-----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, Kl5Tg/mRf93WWC1iMUhlQvGTqSD4EgA3j3LgARJycPdfdytDxk2NKhNseNnrx6gx oZxSPLrtZ6YHGzhVeZeEzw== 0000950134-99-009595.txt : 19991110 0000950134-99-009595.hdr.sgml : 19991110 ACCESSION NUMBER: 0000950134-99-009595 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991109 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-Q SEC ACT: SEC FILE NUMBER: 000-19969 FILM NUMBER: 99744030 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-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 1999 ----------------------- [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission file number 0-19969 ARKANSAS BEST CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 6711 71-0673405 - -------------------------------------- ----------------------------------- ---------------------------------------- (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code No.) Identification No.)
3801 Old Greenwood Road Fort Smith, Arkansas 72903 (501) 785-6000 - -------------------------------------------------------------------------------- (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of The Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 29, 1999 ------------------------------ ------------------------------- Common Stock, $.01 par value 19,735,333 shares 2 ARKANSAS BEST CORPORATION INDEX
PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets -- September 30, 1999 and December 31, 1998 ............................................... 3 Consolidated Statements of Operations -- For the Three and Nine Months Ended September 30, 1999 and 1998......................... 5 Consolidated Statements of Shareholders' Equity For the Nine Months Ended September 30, 1999 .......................................... 7 Condensed Consolidated Statements of Cash Flows -- For the Nine Months Ended September 30, 1999 and 1998 .................................. 8 Notes to Consolidated Financial Statements - September 30, 1999 .......................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................... 16 Item 2a. Quantitative and Qualitative Disclosures about Market Risk................................ 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings ........................................................................ 28 Item 2. Changes in Securities .................................................................... 28 Item 3. Defaults Upon Senior Securities .......................................................... 28 Item 4. Submission of Matters to a Vote of Security Holders ...................................... 28 Item 5. Other Information ........................................................................ 28 Item 6. Exhibits and Reports on Form 8-K ......................................................... 28 SIGNATURES ..................................................................................... 29
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ARKANSAS BEST CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 1999 1998 ------------ ----------- (UNAUDITED) NOTE ($ THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents .................................... $ 4,374 $ 4,543 Trade receivables, less allowances (1999-$5,646,000; 1998-$7,051,000) ........................... 194,049 166,520 Inventories .................................................. 32,161 33,150 Prepaid expenses ............................................. 7,526 12,700 Deferred income taxes ........................................ 830 874 Net assets of discontinued operations ........................ 145 3,546 Other ........................................................ 3,331 5,467 --------- --------- TOTAL CURRENT ASSETS ...................................... 242,416 226,800 PROPERTY, PLANT AND EQUIPMENT Land and structures .......................................... 222,694 218,250 Revenue equipment ............................................ 289,150 256,474 Manufacturing equipment ...................................... 15,898 17,506 Service, office and other equipment .......................... 81,189 73,891 Leasehold improvements ....................................... 9,919 9,484 --------- --------- 618,850 575,605 Less allowances for depreciation and amortization ............... (277,701) (255,732) --------- --------- 341,149 319,873 OTHER ASSETS .................................................... 38,868 35,682 GOODWILL, less amortization (1999-$35,353,000; 1998-$36,740,000) ......................................... 110,397 124,975 --------- --------- $ 732,830 $ 707,330 ========= =========
NOTE: The balance sheet at December 31, 1998, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying notes are an integral part of the consolidated financial statements. 3 4 ARKANSAS BEST CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 1999 1998 ------------ ----------- (UNAUDITED) NOTE ($ THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank overdraft and drafts payable ............................ $ 19,731 $ 19,830 Trade accounts payable ....................................... 77,657 69,983 Accrued expenses ............................................. 160,508 145,432 Federal and state income taxes ............................... 2,606 8,179 Current portion of long-term debt ............................ 18,864 17,504 --------- --------- TOTAL CURRENT LIABILITIES ................................. 279,366 260,928 LONG-TERM DEBT, less current portion ............................ 202,370 196,079 OTHER LIABILITIES ............................................... 26,761 20,577 DEFERRED INCOME TAXES ........................................... 18,905 22,319 MINORITY INTEREST IN TREADCO, INC ............................... -- 33,512 SHAREHOLDERS' EQUITY Preferred stock, $.01 par value, authorized 10,000,000 shares; issued and outstanding 1,495,000 shares ................... 15 15 Common stock, $.01 par value, authorized 70,000,000 shares; issued and outstanding 1999: 19,718,133 shares; 1998: 19,610,213 shares .................................. 197 196 Additional paid-in capital ................................... 193,866 193,117 Retained earnings (deficit) .................................. 11,350 (19,413) Accumulated Other Comprehensive Income ....................... -- -- --------- --------- TOTAL SHAREHOLDERS' EQUITY ................................ 205,428 173,915 COMMITMENTS AND CONTINGENCIES ................................... --------- --------- $ 732,830 $ 707,330 ========= =========
NOTE: The balance sheet at December 31, 1998, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying notes are an integral part of the consolidated financial statements. 4 5 ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (UNAUDITED) ($ thousands, except per share data) CONTINUING OPERATIONS: OPERATING REVENUES Transportation operations ................... $ 399,551 $ 368,896 $ 1,126,237 $ 1,067,907 Tire operations ............................. 53,299 51,521 139,893 135,044 ----------- ----------- ----------- ----------- 452,850 420,417 1,266,130 1,202,951 ----------- ----------- ----------- ----------- OPERATING EXPENSES AND COSTS Transportation operations ................... 369,242 349,364 1,052,775 1,018,639 Tire operations ............................. 50,754 50,315 137,488 133,242 ----------- ----------- ----------- ----------- 419,996 399,679 1,190,263 1,151,881 ----------- ----------- ----------- ----------- OPERATING INCOME ............................... 32,854 20,738 75,867 51,070 OTHER INCOME (EXPENSE) Net gains (losses) on sales of property and non-revenue equipment ................. 507 (195) 971 1,153 Interest expense ............................ (4,905) (4,558) (14,232) (13,389) Minority interest in Treadco, Inc. .......... -- (341) 245 (471) Other, net .................................. (1,047) (579) (3,424) (4,023) ----------- ----------- ----------- ----------- (5,445) (5,673) (16,440) (16,730) ----------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ....................... 27,409 15,065 59,427 34,340 FEDERAL AND STATE INCOME TAXES Current ..................................... 7,701 3,425 21,532 11,741 Deferred .................................... 3,632 2,666 3,244 2,147 ----------- ----------- ----------- ----------- 11,333 6,091 24,776 13,888 ----------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS .............. 16,076 8,974 34,651 20,452 ----------- ----------- ----------- ----------- DISCONTINUED OPERATIONS: Loss from discontinued operations (net of tax benefits of $467 for the three months ended September 30, 1998, and $394 and $607 for the nine months ended September 30, 1999 and 1998 respectively) ............................... -- (881) (664) (1,340) ----------- ----------- ----------- ----------- LOSS FROM DISCONTINUED OPERATIONS .............. -- (881) (664) (1,340) ----------- ----------- ----------- ----------- NET INCOME ..................................... 16,076 8,093 33,987 19,112 Preferred stock dividends ................... 1,075 1,075 3,224 3,224 ----------- ----------- ----------- ----------- NET INCOME FOR COMMON SHAREHOLDERS ............. $ 15,001 $ 7,018 $ 30,763 $ 15,888 =========== =========== =========== ===========
