tax liabilities $ 6,015 $ 16,480 ======== ========
Significant components of the provision for income taxes are as follows:
December 31 1996 1995 1994 ($ thousands) Current (credit): Federal $ (16,400) $ (5,200) $ 12,595 State - - 2,148 -------- -------- -------- Total current (credit) (16,400) (5,200) 14,743 Deferred (credit): Federal (897) (6,751) 2,670 State (2,838) (2,244) 519 -------- -------- -------- Total deferred (credit) (3,735) (8,995) 3,189 -------- -------- -------- Total income tax expense (credit) $ (20,135) $ (14,195) $ 17,932 ======== ======== ========
A reconciliation between the effective income tax rate, as computed on income before extraordinary item, and the statutory federal income tax rate is presented in the following table:
Year Ended December 31 1996 1995 1994 ($ thousands) Income tax (benefit) at the statutory federal rate of 35% $ (19,858) $ (16,445) $ 12,824 Federal income tax effects of: State income taxes 990 788 (933) Nondeductible goodwill 2,548 1,680 1,031 Other nondeductible expenses 1,409 1,407 969 Minority interest (619) 454 1,233 Undistributed earnings of Treadco (99) 77 210 Rate difference for Treadco 53 (41) (108) Resolution of tax contingencies (1,573) - - Other (148) 130 39 -------- -------- -------- Federal income taxes (benefit) (17,297) (11,950) 15,265 State income taxes (benefit) (2,838) (2,245) 2,667 -------- -------- -------- $ (20,135) $ (14,195) $ 17,932 ======== ======== ======== Effective tax rate (35.5)% (30.2)% 48.9% ======== ======== ========
No income taxes were paid in 1996, approximately $9,900,000 were paid in 1995, and $12,368,000 were paid in 1994. Income tax refunds amounted to $28,825,000 in 1996. As of December 31, 1996, the Company has federal net operating loss and state operating loss carryovers of approximately $40,870,000 and $140,000,000, respectively. The federal net operating loss carryovers expire beginning in 2010. State net operating loss carryovers expire generally in five to seven years. The Company has alternative minimum tax credits of approximately $5,629,000 at December 31, 1996 which carry over indefinitely. For financial reporting purposes, a valuation allowance of approximately $1,173,000 has been established for certain state net operating loss carryovers for which realization is uncertain. NOTE H - SHAREHOLDERS' EQUITY Preferred Stock. In February, 1993, the Company completed a public offering of 1,495,000 shares of Preferred Stock at $50 per share. The Preferred Stock is convertible at the option of the holder into Common Stock at the rate of 2.5397 shares of Common Stock for each share of Preferred Stock. Annual dividends are $2.875 and are cumulative. The Preferred Stock is exchangeable, in whole or in part, at the option of the Company on any dividend payment date beginning February 15, 1995, for the Company's 5 3/4% Convertible Subordinated Debentures due February 15, 2018, at a rate of $50 principal amount of debentures for each share of Preferred Stock. The Preferred Stock is redeemable at any time, in whole or in part, at the Company's option, initially at a redemption price of $52.0125 per share and thereafter at redemption prices declining to $50 per share on or after February 15, 2003, plus unpaid dividends to the redemption date. Holders of Preferred Stock have no voting rights unless dividends are in arrears six quarters or more, at which time they have the right to elect two directors of the Company until all dividends have been paid. Dividends of $4,298,000 were paid during 1996, 1995 and 1994. Stock Options. The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has a stock option plan which provides 2,000,000 shares of Common Stock for the granting of options to directors and key employees of the Company. All options granted are exercisable starting 12 months after the grant date, with 20% of the shares covered thereby becoming exercisable at that time and with an additional 20% of the options shares becoming exercisable on each successive anniversary date, with full vesting occurring on the fifth anniversary date. The options were granted for a term of 10 years. The Company also had a disinterested directors stockholder plan, which provided 225,000 shares of Common Stock for the granting of options to directors who administer the Company's stock option plan and were not permitted to receive stock option grants under such plan. This plan was terminated in May 1994. The options previously granted under this plan will continue in effect according to their terms. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant, using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.8% and 7.3%; dividend yields of .01% and .01%; volatility factors of the expected market price of the Company's Common Stock of .41 and .37; and a weighted-average expected life of the option of 9.5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
