-----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, U8R0sKL3LskM6wkhTqc8UGBia7xw1xaT+U7qbduupnceOAOY2x3XY0R/VUTgIQw8 VIw8Q5kNSicWgu7phWBSfQ== 0000950134-98-002511.txt : 19980330 0000950134-98-002511.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950134-98-002511 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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: SEC FILE NUMBER: 000-19969 FILM NUMBER: 98575702 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 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 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, 1997. [ ] 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, 72903 Arkansas ------------------ - --------------------------------------- (Zip Code) (Address of principal executive offices) 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 February 27, 1998, was $189,718,875. The number of shares of Common Stock, $.01 par value, outstanding as of February 27, 1998, was 19,607,213. Documents incorporated by reference into the Form 10-K 1) The following sections of the 1997 Annual Report to Stockholders: - Market and Dividend Information - Selected Financial Data - Management's Discussion and Analysis of Financial Condition and Results of Operations - Consolidated Financial Statements 2) Proxy Statement for the Annual Stockholder's meeting to be held May 7, 1998 2 ARKANSAS BEST CORPORATION FORM 10-K TABLE OF CONTENTS
ITEM PAGE NUMBER NUMBER PART I Item 1. Business ........................................................................... 3 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 ............................................................ 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................................... 13 Item 8. Financial Statements and Supplementary Data ........................................ 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................................... 13 PART III Item 10. Directors and Executive Officers of the Registrant ................................. 14 Item 11. Executive Compensation ............................................................. 14 Item 12. Security Ownership of Certain Beneficial Owners and Management ..................... 14 Item 13. Certain Relationships and Related Transactions ..................................... 14 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K .................... 15
2 3 PART I Except for historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Arkansas Best Corporation's (the "Company") actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1, "Business." ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS CORPORATE PROFILE The Company is a diversified holding company located in Fort Smith, Arkansas. Through its motor carrier subsidiaries, Arkansas Best provides national and regional transportation of general commodities. The Company's intermodal subsidiaries offer domestic and international freight services, utilizing a variety of transportation modes including over-the-road, rail, ocean and air. A 46%-owned subsidiary provides truck tire retreading and new truck tire sales. The Company's principal subsidiaries are ABF Freight System, Inc. ("ABF"); Treadco, Inc. ("Treadco"); Clipper Exxpress Company, CaroTrans International, Inc. ("Clipper Worldwide") and related companies (collectively "Clipper Group"); G. I. Trucking Company ("G.I. Trucking"); Fleetnet America, Inc. (formerly Carolina Breakdown Service, Inc.); and, until July 15, 1997, Cardinal Freight Carriers, Inc. ("Cardinal"). HISTORICAL BACKGROUND The Company was publicly owned from 1969 until 1988, when it 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"). 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 P - Business Segment Data" appearing on page 37 of the registrant's Annual Report to Stockholders for the year ended December 31, 1997, and is incorporated herein by reference under Item 14. 3 4 ITEM 1. BUSINESS -- Continued (c) NARRATIVE DESCRIPTION OF BUSINESS GENERAL The Company operates in three defined business segments: 1) Motor carrier, which includes primarily less-than-truckload (LTL) operations conducted by ABF and G.I. Trucking, and truckload operations which were conducted primarily by Cardinal, which was sold in July, 1997; 2) Intermodal operations, which includes the Clipper Group, including CaroTrans; and 3) Tire operations which includes the operations of Treadco. ACQUISITION In August, 1995, pursuant to a tender offer, a wholly owned subsidiary of the Company purchased all of the outstanding shares of common stock of WorldWay Corporation ("WorldWay"), at a price of $11 per share (the "Acquisition"). The total purchase price of Worldway amounted to approximately $76 million. WorldWay was a publicly-held transportation Company with LTL, truckload and logistics operations. DISCONTINUED OPERATIONS As of June 30, 1997 and prior periods since 1995, the Company was engaged in providing logistics services, including warehousing and distribution, through two wholly owned subsidiaries, The Complete Logistics Company ("CLC") and Integrated Distribution, Inc. ("IDI"). CLC was sold on August 8, 1997. In September, 1997, the Company completed a formal plan to exit the logistics segment by disposing of IDI. The Company closed the sale of IDI on October 31, 1997. EMPLOYEES At December 31, 1997, the Company and its subsidiaries had a total of 14,757 employees of which approximately 67% are members of a labor union. MOTOR CARRIER OPERATIONS 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 ("G.I. Trucking"). LTL carriers offer services to shippers transporting 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 and consolidate them at the terminal. Shipments are consolidated by destination for transportation by intercity units to their destination cities or to distribution centers. Shipments from various 4 5 ITEM 1. BUSINESS -- Continued 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 the 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 is then 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 directly affected by the state of the overall economy. The trucking industry faces rising costs including government regulations on safety, maintenance and fuel 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. Headquartered in Fort Smith, Arkansas, ABF is the largest subsidiary of the Company. ABF currently accounts for approximately 69% of the Company's consolidated revenues and 91% of LTL operations revenue. ABF is the fourth largest LTL motor carrier in the United States, based on revenues for 1997 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 39,000 points through 311 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, 1997, no single customer accounted for more than 3% of ABF's revenues, and the ten largest customers accounted for less than 9% of ABF's revenues. 5 6 ITEM 1. BUSINESS -- Continued Employees At December 31, 1997, ABF employed 11,877 persons. Employee compensation and related costs are the largest components of LTL motor carrier operating expenses. In 1997, such costs amounted to 61.1% of LTL operations revenues. Approximately 80% of ABF's employees are covered under a collective bargaining agreement with the International Brotherhood of Teamsters ("IBT"), which expires March 31, 1998. On February 9, 1998, a tentative settlement on a new five-year collective bargaining agreement was reached with the IBT. The tentative settlement is subject to ratification by the IBT membership. Under the National Agreement, employee wages and benefits have increased an average of 3.3%, 3.8% and 3.9% annually during 1995, 1996 and 1997, respectively. The increases in wages and benefits associated with the 1998 agreement are expected to have a somewhat lesser impact on the annual cost for salaries, wages and benefits in 1998 and the remaining term on the contract, than the previous agreement had on an annual basis. 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 IBT. 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. Four of the five largest LTL carriers are unionized and generally pay comparable amounts for wages and benefits. 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 adequate to cover losses in excess of such amounts. 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 for its motor carrier industry segment. 6 7 ITEM 1. BUSINESS -- Continued G.I. TRUCKING COMPANY Headquartered in LaMirada, California, G. I. Trucking is a non-union regional LTL motor carrier. G.I. Trucking offers one to three-day regional service through 73 service centers in 15 western states including Hawaii and Alaska. G.I. Trucking accounted for approximately 6% of the Company's consolidated revenues and 8% of LTL operations revenue. Transcontinental service is provided through a partnership with three other regional carriers through six major hub terminals located throughout the Midwest and the East Coast. Customer service is enhanced through EDI communications between the partners. G.I. Trucking's linehaul structure utilizes company solo drivers, company sleeper teams, contract carriers and one-way carriers, providing flexibility in maintaining customer service and lane balance. G.I. Trucking's family of electronic services include EDI information, customer FAX capabilities, tracing, rating and reporting interface. TRUCKLOAD MOTOR CARRIER OPERATIONS The Company's truckload motor carrier operations were conducted primarily through Cardinal. On July 15, 1997, the Company closed the sale of Cardinal. INTERMODAL OPERATIONS GENERAL The Company's intermodal operations are conducted through Clipper Group, headquartered in Lemont, Illinois. The Clipper Group's 1997 revenues accounted for approximately 12% of the Company's consolidated revenues for 1997. The Clipper Group operates in three business units: Clipper LTL, Clipper Freight Management ("CFM") and Clipper Worldwide. Clipper Group offers domestic and international freight services, utilizing a variety of transportation modes including over-the-road, rail, ocean and air. Clipper Group links a domestic rail intermodal network with a strong ocean intermodal network. COMPETITION, PRICING AND INDUSTRY FACTORS The Clipper Group operates in a highly competitive environment. Competition is based on the most consistent transit times, freight rates, damage-free shipments and on-time delivery of freight. The Company's intermodal operations compete with other intermodal operations, freight forwarders, railroads and airlines, as well as with other national and regional LTL and truckload motor carrier operations. Intermodal operations are akin to motor carrier operations in terms of market conditions, with revenues being weaker in the first quarter and stronger in the months of September and October. Freight shipments, operating costs and earnings are also affected by inclement weather. The reliability of rail services, a critical component of Clipper's ability to provide service to its customers, has recently become a significant problem. The result for Clipper has been lost revenue as well as higher operating costs. 