5 6 ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS - Continued - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 -------------- -------------- -------------- -------------- (UNAUDITED) ($ thousands, except per share data) NET INCOME (LOSS) PER COMMON SHARE BASIC: Continuing operations (1)........... $ 0.76 $ 0.40 $ 1.60 $ 0.88 Discontinued operations............. -- (0.04) (0.03) (0.07) -------------- -------------- -------------- -------------- NET INCOME (1)........................ $ 0.76 $ 0.36 $ 1.57 $ 0.81 -------------- -------------- -------------- -------------- AVERAGE COMMON SHARES OUTSTANDING (BASIC).................... 19,691,666 19,610,213 19,645,951 19,608,546 ============== ============== ============== ============== DILUTED: Continuing operations (2)........... $ 0.67 $ 0.38 $ 1.46 $ 0.87 Discontinued operations............. -- (0.04) (0.03) (0.07) -------------- -------------- -------------- -------------- NET INCOME (2)........................ $ 0.67 $ 0.34 $ 1.43 $ 0.80 -------------- -------------- -------------- -------------- AVERAGE COMMON SHARES OUTSTANDING (DILUTED).................. 24,102,750 23,606,484 23,821,934 19,980,164 ============== ============== ============== ============== CASH DIVIDENDS PAID PER COMMON SHARE... $ -- $ -- $ -- $ -- ============== ============== ============== ==============
(1) Gives consideration to preferred stock dividends of $1.1 million per quarter. (2) For the nine months ended September 30, 1998, consideration is given to preferred dividends of $3.2 million. Conversion of preferred stock into common would be antidilutive for the nine months ended September 30, 1998. For the three months ended September 30, 1999 and 1998, and the nine months ended September 30, 1999, conversion of preferred shares into common is assumed. 6 7 ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
ACCUMULATED ADDITIONAL RETAINED OTHER PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE TOTAL STOCK STOCK CAPITAL (DEFICIT) INCOME EQUITY --------- ------ ---------- --------- ------------- ------ (UNAUDITED) ($ thousands) Balances at January 1, 1999 ................. $ 15 $ 196 $ 193,117 $ (19,413) $ -- $ 173,915 Net income .................................. -- -- -- 33,987 -- 33,987 Common stock issued on exercise of stock options .......................... -- 1 742 -- -- 743 Tax effect of stock options exercised ....... -- -- 7 -- -- 7 Dividends on preferred stock ................ -- -- -- (3,224) -- (3,224) --------- --------- --------- --------- ----- --------- Balances at September 30, 1999 .............. $ 15 $ 197 $ 193,866 $ 11,350 $ -- $ 205,428 ========= ========= ========= ========= ===== =========
7 8 ARKANSAS BEST CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 1999 1998 --------- --------- (UNAUDITED) ($ thousands) OPERATING ACTIVITIES Net cash provided by operating activities .................... $ 73,944 $ 40,555 INVESTING ACTIVITIES Purchases of property, plant and equipment less capitalized leases .................................... (42,481) (48,472) Purchase of Treadco, Inc. stock .............................. (23,673) (1,132) Proceeds from asset sales and other .......................... 13,855 14,341 --------- --------- NET CASH USED BY INVESTING ACTIVITIES ........................... (52,299) (35,263) --------- --------- FINANCING ACTIVITIES Deferred financing costs and expenses ........................ (125) (731) Borrowings under revolving credit facilities ................. 370,750 424,925 Payments under revolving credit facilities ................... (369,000) (394,625) Payments on long-term debt ................................... (20,299) (17,598) Payments under term loan facilities .......................... -- (13,000) Dividends paid ............................................... (3,224) (3,224) Other, net ................................................... 84 (3,837) --------- --------- NET CASH USED BY FINANCING ACTIVITIES ........................... (21,814) (8,090) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS ....................... (169) (2,798) Cash and cash equivalents at beginning of period ............. 4,543 7,203 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 4,374 $ 4,405 ========= =========
8 9 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1999 - -------------------------------------------------------------------------------- NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS Arkansas Best Corporation (the "Company") is a diversified holding company engaged through its subsidiaries primarily in motor carrier transportation operations, intermodal transportation operations and truck tire retreading and new tire sales (see Note H). Principal subsidiaries are ABF Freight System, Inc., ("ABF"); Treadco, Inc. ("Treadco"); Clipper Exxpress Company and related companies ("Clipper"); G.I. Trucking Company ("G.I. Trucking"); and FleetNet America, LLC. Approximately 79% of ABF's employees are covered under a five-year collective bargaining agreement, which began on April 1, 1998, with the International Brotherhood of Teamsters ("IBT"). NOTE B - FINANCIAL STATEMENT PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the Company's financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The difference between the effective tax rate for the three and nine-month periods ended September 30, 1999 and 1998, and the federal statutory rate resulted from state income taxes, amortization of nondeductible goodwill, minority interest, nondeductible tender offer response costs (incurred by Treadco) and other nondeductible expenses. NOTE C - DISCONTINUED OPERATIONS At December 31, 1998, the Company was engaged in international ocean freight services through its subsidiary, CaroTrans International, Inc. ("Clipper International"), a non-vessel operating common carrier (N.V.O.C.C.). On February 28, 1999, the Company completed a formal plan to exit its international ocean freight N.V.O.C.C. services by disposing of the business and assets of Clipper International. On April 17, 1999, the Company closed the sale of the business and certain assets of Clipper International, including the trade name "CaroTrans International, Inc." Remaining assets are being liquidated. The aggregate of the selling price of the assets sold and the estimated liquidation value of the retained Clipper International assets aggregated approximately $5.0 million which was approximately equal to the Company's net investment in the related assets. 9 10 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued - -------------------------------------------------------------------------------- Results of operations of the international ocean freight services segment have been reported as discontinued operations as of September 30, 1999, and the statements of operations for all periods have been restated to remove revenue and expenses of this segment. Results of Clipper International included in discontinued operations are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 --------- ------------ ----------- ----------- ($ thousands) Revenues ............................................ $ - $ 11,108 $ 6,777 $ 33,339 Operating loss ...................................... - (1,283) (1,114) (1,703) Pre-tax loss......................................... - (1,348) (1,058) (1,947)
NOTE D - INVENTORIES
SEPTEMBER 30 DECEMBER 31 1999 1998 ------------ ------------ ($ thousands) Finished goods ..................................................................... $ 24,656 $ 25,523 Materials .......................................................................... 4,893 5,147 Repair parts, supplies and other ................................................... 2,612 2,480 ---------- ---------- $ 32,161 $ 33,150 ========== ==========
NOTE E - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS Various legal actions, the majority of which arise in the normal course of business, are pending. None of these legal actions are expected to have a material adverse effect on the Company's financial condition, cash flows or results of operations. The Company maintains liability insurance against risks arising out of the normal course of its business, subject to certain self-insured retention limits. The Company's subsidiaries store some fuel for its tractors and trucks in approximately 78 underground tanks located in 27 states. Maintenance of such tanks is regulated at the federal and, in some cases, state levels. The Company believes that it is in substantial compliance with all such regulations. The Company is not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on the Company. Environmental regulations have been adopted by the United States Environmental Protection Agency ("EPA") that required the Company to upgrade its underground tank systems by December 1998. The Company successfully completed the upgrades prior to December 31, 1998. The Company has received notices from the EPA and others that it has been identified as a potentially responsible party ("PRP") under the Comprehensive Environmental Response Compensation and Liability Act or other federal or state environmental statutes at several hazardous waste sites. After investigating the Company's or its subsidiaries' involvement in waste disposal or waste generation at such sites, the Company has either agreed to de minimis settlements (aggregating approximately $300,000 over the last ten years), or believes its obligations with respect to such sites would involve immaterial monetary liability, although there can be no assurances in this regard. 