1996 1995 Net loss - as reported $(36,603) $(32,792) ======== ======== Net loss - pro forma $(37,379) $(32,836) ======== ======== Loss per share - as reported $ (2.10) $ (1.90) ======== ======== Loss per share - pro forma $ (2.14) $ (1.90) ======== ========
A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
1996 1995 1994 Weighted- Weighted- Weighted- Average Average Average Options Exercise Price Options Exercise Price Options Exercise Price Outstanding - beginning of year 688,700 $ 11.05 628,900 $ 10.95 589,100 $ 10.79 Granted 1,101,500 6.44 75,500 11.84 54,700 12.68 Exercised - - (15,700) 10.88 (3,440) 10.88 Forfeited - - - - (11,460) 10.88 --------- -------- ------- -------- ------- -------- Outstanding - end of year 1,790,200 $ 8.21 688,700 $ 11.05 628,900 $ 10.95 ========= ======== ======= ======== ======= ======== Exercisable at end of year 476,280 $ 10.92 338,540 $ 10.87 222,180 $ 10.83 ========= ======== ======= ======== ======= ======== Estimated weighted- average fair value per share of options granted to employees during the year $ 3.87 $ 6.88 ======== ========
The following table summarizes information concerning currently outstanding and exercisable options:
Weighted Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price $6 - $8 1,079,000 9.1 $ 6.40 - $ - $8 - $10 80,500 7.6 9.18 26,600 9.54 $10 - $12 521,000 5.6 10.88 416,800 10.88 $12 - $14 109,700 7.6 12.64 32,880 12.65 --------- ---- -------- ------- ------- 1,790,200 476,280 ========= =======
Shareholders' Rights Plan. Each issued and outstanding share of Common Stock has associated with it one Common Stock purchase right to purchase a share of Common Stock from the Company at a price of $60.00. Such rights are not exerciseable until certain events occur as detailed in the rights agreement. Due to the extent of management shareholders of a predecessor company continuing their ownership interest in the Company subsequent to a 1988 leveraged buyout of the Company, the equity interest of these management shareholders was valued at the predecessor basis rather than at fair market value. Accordingly, the new basis of reporting for the Company's net assets using fair market values at the date of the leveraged buyout was reduced by $15,371,000 to reflect the carryover basis of the management shareholders. This amount has been offset against additional paid-in capital in the accompanying financial statements. NOTE I - LEASES AND COMMITMENTS Rental expense amounted to approximately $102,733,000 in 1996, $84,751,000 in 1995, and $72,802,000 in 1994. These amounts include $25,227,000, $27,297,000, and $31,686,000, respectively, for month-to-month rentals of revenue equipment. The future minimum rental commitments, net of future minimum rentals to be received under noncancellable subleases, as of December 31, 1996 for all noncancellable operating leases are as follows:
Terminals Equipment and Retread and Period Total Plants Other ($ thousands) 1997 $ 36,578 $ 11,712 $ 24,866 1998 22,008 8,082 13,926 1999 8,299 5,511 2,788 2000 3,212 3,065 147 2001 2,442 2,355 87 Thereafter 7,259 7,187 72 -------- -------- -------- $ 79,798 $ 37,912 $ 41,886 ======== ======== ========
Certain of the leases are renewable for substantially the same rentals for varying periods. Future minimum rentals to be received under noncancellable subleases totaled approximately $2,337,000 at December 31, 1996. The future minimum payments under capitalized leases at December 31, 1996, consisted of the following ($ thousands): 1997 $ 16,692 1998 16,618 1999 14,257 2000 8,870 2001 5,366 Thereafter 6,268 -------- Total minimum lease payments 68,071 Amounts representing interest 10,109 -------- Present value of net minimum lease included in long-term debt - Note E $ 57,962 ======== Assets held under capitalized leases are included in property, plant and equipment as follows:
December 31 1996 1995 ($ thousands) Revenue equipment $ 70,747 $ 80,232 Land and structures 13,723 30,138 -------- -------- 84,470 110,370 Less accumulated amortization 26,155 25,147 -------- -------- $ 58,315 $ 85,223 ======== ========