7 8 ITEM 1. BUSINESS -- Continued CLIPPER LTL Clipper LTL operates primarily through Clipper Exxpress Company ("Clipper Exxpress"). which is the Company's largest intermodal operations subsidiary, accounting for approximately 57% of the Company's intermodal operations revenues during 1997. Clipper Exxpress is one of the largest consolidators and forwarders of LTL shipments in the United States. Clipper LTL's collection and distribution network consists of 38 geographically dispersed locations throughout the United States. Clipper LTL's 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 LTL 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. CFM CFM provides services through Agricultural Express of America, Inc. (d/b/a/ Clipper Controlled Logistics), Agile Freight System, Inc. (d/b/a Clipper Highway Services), and partially through Clipper Exxpress Company. CFM provides an extensive list of transportation services such as intermodal and truck brokerage, warehousing, consolidation, transloading, repacking, and other ancillary services. As an intermodal marketing operation, CFM 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. CFM'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 Controlled Logistics 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. At December 31, 1997, Clipper Controlled Logistics owns or leases 470 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, Clipper Controlled Logistics 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. Clipper Highway Services is a non-asset intensive, premium service, long-haul truckload carrier that primarily utilizes two-person driver teams provided by owner-operators. Clipper Highway Services provides "near airfreight" truckload service in tightly focused long-haul lanes that originate or terminate near a Clipper LTL market. Clipper Highway Services moves full truckloads of consolidated LTL shipments for Clipper LTL, as well as other shippers. 8 9 ITEM 1. BUSINESS -- Continued CLIPPER WORLDWIDE Clipper Worldwide offers services through CaroTrans International, Inc. ("CaroTrans") and partially through Clipper Exxpress Company. 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. CaroTrans is one of the largest NVOCC's in the world, offering more destinations by a "master loader" than any other NVOCC. Overseas, Clipper Worldwide is recognized as a leader in international transportation between North America and many worldwide destinations. Clipper Worldwide 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. TIRE OPERATIONS GENERAL The Company's tire operations are conducted by Treadco, Inc. a 46% owned subsidiary. Treadco is the nation's largest independent tire retreader for the trucking industry and the fourth largest commercial truck tire dealer. Treadco's revenues currently account for approximately 10% of the Company's consolidated revenues. COMPETITION, PRICING AND INDUSTRY FACTORS The trucking industry faces rising costs including government regulations on safety, maintenance and fuel economy. As a result, trucking companies continually seek ways to obtain more mileage from new tires and less expensive ways to replace old tires. Retreading tires is significantly less expensive than buying new tires. The retread tire market is highly competitive. Historically, Treadco was a Bandag Incorporated ("Bandag") franchisee and competed primarily against smaller independent dealers in a highly fragmented market. Following the termination of the Bandag franchise agreements in 1996, Treadco has seen increased competition as Bandag has granted additional franchises in some locations currently being served by Treadco. This new competition has led to increased pricing pressures in the marketplace. Bandag also continues to target Treadco's customers which has caused the loss of a substantial amount of national account business. Treadco's ability to offer excellent service to its niche market customers, competitive pricing, central administration and purchasing for its production facilities appeal to fleet customers and enables Treadco to compete effectively against these dealers. The new truck tire business is also highly competitive and includes various manufacturers, dealers and retailers. Generally, demand for new truck tires is closely related to the strength of regional and, ultimately national economies. Treadco experiences reduced demand for retreads and new truck tires in the winter months due to more difficult driving and tire maintenance conditions resulting from the inclement weather. Treadco's operations are somewhat seasonal, with the last six months of the calendar year generally having the highest sales. 9 10 ITEM 1. BUSINESS -- Continued TREADCO, INC. Treadco, Inc. uses the precure process to retread tires at the vast majority of its locations. The precure process uses a specific tread design measured from strips of tread rubber, cut and applied to the casing. A flexible rubber envelope then seals each tire which is placed in a bonding chamber. Air pressure in the chamber creates uniform force, applying pressure on all points of the tire. The tread is bonded to the casing by using a combination of heat and air pressure to cure the encased tire in the bonding chamber. The principal raw material in manufacturing retreaded truck tires is synthetic rubber, which is comprised of styrene and butadiene, both petroleum derivatives. Thus, the commodity price of oil directly affects the price of the Company's principal raw materials. However, because retreading uses roughly one-third of the amount of oil that the manufacture of new tires requires, retreads maintain a competitive price advantage in comparison to new tires, particularly when oil prices increase. 