10 11 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued - -------------------------------------------------------------------------------- As of September 30, 1999, the Company has accrued approximately $3.0 million to provide for environmental-related liabilities. The Company's environmental accrual is based on management's best estimate of the actual liability. The Company's estimate is founded on management's experience in dealing with similar environmental matters and on actual testing performed at some sites. Management believes that the accrual is adequate to cover environmental liabilities based on the present environmental regulations. Accruals for environmental liability are included in the balance sheet as accrued expenses. NOTE F - RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee of The American Institute of CPA's ("AcSEC") issued Statement of Position ("SOP") 98-1, Accounting for Costs of Computer Software Developed For or Obtained For Internal Use. Under the SOP, qualifying computer software costs incurred during the "application development stage" are required to be capitalized and amortized over the software's estimated useful life. The Company adopted SOP 98-1 January 1, 1999. The SOP results in capitalization of costs related to internal computer software development. All such costs were previously expensed. The amount of costs capitalized within any period is dependent on the nature of software development activities and projects in each period. For the three and nine months ended September 30, 1999, the Company capitalized internal software development costs amounting to approximately $.7 million and $1.8 million, respectively, which increased net income and income from continuing operations by $.02 per share (diluted) and $.04 per share (diluted) respectively. In April 1998, the AcSEC issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. Under the SOP, certain costs associated with start-up activities are required to be expensed as incurred. The Company adopted SOP 98-5 in 1999. The Company has historically expensed start-up costs and, therefore, there is no impact of adoption on the Company's financial statements and related disclosures. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The Statement is effective for the Company in 2001. The Company is evaluating the impact the Statement will have on its financial statements and related disclosures. 11 12 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued - -------------------------------------------------------------------------------- NOTE G - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 -------------- ------------- ------------- ------------- ($ thousands, except per share data) NUMERATOR: Numerator for basic earnings per share -- Net income ................................ $ 16,076 $ 8,093 $ 33,987 $ 19,112 Preferred stock dividends ................. (1,075) (1,075) (3,224) (3,224) -------------- ------------- ------------- ------------- Numerator for basic earnings per share -- Net income available to common shareholders ....................... 15,001 7,018 30,763 15,888 Effect of dilutive securities (1).......... 1,075 1,075 3,224 -- -------------- ------------- ------------- ------------- Numerator for diluted earnings per share -- Net income available to common shareholders .................... $ 16,076 $ 8,093 $ 33,987 $ 15,888 ============== ============= ============= ============= DENOMINATOR: Denominator for basic earnings per share - weighted-average shares ....... 19,691,666 19,610,213 19,645,951 19,608,546 Effect of dilutive securities: Conversion of preferred stock (1).......... 3,796,852 3,796,852 3,796,852 -- Stock options ............................. 614,232 199,419 379,131 371,618 -------------- ------------- ------------- ------------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions ............ 24,102,750 23,606,484 23,821,934 19,980,164 ============== ============= ============= ============= NET INCOME (LOSS) PER COMMON SHARE BASIC: Continuing operations ........................ $ 0.76 $ 0.40 $ 1.60 $ 0.88 Discontinued operations ...................... -- (0.04) (0.03) (0.07) -------------- ------------- ------------- ------------- NET INCOME PER SHARE ............................ $ 0.76 $ 0.36 $ 1.57 $ 0.81 ============== ============= ============= ============= AVERAGE COMMON SHARES OUTSTANDING (BASIC): ......................... 19,691,666 19,610,213 19,645,951 19,608,546 ============== ============= ============= ============= DILUTED: Continuing operations ........................ $ 0.67 $ 0.38 $ 1.46 $ 0.87 Discontinued operations ...................... -- (0.04) (0.03) (0.07) -------------- ------------- ------------- ------------- NET INCOME PER SHARE ............................ $ 0.67 $ 0.34 $ 1.43 $ 0.80 ============== ============= ============= ============= AVERAGE COMMON SHARES OUTSTANDING (DILUTED): ....................... 24,102,750 23,606,484 23,821,934 19,980,164 ============== ============= ============= ============= CASH DIVIDENDS PAID PER COMMON SHARE ............................. $ -- $ -- $ -- $ -- ============== ============= ============= =============
(1) For the nine months ended September 30, 1998, consideration is given to preferred dividends of $3.2 million. Conversion of preferred stock into common would be antidilutive for the nine months ended September 30, 1998. For the three months ended September 30, 1999, and 1998, and the nine months ended September 30, 1999, conversion of preferred shares into common is assumed. 12 13 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued - -------------------------------------------------------------------------------- NOTE H - ACQUISITION OF MINORITY INTEREST IN TREADCO, INC. On January 22, 1999, the Company announced that it had submitted a formal proposal to Treadco's Board of Directors under which the outstanding shares of Treadco's common stock not owned by the Company would be acquired for $9.00 per share in cash. The announcement stated that the proposal had the support of Shapiro Capital Management Company, Inc., Treadco's largest independent stockholder, which beneficially owned 1,132,775 shares (or approximately 22%) of the common stock of Treadco. On March 15, 1999, the Company and Treadco signed a definitive merger agreement for the acquisition of all shares of Treadco's stock not owned by the Company for $9.00 per share in cash via a tender offer. The tender offer commenced on March 23, 1999, and closed on April 20, 1999. A total of approximately 2,457,000 shares were tendered to the Company. Including the tendered shares, the Company owned approximately 98% of Treadco at the closing of the tender. At a June 10, 1999 special meeting, the shareholders of Treadco, Inc. approved the merger of Treadco Acquisition Corporation, a wholly owned subsidiary of the Company, into Treadco, Inc. This transaction resulted in Treadco, Inc. becoming a wholly owned subsidiary of the Company. Subject to the terms of the merger agreement, shares of common stock not tendered were converted into the right to receive $9.00 per share. As a result of the merger, the Company voluntarily delisted Treadco Inc.'s common stock from trading on The Nasdaq Stock Market, Inc. on June 10, 1999. The cost of the Treadco shares and related expenses of $23.7 million was funded with the Company's Revolving Credit Facility. The acquisition of the Treadco stock was accounted for as a purchase. The application of purchase accounting to the acquired assets and liabilities of Treadco resulted in the elimination of Treadco's goodwill of approximately $12.0 million and a reduction of Treadco's fixed assets of approximately $4.0 million. Pro forma information (as if the acquisition and related transactions were completed at the beginning of their respective periods) for the nine months ended September 30, 1999 and 1998 is as follows:
NINE MONTHS ENDED SEPTEMBER 30 -------------------------------- 1999 1998 ------------- ------------ Operating revenues ......................................... $ 1,266,130 $ 1,202,951 Net income.................................................. 33,808 19,729 Net income per share (diluted).............................. 1.42 0.83