The revenue equipment leases have remaining terms from one to seven years and contain renewal or fixed price purchase options. The lease agreements require the lessee to pay property taxes, maintenance and operating expenses. Lease amortization is included in depreciation expense. Capital lease obligations of $6,470,000, $25,118,000, and $15,793,000 were incurred for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE J - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS AND OTHER EVENTS In August 1990, a lawsuit was filed in the United States District Court for the Southern District of New York, by Riverside Holdings, Inc., Riverside Furniture Corporation ("Riverside") and MR Realty Associates, L.P. ("Plaintiffs") against the Company and a subsidiary. Plaintiffs asserted state law, Employee Retirement Income Security Act of 1974 and securities claims against the Company in connection with the Company's sale of Riverside in April 1989. Plaintiffs sought approximately $4 million in actual damages and $10 million in punitive damages. On November 20, 1996, the Company and Riverside executed a settlement agreement with terms that are not financially material to the Company's financial position or results of operations. In November 1995, Daily Transport Canada, Inc. ("Daily"), a Toronto-based LTL carrier, and related companies served a Request for Arbitration against ABF, as successor to Carolina Freight Carriers Corporation ("CFCC"), for its lost profits claimed to be in the amount of $15,000,000 resulting from the alleged breach of a contract between CFCC and Daily. On August 14, 1996, ABF and Daily reached a settlement of this litigation on terms that are not financially material to the Company's financial position or results of operations. Various other legal actions, the majority of which arise in the normal course of business, are pending. None of these other legal actions is expected to have a material adverse effect on the Company's financial condition. 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 148 underground tanks located in 33 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 process, 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 December 31, 1996, the Company has accrued approximately $3.1 million to provide for environmental-related liabilities. The Company's environmental accrual is based on management's best estimate of the actual liability. The Company's estimate is founded on management's experience in dealing with similar environmental matters and on actual testing performed at some sites. Management believes that the accrual is adequate to cover environmental liabilities based on the present environmental regulations. On October 30, 1995, Treadco filed a lawsuit in Arkansas State Court, alleging that Bandag Incorporated ("Bandag") and certain of its officers and employees have violated Arkansas statutory and common law in attempting to solicit Treadco's employees to work for Bandag or its competing franchisees and attempting to divert customers from Treadco. At Treadco's request, the Court entered a Temporary Restraining Order barring Bandag, Treadco's former officers J.J. Seiter, Ronald W. Toothaker, and Ronald W. Hawks and Bandag officers Martin G. Carver and William Sweatman from soliciting or hiring Treadco's employees to work for Bandag or any of its franchisees, from diverting or soliciting Treadco's customers to buy from Bandag franchisees other than Treadco, and from disclosing or using any of Treadco's confidential information. On November 8, 1995, Bandag and the other named defendants asked the State Court to stop its proceedings, pending a decision by the United States District Court, Western District of Arkansas, on a Complaint to Compel Arbitration filed by Bandag in the Federal District Court on November 8, 1995. The Federal District Court has ruled that under terms of Treadco's franchise agreements with Bandag, all of the issues involved in Treadco's lawsuit against Bandag are to be decided by arbitration. Treadco and Bandag are conducting discovery in preparation for the arbitration hearing. A date for the arbitration hearing has been set for the latter part of 1997. NOTE K - EMPLOYEE BENEFIT PLANS The Company and its subsidiaries have noncontributory defined benefit pension plans covering substantially all noncontractual employees. Benefits are based on years of service and employee compensation. Contributions are made based upon at least the minimum amounts required to be funded under provisions of the Employee Retirement Income Security Act of 1974, with the maximum amounts not to exceed the maximum amount deductible under the Internal Revenue Code. The plans' assets are held in bank-administered trust funds and are primarily invested in equity and government securities. Additionally, the Company participates in several multiemployer plans, which provide defined benefits to the Company's union employees. In the event of insolvency or reorganization, plan terminations or withdrawal by the Company from the multiemployer plans, the Company may be liable for a portion of the plan's unfunded vested benefits, the amount of which, if any, has not been determined. The merger of Carolina Freight into ABF was not considered a withdrawal. A summary of the components of net periodic pension costs for the defined benefit plans for the periods indicated and the total contributions charged to pension expense for the multiemployer plans follows:
Year Ended December 31 1996 1995 1994 ($ thousands) Defined Benefit Plans Service cost - benefits earned during the year $ 8,025 $ 5,075 $ 4,492 Interest cost on projected benefit obligations 11,028 8,095 5,249 Actual return on plan assets (gain) loss (17,324) (25,632) 220 Net amortization and deferral 4,765 17,906 (5,379) -------- -------- -------- Net pension cost of defined benefit plans 6,494 5,444 4,582 Multiemployer Plans 60,930 51,951 40,833 -------- -------- -------- Total pension expense $ 67,424 $ 57,395 $ 45,415 ======== ======== ========
Assumptions used in determining net periodic pension cost for the defined benefit plans were: Year Ended December 31 1996 1995 1994 Weighted average discount rate 7.10% 7.80% to 8.73% 7.24% Annual compensation increases 3.00% 3.00% 3.00% Expected long-term rates of return on assets 8.00% to 9.00% 8.00% to 9.00% 9.00% The following sets forth the funded status and amounts recognized in the consolidated balance sheets for the Company's defined benefit pension plans at December 31:
1996 1995 Plans for Which Plans for Which Plans for Which Plans For Which Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits Benefits Exceed Assets Benefits Exceed Assets ($ thousands) Actuarial present value of benefit obligations: Vested benefit obligation $ (95,853) $ (22,891) $ (104,914) $ (21,058) ========== ========== ========== ========== Accumulated benefit obligation $ (104,475) $ (24,282) $ (113,604) $ (22,211) ========== ========== ======== ========== Projected benefit obligation $ (121,132) $ (24,941) $ (138,787) $ (23,091) Plan assets at fair value 137,093 21,399 150,182 17,107 ---------- ---------- ---------- ---------- Projected benefit obligation (in excess of) or less than plan assets 15,961 (3,542) 11,395 (5,984) Unrecognized net loss 7,460 933 13,852 2,911 Prior service benefit not yet recognized in net periodic pension cost 757 524 672 37 Unrecognized net asset at January 1, 1987, net of amortization (59) (3) (63) (1) Adjustment required to recognize minimum liability - (796) - (2,067) ---------- ---------- ---------- ---------- Net pension asset (liability) $ 24,119 $ (2,884) $ 25,856 $ (5,104) ========== ========== ========== ==========
At December 31, 1996, the net pension asset is reflected in the accompanying financial statements as an accrued expense of $5,851,000 and a noncurrent asset of $27,086,000 included in other assets. At December 31, 1995, the net pension asset is reflected in the accompanying financial statements as an accrued expense of $11,628,000 and a noncurrent asset of $32,380,000 included in other assets. The net pension asset recorded as of December 31, 1995 reflects the impact of a curtailment gain of approximately $15 million which was recorded as part of the purchase allocation in conjunction with the WorldWay acquisition. In 1995, the Company recognized an additional minimum liability of $1,041,000 as a charge to equity due to one plan's accumulated benefit obligation exceeding the fair value of plan assets. In 1996, the Company recognized a reduction to the additional minimum liability and an increase to equity of $770,000 due to the reduction of that plan's accumulated benefit obligation in excess of the fair value of plan assets. The following assumptions were used in determining the pension obligation: December 31 1996 1995 Weighted average discount rate 7.50% 7.10% Annual compensation increases 3.00% 3.00% The Company has deferred compensation agreements with certain executives for which liabilities aggregating $1,565,000 and $1,479,000 as of December 31, 1996 and 1995, respectively, have been recorded. The Company also has a supplemental benefit plan for the purpose of supplementing benefits under the Company's retirement plans. The plan will pay sums in addition to amounts payable under the retirement plans to eligible participants. Participation in the plan is limited to employees of the Company who are participants in the Company's retirement plans and who are also either participants in the Company's executive incentive plans or are designated as participants in the plan by the Company's Board of Directors. As of December 31, 1996, the Company has a liability of $2,692,000 for future costs under this plan reflected in the accompanying consolidated financial statements in other liabilities. At December 31, 1995, the Company had a liability of $2,349,000 for future costs under this plan. An additional benefit plan provides certain death and retirement benefits for certain officers and directors of WorldWay and its former subsidiaries. The Company has a liability of $6,641,000 and $3,686,000 as of December 31, 1996 and 1995, respectively, for future costs under this plan reflected as other liabilities in the accompanying consolidated financial statements. WorldWay has insurance policies on the participants in amounts which are sufficient to fund a substantial portion of the