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. On February 1, 1996, Treadco gained Bridgestone certification to produce and sell ONCOR remanufactured tires at its St. Louis (MO) production facility, which is a mold cure process 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. Treadco's sales and marketing strategy is based on its service strengths, network of production and sales facilities and strong regional reputation. None of Treadco's customers for retreads and new tires, including ABF or other affiliates, represent more than 3% of Treadco's revenues for 1997. 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. In addition, the Company is subject to significant regulations dealing with underground fuel storage tanks. The Company's subsidiaries store some fuel for trucks and tractors in 114 underground tanks located in 30 states. The Company believes that it is in substantial compliance with applicable 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. 10 11 ITEM 1. BUSINESS -- Continued 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 1998 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 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 operations or financial condition. As of December 31, 1997, 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 and has not been reduced by any future recoveries from insurance or other sources unless such recovery is assured. 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. 11 12 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 311 terminal facilities of which it owns 78, leases 53 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 Carlisle, Pennsylvania (two structures) 241 82,960 Dallas, Texas 108 72,500 Leased from affiliate, Transport Realty: North Little Rock, Arkansas 195 82,050 Winston-Salem, North Carolina 150 95,700 Pico Rivera, California 94 22,500
G.I. Trucking currently operates out of 72 terminal facilities of which 30 are company operated and 42 are agent terminals. G. I. Trucking owns 10 facilities, leases two facilities from an affiliate and the remainder of the service centers are leased from non-affiliates. INTERMODAL OPERATIONS SEGMENT Clipper Group operates from 38 locations, geographically dispersed throughout the United States and from five international locations. Clipper Group leases all of its facilities. TIRE OPERATIONS SEGMENT Treadco currently operates from 55 locations. Treadco owns 16 production and 6 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 stockholders during the fourth quarter ended December 31, 1997. 12 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the Caption "Market and Dividend Information" on page 5 of the registrant's Annual Report to Stockholders for the year ended December 31, 1997, is incorporated by reference under Item 14 herein. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Data" on page 4 of the registrant's Annual Report to Stockholders for the year ended December 31, 1997, is incorporated by reference under Item 14 herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 6 through 15 of the registrant's Annual Report to Stockholders for the year ended December 31, 1997, is incorporated by reference under Item 14 herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors, consolidated financial statements and supplementary information, appearing on pages 17 through 40 of the registrant's Annual Report to Stockholders for the year ended December 31, 1997, are incorporated by reference under Item 14 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 13 14 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 filed by the Company with the Securities and Exchange Commission ("Definitive Proxy Statement"), 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 Definitive Proxy Statement, 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 Stockholders and Management Ownership" in the Company's Definitive Proxy Statement 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 Definitive Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998, sets forth certain information with respect to relations of and transactions by management of the Company and is incorporated herein by reference. 14 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS The following information appearing in the 1997 Annual Report to Stockholders is incorporated by reference in this Form 10-K Annual Report as Exhibit (13):
Page Selected Financial Data 4 Market and Dividend Information 5 Financial Condition and Results of Operations 6 - 15 Consolidated Financial Statements 17 - 40 Report of Independent Auditors 17 Quarterly Financial Information 40
With the exception of the aforementioned information, the 1997 Annual Report to Stockholders is not deemed filed as part of this report. Financial statements other than those listed are omitted for the reason that they are not required or are not applicable. The following additional financial data should be read in conjunction with the consolidated financial statements in such 1997 Annual Report to Stockholders. (a)(2) FINANCIAL STATEMENT SCHEDULES
Page For the years ended December 31, 1997, 1996 and 1995: Schedule II - Valuation and Qualifying Accounts 18