NOTE I - OPERATING SEGMENT DATA The Company used the "management approach" to determine its reportable operating segments as well as to determine the basis of reporting the operating segment information. The management approach focuses on financial information that the Company's decision-makers use to make decisions about operating matters. Management uses operating revenues, operating expense categories, operating ratios, operating income, and key operating statistics to evaluate performance and allocate resources to the Company's operating segments. During the periods being reported on, the Company operated in four defined reportable operating segments: 1) ABF; 2) G.I. Trucking; 3) Clipper; and 4) Treadco. 13 14 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued - -------------------------------------------------------------------------------- Results of operations for Clipper International, previously reflected as a reportable segment, have been reported as discontinued operations for the three and nine months ended September 30, 1999, and the statements of operations for all prior periods have been restated to remove the revenue and expense of the ocean freight services N.V.O.C.C. segment (see Note C). The Company eliminates intercompany transactions in consolidation. However, the information used by the Company's management with respect to its reportable segments is before intersegment eliminations of revenues and expenses. Intersegment revenues and expenses are not significant. Further classifications of operations or revenues by geographic location beyond the descriptions provided above are impractical, and are, therefore, not provided. The Company's foreign operations are not significant. No material changes have occurred in the total assets for any reportable operating segment since December 31, 1998, except for the impact of purchase accounting on Treadco's assets as discussed in Note H, and the reclassification of Clipper International's assets to discontinued operations. The following tables reflect reportable operating segment information for the Company, as well as a reconciliation of reportable segment information to the Company's consolidated operating revenues, operating expenses and operating income.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 --------- --------- ----------- ----------- (UNAUDITED) ($ thousands) OPERATING REVENUES ABF Freight System, Inc.............................. $ 332,302 $ 302,985 $ 936,421 $ 877,084 G.I. Trucking Company................................ 34,904 32,303 101,351 92,717 Clipper.............................................. 29,593 31,585 80,868 93,686 Treadco, Inc......................................... 53,933 52,137 141,561 136,735 Other revenues and eliminations...................... 2,118 1,407 5,929 2,729 --------- --------- ----------- ----------- Total consolidated operating revenues.............. $ 452,850 $ 420,417 $ 1,266,130 $ 1,202,951 ========= ========= =========== ===========
14 15 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (UNAUDITED) ($ thousands) OPERATING EXPENSES AND COSTS ABF FREIGHT SYSTEM, INC. Salaries and wages ................................. $ 208,972 $ 199,409 $ 607,346 $ 589,300 Supplies and expenses .............................. 37,001 31,475 102,543 93,528 Operating taxes and licenses ....................... 9,650 8,904 28,372 27,787 Insurance and claims ............................... 5,643 5,200 15,470 14,669 Communications and utilities ....................... 4,098 3,697 11,641 10,405 Depreciation and amortization ...................... 8,029 6,641 22,313 18,801 Rents and purchased transportation ................. 27,535 26,857 73,137 71,999 Other .............................................. 1,250 1,719 3,748 4,663 (Gain) on sale of revenue equipment ................ (430) (464) (677) (2,084) ----------- ----------- ----------- ----------- 301,748 283,438 863,893 829,068 ----------- ----------- ----------- ----------- G.I. TRUCKING COMPANY Salaries and wages ................................. 16,206 15,333 46,927 43,438 Supplies and expenses .............................. 2,842 2,670 8,211 7,967 Operating taxes and licenses ....................... 820 582 2,395 1,822 Insurance and claims ............................... 907 626 2,942 2,858 Communications and utilities ....................... 454 443 1,309 1,219 Depreciation and amortization ...................... 1,054 824 2,559 2,364 Rents and purchased transportation ................. 11,518 10,341 32,287 29,106 Other .............................................. 807 703 2,500 2,278 (Gain) on sale of revenue equipment ................ (25) (4) (80) (66) ----------- ----------- ----------- ----------- 34,583 31,518 99,050 90,986 ----------- ----------- ----------- ----------- CLIPPER Cost of services ................................... 25,268 27,969 69,691 81,921 Selling, administrative and general ................ 3,547 3,987 10,262 12,148 (Gain) on sale of revenue equipment ................ -- -- (33) (64) ----------- ----------- ----------- ----------- 28,815 31,956 79,920 94,005 ----------- ----------- ----------- ----------- TREADCO, INC. Cost of sales ...................................... 36,524 37,071 97,992 96,988 Selling, administrative and general ................ 14,619 13,659 40,542 37,416 ----------- ----------- ----------- ----------- 51,143 50,730 138,534 134,404 ----------- ----------- ----------- ----------- Other expenses and eliminations ....................... 3,707 2,037 8,866 3,418 ----------- ----------- ----------- ----------- Total consolidated operating expenses and costs .... $ 419,996 $ 399,679 $ 1,190,263 $ 1,151,881 =========== =========== =========== =========== OPERATING INCOME (LOSS) ABF Freight System, Inc. .............................. $ 30,554 $ 19,547 $ 72,528 $ 48,016 G.I. Trucking Company ................................. 321 785 2,301 1,731 Clipper ............................................... 778 (371) 948 (319) Treadco, Inc. ......................................... 2,790 1,407 3,027 2,331 Other income (loss) and eliminations .................. (1,589) (630) (2,937) (689) ----------- ----------- ----------- ----------- Total consolidated operating income ................ $ 32,854 $ 20,738 $ 75,867 $ 51,070 =========== =========== =========== ===========
15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- OPERATING SEGMENT DATA The following table sets forth, for the periods indicated, a summary of the Company's operating expenses by segment as a percentage of revenue for the applicable segment. The Company has restated its 1998 segment information to conform to the current year's segment presentation, which is in accordance with the requirements of FAS No. 131. Note I to the Consolidated Financial Statements, for the year ended December 31, 1998, contains additional information regarding the Company's operating segments.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 ---- ---- ---- ---- (UNAUDITED) OPERATING EXPENSES AND COSTS ABF FREIGHT SYSTEM, INC. Salaries and wages .................................. 62.9% 65.8% 64.9% 67.2% Supplies and expenses ............................... 11.1 10.4 11.0 10.7 Operating taxes and licenses ........................ 2.9 2.9 3.0 3.2 Insurance and claims ................................ 1.7 1.7 1.7 1.7 Communications and utilities ........................ 1.2 1.2 1.2 1.2 Depreciation and amortization ....................... 2.4 2.2 2.4 2.1 Rents and purchased transportation................... 8.3 8.9 7.8 8.2 Other ............................................... 0.4 0.6 0.4 0.4 (Gain) on sale of revenue equipment.................. (0.1) (0.2) (0.1) (0.2) ---- ----- ---- ----- 90.8% 93.5% 92.3% 94.5% ---- ----- ---- ----- G.I. TRUCKING COMPANY Salaries and wages .................................. 46.4% 47.5% 46.3% 46.9% Supplies and expenses ............................... 8.1 8.3 8.1 8.6 Operating taxes and licenses ........................ 2.3 1.8 2.4 2.0 Insurance and claims ................................ 2.6 1.9 2.9 3.1 Communications and utilities ........................ 1.3 1.4 1.3 1.3 Depreciation and amortization ....................... 3.0 2.6 2.5 2.5 Rents and purchased transportation................... 33.0 32.0 31.9 31.4 Other ............................................... 2.5 2.1 2.4 2.4 (Gain) on sale of revenue equipment.................. (0.1) - (0.1) (0.1) ---- ----- ---- ----- 99.1% 97.6% 97.7% 98.1% ---- ----- ---- ----- CLIPPER Cost of services..................................... 85.4% 88.5% 86.2% 87.4% Selling, administrative and general ................. 12.0 12.7 12.6 13.0 (Gain) on sale of revenue equipment ................. - - - (0.1) ---- ----- ---- ----- 97.4% 101.2% 98.8% 100.3% ---- ----- ---- ----- TREADCO, INC. Cost of sales........................................ 67.7% 71.1% 69.2% 70.9% Selling, administrative and general ................. 27.1 26.2 28.7 27.4 ---- ----- ---- ----- 94.8% 97.3% 97.9% 98.3% ---- ----- ---- ----- OPERATING INCOME ABF Freight System, Inc................................. 9.2% 6.5% 7.7% 5.5% G. I. Trucking Company ................................. 0.9% 2.4% 2.3% 1.9% Clipper ................................................ 2.6% (1.2)% 1.2% (0.3)% Treadco, Inc............................................ 5.2% 2.7% 2.1% 1.7%