benefits under the plan. The Company has various defined contribution plans which cover substantially all of its employees. Prior to October, 1995, participation was limited to those employees not covered by a collective bargaining agreement. In October, 1995, the Company amended its plans to allow participation by collective bargaining employees. The plans permit participants to defer a portion of their salary up to a maximum ranging by plan from 8% to 15% as provided in Section 401(k) of the Internal Revenue Code. The Company matches the participant contributions up to a specified limit ranging from 1% to 4% in 1996. The matching contributions may be made in cash or Company stock. The plans also allow for discretionary Company contributions determined annually. The Company's expense for the defined contribution plans totaled $1,431,000 for 1996, $1,412,000 for 1995 and $955,000 for 1994. Treadco has an employee stock ownership plan (the "Treadco ESOP") and a related trust (the "Treadco Trust") covering substantially all employees of Treadco. The cost of the Treadco ESOP is borne by Treadco through annual contributions to the Treadco Trust in amounts determined by Treadco's Board of Directors. Charges to operations for contributions to the Treadco ESOP totaled $250,000 for 1995, and 1994. No contribution was approved for 1996. The Company sponsors plans that provide supplemental postretirement medical benefits, life insurance and accident and vision care to full-time officers of the Company. The plans are noncontributory, with the Company paying up to 80% of covered charges incurred by participants of the plan. There are no separate funds established by the Company relating to these plans. The following table represents the amounts recognized in the Company's consolidated balance sheets:
December 31 1996 1995 Accumulated postretirement benefit obligation: Retirees $ (2,606) $ (2,926) Fully eligible active plan participants (1,301) (417) Other active plan participants (1,626) (1,419) -------- -------- (5,533) (4,762) Unrecognized net (gain) loss (68) (83) Unrecognized prior service cost 1,082 - Unrecognized transition obligation 2,153 2,287 -------- -------- Accrued postretirement benefit cost $ (2,366) $ (2,558) ======== ========
Net periodic postretirement benefit cost includes the following components:
1996 1995 1994 Service cost $ 68 $ 51 $ 59 Interest cost 321 282 212 Amortization of transition obligation over 20 years 135 135 135 Amortization of net gain (35) - - -------- -------- -------- Net periodic postretirement benefit cost $ 489 $ 468 $ 406 ======== ======== ========
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (in health care cost trend) is 9% to 10% for 1997 (9.5% to 11% for 1996) and is assumed to decrease gradually to 4.5% in years 2008 and later. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $833,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1996 by $52,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% at December 31, 1996 and 7.10% at December 31, 1995. Additionally, the Company's union employees are provided postretirement health care benefits through defined benefit multiemployer plans. The cost of such benefits cannot be readily separated between retirees and active employees. The aggregate contribution to the multiemployer health and welfare benefit plans totaled approximately $72,397,000, $63,500,000 and $48,300,000 for the years ended December 31, 1996, 1995, and 1994, respectively. In October 1995, the Company adopted a performance award program. Upon award, the units will be valued equal to the closing price per share of the Company's common stock on the date awarded. The vesting provisions and the return on equity target will be set upon award. No awards were granted in 1996. NOTE L - OPERATING EXPENSES AND COSTS
Year Ended December 31 1996 1995 1994 ($ thousands) LESS-THAN-TRUCKLOAD MOTOR CARRIER OPERATIONS Salaries and wages $ 832,474 $ 779,453 $ 613,187 Supplies and expenses 130,330 120,439 96,210 Operating taxes and licenses 47,552 45,906 35,928 Insurance 28,393 24,122 18,237 Communications and utilities 29,897 26,776 22,639 Depreciation and amortization 41,755 37,822 24,302 Rents and purchased transportation 95,169 76,823 67,550 Other 12,296 8,219 4,298 ---------- ---------- ---------- 1,217,866 1,119,560 882,351 TRUCKLOAD MOTOR CARRIER OPERATIONS Salaries and wages 27,483 9,746 - Supplies and expenses 13,552 4,530 - Operating taxes and licenses 7,060 2,571 - Insurance 2,208 980 - Communications and utilities 1,038 420 - Depreciation and amortization 3,580 1,249 - Rents and purchased transportation 14,880 5,348 - Other 434 108 - ---------- ---------- ---------- 70,235 24,952 - INTERMODAL OPERATIONS Cost of services 151,799 117,455 26,817 Selling, administrative and general 27,658 18,711 3,542 ---------- ---------- ---------- 179,457 136,166 30,359 LOGISTICS OPERATIONS Cost of services 50,612 30,588 7,100 Selling, administrative, and general 7,081 3,711 1,388 ---------- ---------- ---------- 57,693 34,299 8,488 TIRE OPERATIONS Cost of sales 109,673 108,686 100,909 Selling, administrative and general 37,491 31,642 26,206 ---------- ---------- ---------- 147,164 140,328 127,115 SERVICE AND OTHER 9,097 5,433 1,993 ---------- ---------- ---------- $1,681,512 $1,460,738 $1,050,306 ========== ========== ==========