Schedules other than those listed are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. (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. 15 16 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -- Continued (b) REPORTS ON FORM 8-K None (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. 16 17 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/ David E. Loeffler ------------------------------------ David E. Loeffler Vice President - Chief Financial Officer and Treasurer 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 3/23/98 - --------------------------------- ------------------------ William A. Marquard /s/Robert A. Young, III Director, Chief Executive Officer 3/24/98 - --------------------------------- and President (Principal ------------------------ Robert A. Young, III Executive Officer) /s/David E. Loeffler Vice President - Chief Financial Officer 3/24/98 - --------------------------------- and Treasurer ------------------------ David E. Loeffler /s/Frank Edelstein Director 3/19/98 - --------------------------------- ------------------------ Frank Edelstein /s/Arthur J. Fritz Director 3/19/98 - --------------------------------- ------------------------ Arthur J. Fritz /s/John H. Morris Director 3/23/98 - --------------------------------- ------------------------ John H. Morris /s/Alan J. Zakon Director 3/20/98 - --------------------------------- ------------------------ Alan J. Zakon
17 18
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES ARKANSAS BEST CORPORATION COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ---------------------------------------------------------------------------------------------------------------------------------- ADDITIONS --------- 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, 1997: Deducted from asset accounts: Allowance for doubtful $ 7,926(B) accounts receivable.............. $ 5,077 $ 7,245 $ 3,270(A) 63(E) $ 7,603 ================================================================================================================================== Year Ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful $ l7,755(B) accounts receivable.............. $ 19,166 $ 8,408 $ 3,932(A) 8,674(D) $ 5,077 ================================================================================================================================== Year Ended December 31, 1995: Deducted from asset accounts: Allowance for doubtful $ 1,414(A) accounts receivable ............. $ 2,818 $ 4,139 20,606(C) $ 9,811(B) $ 19,166 ==================================================================================================================================
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. Note E - The allowance for doubtful accounts for Cardinal Freight Carriers as of the date of sale. NOTE: ALL INFORMATION REFLECTED IN THE ABOVE TABLE HAS BEEN RESTATED TO EXCLUDE VALUATION ALLOWANCES OF DISCONTINUED OPERATIONS. 18 19 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 the Company as 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).
19 20 FORM 10-K -- ITEM 14(c) EXHIBIT INDEX ARKANSAS BEST CORPORATION (Continued)
EXHIBIT NO. 10.5* $30,000,000 Credit Agreement dated as of February 21, 1996 among the Company as 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 the Company as Borrower, Societe Generale, Southwest Agency as Agent, and the Banks named herein as the Banks (previously filed as Exhibit 10.3 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). 10.9* Second Amendment, dated July 15, 1997, to the $346,971,312 Amended and Restated Credit Agreement among the Company as 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 10.3 to the Company's current Report on Form 8-K, filed with the Commission on August 1, 1997, Commission File No. 0-19969, and incorporated herein by reference). 13 1997 Annual Report to Stockholders 21 List of Subsidiary Corporations 23 Consent of Ernst & Young LLP, Independent Auditors 27.1 Financial Data Schedule 27.2 Restated 3/31/97 27.3 Restated 6/30/97 27.4 Restated 9/30/97 27.5 Restated 3/31/96 27.6 Restated 6/30/96 27.7 Restated 9/30/96 27.8 Restated 12/31/96 27.9 Restated 12/31/95 - ------------------------
* Previously filed with the Securities and Exchange Commission and incorporated herein by reference. # Designates a compensation plan for Directors or Executive Officers. 20 EX-13 2 ANNUAL REPORT TO SECURITY HOLDERS 1 EXHIBIT 13 Market and Dividend Information Selected Financial Data Management's Discussion and Analysis Consolidated Financial Statements 2 MARKET & DIVIDEND INFORMATION The Company's Common Stock trades on The Nasdaq Stock Market(SM) 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 - --------------------------------------------------------------------------------------------------------------- 1997 First quarter ........................................ $5.500 $4.125 $ - Second quarter........................................ 9.250 4.625 - Third quarter......................................... 12.625 8.875 - Fourth quarter........................................ 12.500 8.938 - 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 -
At February 27, 1998, there were 19,607,213 shares of the Company's stock outstanding which were held by 813 shareholders of record. 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 $4.3 million. 3