16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 Consolidated revenues from continuing operations of the Company for the three and nine months ended September 30, 1999, increased 7.7% and 5.3%, respectively, compared to the same periods in 1998, due primarily to increases in revenues for ABF, G.I. Trucking and Treadco. These increases were offset somewhat by declines in Clipper revenues. The Company's operating income from continuing operations for the three and nine months ended September 30, 1999, increased 58.4% and 48.6% compared to the same periods in 1998. Increases in operating income from continuing operations are attributable to improved operations at ABF, Clipper and Treadco offset, in part, by a decline in the operating income of G.I. Trucking during the third quarter of 1999 and increases in corporate incentive pay accruals. Income from continuing operations for the three and nine months ended September 30, 1999, increased 79.1% and 69.4% from the same periods in 1998. The improvements in income from continuing operations reflect primarily the improvements in operating income. Diluted earnings per share from continuing operations improved 76.3% to $0.67 per share and 67.8% to $1.46 per share for the three and nine months ended September 30, 1999, when compared to the same periods in 1998. ABF FREIGHT SYSTEM, INC. Effective September 13, 1999, ABF implemented an overall rate increase of 5.1%. Previous overall rate increases effective January 1, 1999 and January 1, 1998 were 5.5% and 5.3%, respectively. ABF does not plan to implement a rate increase on January 1, 2000. Revenues for the three and nine months ended September 30, 1999, increased 9.7% and 6.8% to $332.3 million and $936.4 million, respectively, from $303.0 million and $877.1 million for the same periods in 1998. ABF generated operating income for the three and nine months ended September 30, 1999, of $30.6 million and $72.5 million compared to $19.5 million and $48.0 million for the three and nine months ended September 30, 1998. ABF's increase in revenue is due primarily to increases in LTL revenue per hundredweight of 6.6% and 5.9% to $19.45 and $19.31, respectively, for the three and nine months ended September 30, 1999, compared to the same periods in 1998, reflecting a continuing favorable pricing environment. ABF's revenue increase also results from LTL tonnage increases of 3.6% and 1.1% for the three and nine months ended September 30, 1999, compared to the same periods in 1998. In addition, ABF implemented a fuel surcharge on July 7, 1999, based on the increase in diesel fuel prices compared to an index price. Revenue attributable to the fuel surcharge was $2.4 million in the third quarter of 1999. There was no fuel surcharge in effect for the third quarter of 1998. ABF's operating ratio improved to 90.8% and 92.3% for the three and nine months ended September 30, 1999, from 93.5% and 94.5% for the same periods in 1998, as a result of the revenue yield improvements previously described and as a result of improvements in certain operating expense categories as follows: Salaries and wages expense decreased as a percent of revenue by 2.9% and 2.3% for the three and nine months ended September 30, 1999, compared to the same periods in 1998. The decreases for the three and nine months ended September 30, 1999 are due in part to lower line haul and dock labor costs due to retirements and a lower effective wage rate associated with more new hires, offset in part by an increase 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- in incentive pay amounts. Wage rates for new hires increase to full scale levels over a two year period. In addition, the decrease in line haul wages for the nine months ended September 30, 1999 is due in part to an increase in rail utilization for freight transportation. Rail usage increased to 17.7% of total miles for the nine months ended September 30, 1999 compared to 16.4% for the same period in 1998. Supplies and expenses increased 0.7% and 0.3% as a percent of revenue for the three and nine months ended September 30, 1999, compared to the same periods in 1998. This change is due primarily to higher diesel fuel prices, as described previously, which increased 34.8% on an average price per gallon basis when the third quarter of 1999 is compared to the third quarter of 1998. The previously mentioned fuel surcharge on revenue is intended to offset the fuel cost increase. In addition, trailer repair costs were higher due to the installation of conspicuity tape to road and city trailers, in accordance with Federal regulations. Such regulations require that the installation process be complete by June 1, 2001. As of September 30, 1999, the Company has completed the installation on approximately 82% of all road trailers and a small number of city trailers. Depreciation and amortization increased 0.2% and 0.3% as a percent of revenue for the three and nine months ended September 30, 1999, compared to the same periods in 1998. Increases in depreciation resulted from an increase in the number of road tractors under capital leases. A larger portion of ABF's road tractor fleet was under operating leases in the first nine months of 1998. Rents and purchased transportation expense decreased 0.6% and 0.4% as a percent of revenue for the three and nine months ended September 30, 1999, compared to same periods in 1998, due primarily to declines in operating lease expense, reflecting ABF's replacement of road tractors under operating leases with road tractors under capital leases. This decrease was offset, in part, by the increase in rail utilization for the nine months ended September 30, 1999. As described above, ABF's rail usage increased during this period when compared to the same period in 1998. G.I. TRUCKING G.I. Trucking revenues increased 8.1% and 9.3% to $34.9 million and $101.4 million for the three and nine months ended September 30, 1999, from $32.3 million and $92.7 million, respectively, for the same periods during 1998. The revenue increase resulted from increases in G.I. Trucking's revenue per hundredweight of 1.1% and 1.4% to $10.68 and $10.74 for the three and nine months ended September 30, 1999, compared to the same periods during 1998. Tonnage increased 6.8% and 7.8% for the three and nine months ended September 30, 1999, compared to the same periods in 1998. In addition, G.I. Trucking implemented a fuel surcharge of 1.15% during the last week of August 1999, based upon a West Coast average fuel index. G.I. Trucking's fuel surcharge generated revenue of $.2 million in the third quarter of 1999. There was no fuel surcharge revenue in the third quarter of 1998. G.I. Trucking implemented a general rate increase of 5.5% effective October 1, 1999. G. I. Trucking's previous general rate increase was effective on November 1, 1998 and amounted to 5.5%. G.I. Trucking's operating ratio increased to 99.1% from 97.6% when the third quarter of 1999 is compared to the third quarter of 1998. However, during the nine months ended September 30, 1999, G.I. Trucking's operating ratio improved to 97.7% from 98.1% for the nine months ended September 30, 1998. Changes in the operating ratios indicated are the result of changes in yield and changes in certain operating expenses as follows: 18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- Salaries and wages expense declined 1.1% and 0.6% as a percent of revenue during the three and nine months ended September 30, 1999, as compared to the same periods in 1998. The decrease is due to lower pension costs and improved productivity of the labor force. In addition, a portion of salaries and wages expense is generally fixed in nature and declines as a percent of revenue with increases in revenue levels. Supplies and expenses decreased 0.2% and 0.5% as a percent of revenue for the three and nine months ended September 30, 1999, compared to the same periods during 1998. This decrease is due primarily to lower repair and maintenance costs on revenue equipment during the three and nine months ended September 30, 1999, compared to the same periods in 1998, reflecting new equipment purchased during 1998 and 1999 to replace older equipment which required more maintenance. In addition, G.I. Trucking's efforts to control fixed costs for its terminals and the fact that a portion of terminal costs are fixed in nature have resulted in decreases in terminal office and general supplies expenses as a percent of revenue. Improvements in these areas were offset in part during the third quarter by higher fuel costs, which increased in total dollars by 40.9% when the third quarter of 1999 is compared to the third quarter of 1998. Operating taxes and licenses increased 0.5% and 0.4% as a percent of revenue for the three and nine months ended September 30, 1999, compared to the same periods during 1998. This increase is due primarily to real estate taxes associated with the six new terminals opened during 1998. In addition, vehicle licenses and registration fees increased for the three and nine months ended September 30, 1999, as compared to the same periods during 1998, due to G.I. Trucking's increased fleet size resulting from the purchase of 81 tractors and 145 trailers during the first nine months of 1999. G.I. Trucking plans to dispose of some older equipment during the fourth quarter of 1999 as freight volumes decline. Insurance expense increased 0.7% as a percent of revenue for the third quarter of 1999 compared to the third quarter of 1998. This increase is due primarily to a favorable claims experience for bodily injury and property damage during the third quarter 1998 as compared to the third quarter 1999. However, for the nine months ended September 30, 1999 compared to the same period in 1998, bodily injury and property damage experience was more favorable, resulting in a 0.2% improvement, as a percentage of revenue. In addition, the third quarter of 1999 had an increase in cargo claims costs, compared to the third quarter of 1998. Depreciation and amortization expense increased 0.4% as a percent of revenue for the three months ended September 30, 1999, compared to the same period during 1998 due primarily to G.I. Trucking's increased fleet size and the purchase of new equipment, as previously described. Prior to the third quarter of 1999, depreciation and amortization had been lower than the comparable period in 1998 due to older tractors and trailers becoming fully depreciated in the first six months of 1999. As a result, year to date 1999 depreciation and amortization is the same as 1998, as a percent of revenue. Rents and purchased transportation expenses increased 1.0% and 0.5% as a percent of revenue for the three and nine months ended September 30, 1999, as compared to the same periods during 1998. This increase is due primarily to the costs associated with additional linehaul miles run in order to meet customer service needs. In addition, G.I. Trucking's terminal rent cost increased due to the opening of new terminals during 1998. 