NOTE M - BUSINESS SEGMENT DATA The Company operates in five defined business segments: 1) LTL operations, which includes ABF and G.I. Trucking; 2) Intermodal operations, including the Clipper Group and CaroTrans; 3) Truckload operations, which includes Cardinal; 4) Logistics, which includes the Company's three logistics subsidiaries, and 5) Tire operations, which includes the operation of Treadco. The segment information for 1994 has been restated to reflect the Company's current reported business segments. Intersegment sales are not significant. Operating profit is total revenue less operating expenses, excluding interest. Identifiable assets by business segment include both assets directly identified with those operations and an allocable share of jointly used assets. General corporate assets consist primarily of cash and other investments. The following information reflects selected business segment data (information relative to revenues is reflected in the consolidated statements of operations):
Year Ended December 31 1996 1995 1994 ($ thousands) OPERATING PROFIT (LOSS) Less than truckload motor carrier operations $ (18,160) $ (32,915) $ 35,622 Truckload motor carrier operations 4,371 3,031 - Intermodal operations (546) 2,821 695 Logistics operations (2,782) (2,611) (968) Tire operations (4,821) 4,424 11,079 Other (4,699) (3,393) 719 ---------- ---------- ---------- TOTAL OPERATING PROFIT (LOSS) (26,637) (28,644) 47,147 Interest expense 31,869 17,046 6,985 Minority interest (1,768) 1,297 3,523 ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES $ (56,738) $ (46,987) $ 36,639 ========== ========== ========== IDENTIFIABLE ASSETS Less than truckload motor carrier operations $ 520,644 $ 675,412 $ 374,128 Truckload motor carrier operations 37,566 31,365 - Intermodal operations 74,549 75,754 73,816 Logistics operations 23,166 25,062 7,120 Tire operations 108,058 94,658 89,231 Other 34,449 36,014 5,487 ---------- ---------- ---------- 798,432 938,265 549,782 General corporate assets 44,768 47,572 19,263 ---------- ---------- ---------- TOTAL ASSETS $ 843,200 $ 985,837 $ 569,045 ========== ========== ========== Year Ended December 31 1996 1995 1994 ($ thousands) DEPRECIATION AND AMORTIZATION EXPENSE Less than truckload motor carrier operations $ 44,640 $ 40,045 $ 26,630 Truckload motor carrier 3,574 1,249 - Intermodal operations 3,079 2,779 609 Logistics operations 3,847 2,598 501 Tire operations 5,315 4,082 3,444 Other 4,283 2,053 931 ---------- ---------- ---------- $ 64,738 $ 52,806 $ 32,115 ========== ========== ========== CAPITAL EXPENDITURES Less than truckload motor carrier operations $ 14,105 $ 61,250 $ 58,110 Truckload motor carrier operations 838 2,127 - Intermodal operations 374 426 19 Logistics operations 3,080 5,532 116 Tire operations 23,082 5,429 5,684 Other 120 44 169 ---------- ---------- ---------- $ 41,599 $ 74,808 $ 64,098 ========== ========== ==========
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Long- and Short-term Debt. The carrying amounts of the Company's borrowings under its revolving credit agreements approximate their fair values, since the interest rate under these agreements is variable. Also, the carrying amount of long-term debt was estimated to approximate their fair values, with the exception of the WorldWay Subordinated Debentures, Treadco equipment debt and the general office term loan agreement which are estimated using current market rates. The carrying amounts and fair value of the Company's financial instruments at December 31, 1996 are as follows:
Carrying Fair Amount Value ($ thousands) Cash and cash equivalents $ 1,806 $ 1,806 Short-term debt 25,892 25,844 Long-term debt 282,178 277,671
NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The tables below present unaudited quarterly financial information for 1996 and 1995:
1996 Three Months Ended March 31 June 30 September 30 December 31 ($ thousands, except share and per share amount) Operating revenues $401,374 $414,462 $428,513 $414,835 Operating expenses and costs 410,216 420,445 432,232 418,619 -------- -------- --------- -------- Operating loss (8,842) (5,983) (3,719) (3,784) Other expense - net 5,995 8,179 8,835 11,401 Income taxes (credit) (5,278) (5,376) (4,068) (5,413) -------- -------- --------- -------- Net loss $ (9,559) $ (8,786) $ (8,486) $ (9,772) ======== ======== ======== ======== Net loss per share $ (0.54) $ (0.51) $ (0.49) $ (0.56) ======== ======== ======== ======== Average shares outstanding - Note H 19,516,539 19,512,367 19,508,620 19,504,830 ========== ========== ========== ========== 1995 Three Months Ended March 31 June 30 September 30 December 31 ($ thousands, except share and per share amount) Operating revenues $311,207 $312,094 $398,551 $415,427 Operating expenses and costs 297,853 304,890 412,691 445,304 -------- -------- --------- -------- Operating income (loss) 13,354 7,204 (14,140) (29,877) Other expense - net 3,596 2,919 6,632 10,381 Income taxes (credit) 4,616 2,602 (7,643) (13,770) -------- -------- --------- -------- Net income (loss) $ 5,142 $ 1,683 $ (13,129) $(26,488) ======== ======== ========= ======== Net income (loss) per share $ 0.21 $ 0.03 $ (0.73) $ (1.41) ======== ======== ======== ======== Average shares outstanding - Note H 19,566,404 19,515,132 19,549,160 19,529,408 ========== ========== ========== ==========
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES ARKANSAS BEST CORPORATION
Column A Column B Column C Column D Column E Column F Additions (1) (2) Balance at Charged to Charged to beginning costs and other accounts Deductions - Balance at Description of period expenses describe describe end of period Year Ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful $ l8,302(B) accounts receivable $ 19,403 $ 9,489 $ 3,935(A) 8,407(D) $ 6,118 ============ ============ =========== ============= =========== Year Ended December 31, 1995: Deducted from asset accounts: Allowance for doubtful $ 1,414(A) accounts receivable $ 2,825 $ 4,185 20,817(C) $ 9,838(B) $ 19,403 ============ ============ =========== ============= =========== Year Ended December 31, 1994: Deducted from asset accounts: Allowance for doubtful accounts receivable $ 2,200 $ 2,935 $ 962(A) $ 3,272(B) $ 2,825 ============ ============ =========== ============= =========== Note A - Recoveries of amounts previously written off. Note B - Uncollectible accounts written off. Note C - The allowance for doubtful accounts of WorldWay as of date of acquisition. Note D - Adjustment to WorldWay balance at date of acquisition.
FORM 10-K -- ITEM 14(c) EXHIBIT INDEX ARKANSAS BEST CORPORATION The following exhibits are filed with this report or are incorporated by reference to previously filed material. Exhibit No. 3.1* Restated Certificate of Incorporation of the Company (previously filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 3.2* Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 4.1* Form of Indenture, between the Company and Harris Trust and Savings Bank, with respect to $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock (previously filed as Exhibit 4.4 to Amendment No. 2 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on January 26, 1993, Commission File No. 33-56184, and incorporated herein by reference). 4.2* Indenture between Carolina Freight Corporation and First Union National Bank, Trustee with respect to 6 1/4% Convertible Subordinated Debentures Due 2011 (previously filed as Exhibit 4-A to the Carolina Freight Corporation's Registration Statement on Form S-3 filed with the Commission on April 11, 1986, Commission File No. 33-4742, and incorporated herein by reference). 10.1*# Stock Option Plan (previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 10.2*# The Company's Supplemental Benefit Plan (previously filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 10.3* $346,971,321 Amended and Restated Credit Agreement dated as of February 21, 1996 among the Company as the Borrower, Societe Generale, Southwest Agency as Managing Agent and Administrative Agent, NationsBank of Texas, N.A. as Documentation Agent and the Banks named herein as the Banks (previously filed as Exhibit 99.1 to the Company's Current Report on Form 8-K, filed with the Commission on February 28, 1996, Commission File No. 0-19969, and incorporated herein by reference). 10.4* First Amendment dated as of January 31, 1997 to the $346,971,321 Amended and Restated Credit Agreement dated as of February 21, 1996, among Arkansas Best corporation as the Borrower, Societe Generale, Southwest Agency as Managing Agent and Administrative Agent, NationsBank of Texas, N.A. as Documentation Agent and the Banks named herein as the Banks (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the Commission on February 27, 1997, Commission File No. 0-19969, and incorporated herein by reference). 10.5* $30,000,000 Credit Agreement dated as of February 21, 1996 among Arkansas Best Corporation as the Borrower, Societe Generale, Southwest Agency as Agent, and the Banks named herein as the Banks (previously filed as Exhibit 99.2 to the Company's Current Report on Form 8-K, filed with the Commission on February 28, 1996, Commission File No. 0-19969, and incorporated herein by reference). 10.6* First Amendment dated as of January 31, 1997 to the $30,000,000 Credit Agreement dated as of February 21, 1996 among Arkansas Best Corporation as the Borrower, Societe Generale, Southwest Agency as Agent, and the Banks named herein as the Banks (previously filed as Exhibit 10.2 to the Company's Current Report on Form 8-K, filed with the Commission on February 27, 1997, Commission File No. 0- 19969, and incorporated herein by reference). 10.7* National Master Freight Agreement with the International Brotherhood of Teamsters dated as of April 1, 1994 (previously filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File No. 0- 19969, and incorporated herein by reference). 10.8*# Arkansas Best Corporation Performance Award Unit Program effective January 1, 1996 (previously filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File No. 0-19969, and incorporated herein by reference). 11 Statement Re: Computation of Earnings per Share 21 List of Subsidiary Corporations 23 Consent of Ernst & Young LLP 27 Financial Data Schedule - -------------------- * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. # Designates a compensation plan for Directors or Executive Officers. EX-11 2 EXHIBIT 11 EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE ARKANSAS BEST CORPORATION
Year Ended December 31 1996 1995 1994 ($ thousands, except per share data) PRIMARY: Average shares outstanding 19,510,589 19,520,756 19,249,209 Net effect of dilutive stock options -- Based on the treasury stock method using average market price - - 102,587 ---------- ---------- ---------- Average common shares outstanding 19,510,589 19,520,756 19,351,796 ========== ========== ========== Income before extraordinary item and cumulative effect of accounting change $ (36,603) $ (32,792) $ 18,707 Less: preferred stock dividend 4,298 4,298 4,298 ---------- ---------- ---------- Net income (loss) available for common shareholders $ (40,901) $ (37,090) $ 14,409 ========== ========== ========== Net income (loss) per common share $ (2.10) $ (1.90) $ .74 ========== ========== ========== Fully diluted earnings per common share are not presented, as such calculations would be anti-dilutive
EX-21 3 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARY CORPORATIONS ARKANSAS BEST CORPORATION The Registrant owns and controls the following subsidiary corporations: Jurisdiction of % of Voting Name Incorporation Securities Owned Subsidiaries of Arkansas Best Corporation: ABF Freight System, Inc. Delaware 100 Treadco, Inc. Delaware 45.7 Transport Realty, Inc. Arkansas 100 Data-Tronics Corp. Arkansas 100 Arkansas Underwriters Corporation Arkansas 100 Advertising Counselors, Inc. Arkansas 100 ABF Cartage, Inc. Delaware 100 ABF Farms, Inc. Arkansas 100 Land-Marine Cargo, Inc. Puerto Rico 100 Integrated Distribution, Inc. Arkansas 100 ABF Freight System Canada, Ltd. Canada 100 ABF Freight System de Mexico, Inc. Delaware 100 Agile Freight System, Inc. Delaware 100 Agricultural Express of America, Inc. Delaware 100 Clipper Exxpress Company Delaware 100 WorldWay Corporation North Carolina 100 Subsidiary of ABF Freight System, Inc.: ABF Freight System (B.C.), Ltd. British Columbia 100 Subsidiaries of WorldWay Corporation G.I. Trucking Company California 100 Cardinal Freight Carriers, Inc. Virginia 100 CaroTrans International, Inc. North Carolina 100 The Complete Logistics Company California 100 Motor Carrier Insurance, Ltd. Bermuda 100 Carrier Computer Services, Inc. North Carolina 100 Carolina Breakdown Service, Inc. North Carolina 100 Hawaiian Pacific Freight Forwarding California 100 EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-66694) pertaining to the Arkansas Best Corporation Stock Option Plan and Arkansas Best Corporation Disinterested Director Stockholder Plan, the Registration Statement (Form S-8, No. 33-52877), pertaining to the Arkansas Best Corporation Employees' Investment Plan, and the Registration Statement (Form S-8, No. 33-63587), pertaining to (1) the Carolina Freight Corporation Employee Savings and Protection Plan, (2) Complete Leasing Concepts, Inc. Employee Savings & Profit Sharing Plan, and (3) IDI 401(k) Savings Plan, of our report dated January 31, 1997, with respect to the consolidated financial statements and schedule of Arkansas Best Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Little Rock, Arkansas March 21, 1997 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ARKANSAS BEST CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000894405 ARKANSAS BEST CORPORATION 1,000 12-MOS DEC-31-1996 DEC-31-1996 1,806 0 186,065 6,118 33,831 259,105 589,941 222,308 843,200 300,879 326,950 195 0 15 137,220 843,200 141,613 1,659,184 109,673 1,681,512 0 9,489 31,869 (56,738) (20,135) (36,603) 0 0 0 (36,603) (2.10) (2.10)
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