19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- Other operating expenses increased 0.4% as a percent of revenue for the three months ended September 30, 1999, as compared to the same period during 1998, due primarily to lower pension insurance premiums during the third quarter of 1998. CLIPPER Revenues for Clipper were $29.6 million and $80.9 million for the three and nine months ended September 30, 1999, representing a decrease of 6.3% and 13.7% from the three and nine months ended September 30, 1998, which had revenues of $31.6 million and $93.7 million, respectively. Beginning in the fourth quarter of 1997, Clipper was adversely affected by the service problems with the U.S. rail system. During the fourth quarter of 1998, Clipper experienced some improvements in the on-time service levels of its rail suppliers. In the first nine months of 1999, rail service continued to improve; however, in certain lanes, rail service remains inconsistent. In addition, late in the third quarter of 1999, heavy rains and flooding from Hurricane Floyd added to the rail delays and equipment shortages on the East Coast. Intermodal shipments decreased 4.1% for the nine months ended September 30, 1999, compared to the same period in 1998. These declines result primarily from business lost as a result of inconsistent rail service in 1998. Clipper is aggressively trying to regain this business but is faced with competition from truckload carriers and other rail service providers. Clipper experienced declines of 9.4% and 7.5% in the number of LTL shipments from the three and nine months ended September 30, 1998 to the three and nine months ended September 30, 1999. The declines in LTL shipments resulted from management's decision to concentrate on metro-to-metro, long-haul lanes, resulting in the elimination of certain unprofitable lanes and from an emphasis on improving Clipper's account profile. In addition, LTL business levels were negatively impacted by heavy snowfall in the Chicago, Illinois area in January 1999. Clipper's operating ratio improved to 97.4% and 98.8% for the three and nine months ended September 30, 1999, from 101.2% and 100.3% for the three and nine months ended September 30, 1998. Clipper's operating ratio improvements result from the elimination of certain unprofitable lanes, higher percentages of rail utilization of 60.9% and 57.9%, respectively, for the three and nine months ended September 30, 1999, compared to 49.2% and 49.4% for the same periods during 1998, and cost reductions implemented because of lower revenue levels. TREADCO, INC. Revenues for Treadco, Inc. were $53.9 million and $141.6 million for the three and nine months ended September 30, 1999, compared to $52.1 million and $136.7 for the same periods in 1998. For the three months ended September 30, 1999, "same store" sales increased 3.3% compared to the same period in 1998. For the nine months ended September 30, 1999, "same store" sales increased 3.2% compared to the same period in 1998. "New store" sales accounted for 0.1% and 0.3% of the increase from the three and nine months ended September 30, 1998, respectively. "Same store" sales includes both production locations and sales locations that have been in existence for the entire periods presented. "New store" sales resulted from one new sales location for the three months and two new sales locations for the nine months. Revenues from retreading for the three months ended September 30, 1999, were $19.5 million, representing a decrease of 0.9% from $19.7 million for the three months ended September 30, 1998. Retread revenues for the nine months ended September 30, 1999, were $53.6 million, which equaled retread revenues for the same period in 1998. Retread revenues for the three months ended 20 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- September 30, 1999 were lower due to a decrease in the volume of units sold of approximately 4.9% from the same period in 1998. This decrease was offset in part by an increase in the sales price per unit of approximately 3.6% from the same period in 1998. Revenues from new tires increased 3.7% to $27.9 million for the three months ended September 30, 1999 from $26.9 million for the comparable period in 1998, due to a 4.6% increase in unit sales from the 1998 third quarter, offset in part by a 0.9% decrease in the sales price per unit. For the nine months ended September 30, 1999, revenues from new tire sales increased 4.0% to $71.6 million from $68.9 million for the same period in 1998 due primarily to a 5.4% increase in units sold, offset in part by a decrease in the sales price per unit of 1.3%. Service revenues for the three and nine months ended September 30, 1999 increased 16.4% to $6.4 million and 14.8% to $16.3 million, respectively, compared to $5.5 million and $14.2 million for the comparable periods in 1998. Service revenues increased due to Treadco's continued emphasis on its service business. Treadco's operating ratio improved to 94.8% and 97.9% for the three and nine months ended September 30, 1999, from 97.3% and 98.3% for the comparable periods in 1998. The decrease in cost of sales of 3.4% and 1.7% of revenue for the three and nine months ended September 30, 1999, resulted primarily from improvements in retread and new tire margins. Of the overall improvement in new tire margins of 2.3% in the third quarter of 1999, approximately 1% related to a one-time volume discount from a new tire supplier for August and September purchases. The increase in selling, administrative and general expenses of 0.9% and 1.3% of revenue for the three and nine months ended September 30, 1999, from the same periods in 1998, resulted primarily from higher salaries and wages due to salesmen's commissions, which are based on gross margins, and increased service and inventory control personnel. In addition, bad debt expense was lower as a result of an improved aging and more timely collections on accounts receivable. OTHER OPERATING LOSS. The operating loss for the "other" category increased $1.0 million and $2.2 million for the three and nine months ended September 30, 1999, due primarily to increases in corporate incentive pay accruals. INTEREST EXPENSE. Interest expense increased $0.3 million and $0.8 million for the three and nine months ended September 30, 1999, due primarily to borrowings related to the purchase of the non-ABC-owned shares of Treadco (see Note H). INCOME TAXES. The difference between the effective tax rate for 1999 and the federal statutory rate resulted from state income taxes, amortization of nondeductible goodwill, minority interest, nondeductible tender offer response costs incurred by Treadco and other nondeductible expenses. PREPAID EXPENSES. Prepaid expenses decreased $5.2 million from December 31, 1998 to September 30, 1999 due primarily to a $2.4 million claims payment from a prepaid claims deposit account. In addition, a one-time payment for ABF contractual employees paid in August 1998, that was being amortized on a monthly basis, with a balance of $1.7 million at December 31, 1998, became fully amortized in March 1999. ACCRUED EXPENSES. Accrued expenses increased $15.1 million from December 31, 1998 to September 30, 1999 due primarily to increases in incentive accruals for ABF and corporate employees. 21 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the nine months ended September 30, 1999, was $74.0 million compared to $40.6 million for the nine months ended September 30, 1998. The increase is due primarily to the improvement in operating results and net income, as well as increases in accrued expenses for the nine months ended September 30, 1999, compared to the same periods during 1998. Cash provided by operations, proceeds from asset sales of $13.9 million and borrowings were used to purchase revenue equipment and other property and equipment in the amount of $42.5 million, to purchase the non-ABC-owned shares of Treadco for $23.7 million and to pay down outstanding debt during the nine months ended September 30, 1999. During the nine months ended September 30, 1998, cash provided by operations, proceeds from the sale of assets of $14.3 million and borrowings were used to purchase operating assets of $48.5 million. The Company is party to a $250 million credit agreement (the "Credit Agreement") with Societe Generale, Southwest Agency, as Administrative Agent and with Bank of America National Trust and Savings Association and Wells Fargo Bank (Texas), N.A., as Co-Documentation Agents. The Credit Agreement provides for up to $250 million of revolving credit loans (including letters of credit) and extends through 2003. At September 30, 1999, there were $122.6 million of Revolver Advances and approximately $22.8 million of letters of credit outstanding. At September 30, 1999, the Company had approximately $104.6 million of borrowing availability under the Credit Agreement. The Credit Agreement contains various covenants, which limit, among other things, indebtedness, distributions, disposition of assets and capital expenditures, and require the Company to meet certain quarterly financial ratio tests. As of September 30, 1999, the Company was in compliance with the covenants. The Company is party to an interest rate swap on a notional amount of $110 million. The purpose of the swap is to limit the Company's exposure to increases in interest rates from current levels on $110 million of bank borrowings over the seven-year term of the swap. The interest rate under the swap is fixed at 5.845% plus the Credit Agreement margin, which was .625% at September 30, 1999. The Company borrowed $26.1 million under capital lease obligations for the nine months ended September 30, 1999. Funds from these borrowings were used to purchase revenue equipment. At December 31, 1998, Treadco was a party to a revolving credit facility with Societe Generale (the "Treadco Credit Agreement"), providing for borrowings up to the lesser of $20 million or the applicable borrowing base. The Treadco Credit Agreement was terminated on June 25, 1999. Management believes, based upon the Company's current levels of operations, that the Company's cash, capital resources, borrowings available under the Credit Agreement and cash flow from operations will be sufficient to finance current and future operations and meet all present and future debt service requirements. 22 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- YEAR 2000 The Year 2000 issue derives from computer programs being written using two digits rather than four to determine the applicable year. The Company recognizes that the approach of the Year 2000 brings a unique challenge to the ability of computer systems to recognize the date change from December 31, 1999, to January 1, 2000. As a result, the arrival of the Year 2000 could result in system failures or miscalculations, causing disruption of operations, including, among other things, a temporary inability to process transactions or to conduct other normal business activity. Management of the Company began addressing the impact of the Year 2000 on its business operations in 1996. The Company concluded that the Year 2000 would impact its internal information technology (IT) and non-information technology (non-IT) systems. In addition, the Company believes that the Year 2000 will impact its supplier chain environment and electronic data-interchange environment. Beginning in 1996, and continuing since that time, the Company has designated a group of personnel, composed primarily of employees of the Company's computer information services subsidiary, Data-Tronics Corp., to manage the conversion process for its own internal systems, including purchased software, and to monitor the conversion process for supplier chain environment systems and effects, as well as for the Company's data-interchange environment. Internal IT and Non-IT Systems Year 2000 conversions within the Company's mainframe environment have been completed. The mainframe environment, which is Year 2000 ready and operational, includes the Company's computer hardware and operating system, its customized application software, and its purchased software. The Year 2000 readiness of computer mainframe hardware, operating systems, and system utilities has been verified by vendors and tested by Data-Tronics Corp. The Company's customized application software required renovation and regression testing and the revised Year 2000 ready software was installed and operational by the end of 1998. Purchased software has been upgraded to a vendor defined Year 2000 ready version, or replaced by another vendors' Year 2000 ready version. The carrying value of software systems that were replaced for Year 2000 compliance is nominal. The Year 2000 readiness upgrades and testing of the numerous PC servers is complete for all PC servers significant to the Company's business. Server hardware has been tested and is Year 2000 ready. All operating systems have been converted and upgraded with Year 2000 ready upgrades. From time to time, vendors release new Year 2000 upgrades. The Company will continually monitor various vendor resources for Year 2000-related compliance and install new upgrade packages as necessary. The Company's desktop PC hardware, operating systems, and applications have been tested for Year 2000 readiness. All desktop PC environments that are significant to the Company's business have been upgraded and are Year 2000 ready. The Company's embedded systems are those that are automated with embedded computerized microprocessor chips. The Company's evaluation of embedded systems concluded that all affected systems are Year 2000 ready. The Company has completed Year 2000 conversions of its electronic data-interchange software. 23 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- External IT and Non-IT Systems The Company has completed the process of identifying critical exposures arising from the Company's suppliers. The Company's list of critical suppliers includes financial institutions, telecommunications providers, utility companies, and insurance providers, as well as basic suppliers critical to the operations of the Company's subsidiaries and to the Company. The Company has sent and is continuing to send questionnaires to suppliers considered to be significant to operations to determine their status with respect to Year 2000 issues. The Company continually updates its list of critical exposures. The Company does not have any single customer that would be material to the Company as a whole. However, the Company has some customers who, in the aggregate, are significant to the Company's operations and financial results. Year 2000 Costs The Company is using existing personnel who work primarily for Data-Tronics Corp., to perform Year 2000 conversions and evaluations of third-party systems. Since the beginning of the process, the Company estimates its expenditures at approximately $1.6 million, including labor costs and costs that relate to equipment and software purchases. Since 1996, Year 2000 costs have been absorbed in the Company's normal operating expenses, which are funded with the Company's internally generated funds or its revolving credit facility. The Company's cash flows have not been adversely impacted to a material degree by Year 2000 costs. Costs incurred through the current date for the Year 2000 conversion represent less than 8% of the Company's budgeted information services costs for 1999. It is management's conclusion that there have been no significant projects deferred as a result of Year 2000 efforts. The Company estimates it will spend an additional $0.2 million in Year 2000 related costs. The Company expects to continue to expend these costs in normal operations and to fund them with internally generated funds or its revolving credit facility. Contingency Planning Management of the Company has assessed its most reasonably likely worst case scenario using currently available information regarding the status of the internal and external IT systems and non-IT systems. As described above, the Company has completed Year 2000 conversions within the Company's mainframe environment, certain purchased software and its critical PC server and desktop environments. The primary risk the Company faces is with third-party suppliers and vendors not becoming Year 2000 compliant. The Company is still in the process of receiving and in some cases sending follow-up questionnaires and having discussions with critical suppliers of its subsidiaries. The Company mailed more than 10,000 Year 2000 readiness questionnaires in order to assess Year 2000 readiness of vendors, suppliers and other third parties. To date, the Company has received the following response rates with respect to its questionnaires: 69.0% for fuel vendors, 90.4% for communications suppliers, 73.9% for utility suppliers and 58.9% of its other suppliers. Substantially all responses received have indicated that Year 2000 issues are being addressed and that the respondents plan to achieve Year 2000 readiness. The Company continues to monitor and assess questionnaires received and to follow up where considered necessary. 24 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- The Company has a written contingency plan that outlines procedures to deal with Year 2000 risks and uncertainties that do not rise to the level of a most reasonably likely worst case scenario. The Company's contingency plan includes plans to assess the need to increase fuel inventories in late 1999, identification of alternate fuel suppliers, identification of substitute data collection points for localized power shortages, adjustments to staffing as required for changing business levels, dynamic adjustments to freight routes to bypass temporarily bottlenecked distribution centers, and stockpiles of freight forms and reference lists for manual workarounds. The Company's contingency plan also includes additional staffing levels to test certain critical systems immediately after the Year 2000 rollover on January 1, 2000. Management of the Company intends to continually monitor and update its Year 2000 contingency plan as appropriate. Based on responses contained in the questionnaires and other available information, the Company believes that fuel supply shortages, widespread communications systems interruptions, widespread utility systems interruptions and tire and rubber products shortages (which would most affect Treadco) are not most reasonably likely occurrences. The Company believes the most reasonably likely worst case scenario is that some smaller customers will experience data processing system problems because of non Year 2000 compliant software or hardware and that the flow of freight from these customers could be disrupted as a result. Such an event would impact the Company to a limited degree, resulting in lower revenue in the early part of Year 2000. The Company also believes that there could be spot shortages of fuel as a result of the Year 2000 issue, primarily as a result of stockpiling by fuel users. The result of stockpiling of fuel and other supplies by companies attempting to prepare for Year 2000 could result in short-term increases in the cost of such products to the Company. Although the Company has fuel surcharge provisions in its freight contracts, it is uncertain that the Company would be able to increase prices to its customers to cover all the additional costs the Company would incur in such a scenario. With respect to the Company's primary business of freight transportation, if stockpiling of industrial and other supplies by businesses and by consumers of consumer goods is widespread in the fourth quarter of 1999, such stockpiling would most likely decrease freight volumes in the first quarter of Year 2000 as stockpiles are used. The most likely result of this combination of factors is that the Company will experience lower freight volumes and higher costs in the first quarter of Year 2000 and that operating results will be adversely impacted. Management does not presently believe that any individual factor described or the combination of factors described will likely have a material long-term impact on the Company, although there can be no assurance in this regard. If there are any major disruptions to the overall economy or business levels resulting from Year 2000 issues, the Company could be materially adversely impacted. The Company could also be the subject of litigation for computer systems products failure such as, for example, equipment shutdown or failure to properly date business records. The amount of potential liability, increased costs or lost revenue from any Year 2000 issue cannot be predicted at this time. Like virtually all other public and private companies, the Company and its suppliers and customers are dependent on telecommunications services, banking services, and utility services provided by a large number of entities. At this time, the Company is not aware of any of these entities or of any significant supplier that has disclosed that it will not be Year 2000 compliant by January 1, 2000. However, many of these entities are still engaged in the process of attempting to become Year 2000 compliant. As described previously, the Company has attempted to and continues to attempt to obtain written assurance of Year 2000 compliance from all entities which management considers critical to the operations of the Company and its subsidiaries. However, it is likely that some critical suppliers will not give written assurance as to 25 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued - -------------------------------------------------------------------------------- Year 2000 compliance because of concerns as to legal liability. Even where written assurance is provided by critical suppliers and even if the Company has a contingency plan in place to deal with possible non-compliance by other critical suppliers, the Year 2000 conversion process will continue to create risk to the Company which is outside the control of the Company. There can be no assurance that a major Year 2000 disruption will not occur in a critical supplier which would have an impact on the Company that could be material. SEASONALITY ABF and G.I. Trucking are affected by seasonal fluctuations, which affect tonnage to be transported. Freight shipments, operating costs and earnings are also affected adversely by inclement weather conditions. The third calendar quarter of each year usually has the highest tonnage levels while the first quarter has the lowest. Clipper's operations are similar to motor carrier operations with revenues being weaker in the first quarter and stronger during the months of September and October. Treadco's operations are somewhat seasonal with the last nine months of the calendar year generally having the highest levels of sales. FORWARD-LOOKING STATEMENTS Statements contained in the Management's Discussion and Analysis section of this report that are not based on historical facts are "forward-looking statements." Terms such as "estimate," "expect," "predict," "plan," "anticipate," "believe," "intend," "should," "would," "scheduled," and similar expressions and the negatives of such terms are intended to identify forward-looking statements. Such statements are by their nature subject to uncertainties and risk, including but not limited to union relations; availability and cost of capital; shifts in market demand; weather conditions; the performance and needs of industries served by Arkansas Best's subsidiaries; actual future costs of operating expenses such as fuel and related taxes; self-insurance claims and employee wages and benefits; actual costs of continuing investments in technology, the timing and amount of capital expenditures; the accuracy of assessments and estimates relating to Year 2000 computer issues; competitive initiatives and pricing pressures; general economic conditions; and other financial, operational and legal risks and uncertainties detailed from time to time in the Company's SEC public filings. 26 27 ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- INTEREST RATE INSTRUMENTS The Company has historically been subject to market risk on all or a part of its borrowings under bank credit lines which have variable interest rates. In February 1998, the Company entered into an interest rate swap effective April 1, 1998. The swap agreement is a contract to exchange floating interest rate payments for fixed rate payments over the life of the instrument. The notional amount is used to measure interest to be paid or received and does not represent the exposure to credit loss. The purpose of the swap is to limit the Company's exposure to increases in interest rates on the notional amount of bank borrowings over the term of the swap. The fixed interest rate under the swap is 5.845% plus the Credit Agreement margin (currently .625%). This instrument is not recorded on the balance sheet of the Company. Details regarding the swap, as of September 30, 1999, are as follows:
Notional Rate Rate Fair Amount Maturity Paid Received Value (2) ------ -------- ---- -------- --------- $110.0 million April 1, 2005 5.845% Plus Credit Agreement LIBOR rate (1) $3.0 million Margin (currently .625%) Plus Credit Agreement Margin (currently .625%)
(1) LIBOR rate is determined two London Banking Days prior to the first day of every month, and continues up to and including the maturity date. (2) The fair value is an estimated amount the Company would have received at September 30, 1999, to terminate the agreement. OTHER MARKET RISKS Since December 31, 1998, there have been no significant changes in the Company's other market risks, as reported in the Company's Form 10-K Annual Report. 27 28 PART II. OTHER INFORMATION ARKANSAS BEST CORPORATION ITEM 1. LEGAL PROCEEDINGS. From time to time, the Company is named as a defendant in legal actions, the majority of which arise out of the normal course of its business. The Company is not a party to any pending legal proceeding which the Company's management believes to be material to the financial condition of the Company. The Company maintains liability insurance in excess of self-retention levels of certain risks arising out of the normal course of its business (see Note E to the Company's Unaudited Consolidated Financial Statements). ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS. Financial Data Schedule (B) REPORTS ON FORM 8-K. None. 28 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ARKANSAS BEST CORPORATION (Registrant) Date: November 4, 1999 /s/ David E. Loeffler ------------------------------------------------- David E. Loeffler Vice President-Treasurer, Chief Financial Officer and Principal Accounting Officer 29 30 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ARKANSAS BEST CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 SEP-30-1999 4,374 0 194,049 5,646 32,161 242,416 618,850 277,701 732,830 279,366 202,370 0 15 197 205,216 732,830 139,893 1,266,130 97,992 1,190,263 0 1,831 14,232 59,427 24,776 34,651 (664) 0 0 33,987 1.57 1.43
EX-27.2 3 RESTATED FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Quarterly Report on Form 10-Q for the nine months ended September 30, 1998 as restated for discontinued operations and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1998 SEP-30-1998 4,405 0 168,215 7,104 31,509 246,570 564,820 246,298 729,332 263,242 224,956 0 15 196 164,946 729,332 135,044 1,202,951 96,988 1,151,881 0 2,899 13,389 34,340 13,888 20,452 (1,340) 0 0 19,112 .81 .80
-----END PRIVACY-ENHANCED MESSAGE-----