SELECTED FINANCIAL DATA - ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1997 (5) 1996 (4) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- ($ in thousands except per share data) STATEMENT OF OPERATIONS DATA: Operating revenues........................... $ 1,643,678 $ 1,604,335 $ 1,405,580 $ 1,090,908 $ 1,007,028 Operating income (loss)...................... 62,908 (18,008) (17,921) 50,970 54,536 Minority interest in subsidiary.............. (1,359) (1,768) 1,297 3,523 3,140 Other expenses, net.......................... 8,916 5,906 8,165 2,855 3,063 Gain on sale of Cardinal Freight Carriers, Inc............. 8,985 - - - - Interest expense............................. 23,978 30,843 16,352 6,681 7,077 Income (loss) from continuing operations before income taxes and extraordinary item.................... 40,358 (52,989) (43,735) 37,911 41,256 Provision (credit) for income taxes.......... 19,389 (18,782) (12,925) 18,445 19,613 Income (loss) from continuing operations before extraordinary item.................. 20,969 (34,207) (30,810) 19,466 21,643 Extraordinary item (1)....................... - - - - (661) Loss from discontinued operations, net of tax..................... (5,622) (2,396) (1,982) (759) (671) Net income (loss)............................ 15,347 (36,603) (32,792) 18,707 20,311 Income (loss) per common share from continuing operations before extraordinary item (diluted)............... 0.84 (1.98) (1.80) 0.78 0.92 Net income (loss) per common share (diluted)............................ 0.56 (2.10) (1.90) 0.74 0.85 Cash dividends paid per common share (2)..... - 0.01 0.04 0.04 0.04 Balance Sheet Data: Total assets................................. 698,339 828,181 962,176 559,564 444,418 Current portion of long-term debt............ 16,484 37,197 25,018 64,092 15,239 Long-term debt (including capital leases and excluding current portion)............. 202,604 317,874 391,475 53,637 40,571 Other Data: Capital expenditures (3)..................... 14,136 41,599 74,808 64,098 33,160 Depreciation and amortization................ 44,316 56,389 46,627 28,087 28,266 Goodwill amortization........................ 4,629 4,609 5,135 3,527 3,064 Other amortization........................... 4,139 3,740 1,044 501 319
(1) For 1993, represents an extraordinary charge of $661,000 (net of tax of $413,000) from the loss on extinguishment of debt. (2) Cash dividends on the Company's Common Stock were indefinitely suspended by the Company as of the second quarter of 1996. (3) Net of equipment trade-ins. Does not include revenue equipment placed in service under operating leases, which amounted to $21.9 million in 1997, $24.6 million in 1995, and $24.8 million in 1993. There were no operating leases for revenue equipment entered into for 1996 and 1994. (See "Management's Discussion and Analysis-Liquidity and Capital Resources.") (4) 1995 selected financial data is not comparable to the prior years' information due to the WorldWay acquisition on 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. (5) Selected financial data is not comparable to the prior years' information due to the sale of Cardinal on July 15, 1997. (See Note E to the Consolidated Financial Statements.) 4 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 motor carrier transportation operations, intermodal transportation operations, and truck tire retreading and new tire sales. Principal subsidiaries are ABF Freight System, Inc. ("ABF"); Treadco, Inc. ("Treadco"); Clipper Exxpress Company, CaroTrans International, Inc. ("Clipper Worldwide") and related companies (collectively "Clipper Group"); G.I. Trucking Company ("G.I. Trucking"); FleetNet America, Inc. (formerly Carolina Breakdown Service, Inc.); and, until July 15, 1997, Cardinal Freight Carriers, Inc. ("Cardinal"). See Note A to the Consolidated Financial Statements regarding the consolidation of Treadco in the Company's consolidated financial statements. See Note C regarding acquisitions by the Company. See Note D regarding the Company's discontinuation of its logistics segment. See Note E regarding the sale of Cardinal. YEAR 2000 Management of the Company has considered the impact of the Year 2000 on its business operations. All computer systems which are affected by the rollover to the Year 2000 have been identified, including the general office operations, general office environment equipment, and transportation systems. The Company's vulnerability to third-party systems (i.e., for vendors and major customers) has been evaluated and is expected to be minimal. The majority of the Company's systems are developed and maintained in-house. The Company has addressed its exposure to third-party systems by contacting them for Year 2000 compliant upgrades for systems the Company expects to retain. The Company plans to modify its in-house systems for the rollover to the Year 2000 using internal resources. The Company may see some reduction in internal research and development projects because of the resources devoted to the Year 2000 rollover, but with the current plan to distribute the Year 2000 rollover work load among several personnel, the impact on research and development projects is expected to be minimal. The Company undertook the Year 2000 conversion in 1996 and is at various stages of completion. The most significant project is the revision of the mainframe system. This project has completed the renovation phase and will be tested during 1998, with a planned completion date of December 31, 1998. Because the Year 2000 project is being performed with existing staff, during the normal course of maintenance on the Company's systems, the funds associated with Year 2000 rollover will be paid partially in 1998 and continually each year, until the Year 2000. The impact on the Company's financial condition and cash flows is expected to be immaterial for all years. The Company has not identified any significant risks or uncertainties associated with the Year 2000 rollover. RECENT ACCOUNTING PRONOUNCEMENTS In December 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share. Under the new requirements for computing basic earnings per share, the dilutive effect of stock options is excluded. The dilutive effect of common stock equivalents is included in the calculation of diluted earnings per share under SFAS No. 128. The new statement has been applied retroactively. The effect of adoption is not material. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income. The Statement requires the classification components of other comprehensive income by their nature in a financial statement and display of the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the consolidated financial statements. The Statement is effective for the Company in 1998. The Company does not anticipate that adoption of this Statement will have a material impact on the current presentation of its financial statements. In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. The proposal superseded FASB Statement No. 14 on segments. The Statement is effective for the Company in 1998. The Company is currently evaluating the impact that the Statement will have on its business segment reporting. 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, 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. The Company operates in three defined business segments: 1) Motor carrier which includes LTL operations conducted by ABF and G.I. Trucking, and truckload operations which were handled primarily by Cardinal until its sale in July, 1997; 2) Intermodal operations which includes the Clipper Group (including Clipper Worldwide); and 3) Tire operations which consists of the operations of Treadco. The segment information for 1996 and 1995 has been restated to reflect the Company's current reported business segments. Prior to 1996, the Intermodal Operations Segment was referred to as the Forwarding Operations Segment.
- --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES LTL motor carrier operations ........................... $ 1,253,691 $ 1,199,437 $ 1,088,416 Truckload motor carrier operations ..................... 39,366 74,623 27,992 - --------------------------------------------------------------------------------------------------------------------------- Total motor carrier operations ......................... 1,293,057 1,274,060 1,116,408 Intermodal operations .................................. 181,929 180,619 140,691 Tire operations ........................................ 158,912 141,613 145,127 Service and other ...................................... 9,780 8,043 3,354 - --------------------------------------------------------------------------------------------------------------------------- $ 1,643,678 $ 1,604,335 $ 1,405,580 ===========================================================================================================================
6
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued - --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES AND COSTS MOTOR CARRIER OPERATIONS: LTL MOTOR CARRIER OPERATIONS Salaries and wages...................................... $ 820,299 $ 832,474 $ 779,453 Supplies and expenses................................... 124,591 130,330 120,439 Operating taxes and licenses............................ 42,045 47,552 45,906 Insurance .............................................. 24,237 28,393 24,122 Communications and utilities............................ 28,457 29,897 26,776 Depreciation and amortization........................... 32,274 41,755 37,822 Rents and purchased transportation ..................... 113,374 95,169 76,823 Other................................................... 8,380 12,296 8,219 (Gain) on sale of revenue equipment .................... (2,279) (1,468) (2,938) Other non-operating (net) .............................. 6,045 1,199 4,709 - --------------------------------------------------------------------------------------------------------------------------- $ 1,197,423 $ 1,217,597 $ 1,121,331 - --------------------------------------------------------------------------------------------------------------------------- TRUCKLOAD MOTOR CARRIER OPERATIONS Salaries and wages...................................... $ 14,319 $ 27,483 $ 9,746 Supplies and expenses................................... 7,257 13,552 4,530 Operating taxes and licenses............................ 3,543 7,060 2,571 Insurance .............................................. 1,677 2,208 980 Communications and utilities............................ 589 1,038 420 Depreciation and amortization .......................... 1,911 3,580 1,249 Rents and purchased transportation ..................... 7,741 14,880 5,348 Other................................................... 275 434 108 Loss on sale of revenue equipment ...................... 2 13 - Other non-operating (net)............................... 2 4 9 - --------------------------------------------------------------------------------------------------------------------------- $ 37,316 $ 70,252 $ 24,961 - --------------------------------------------------------------------------------------------------------------------------- TOTAL MOTOR CARRIER OPERATIONS ........................... $ 1,234,739 $ 1,287,849 $ 1,146,292 =========================================================================================================================== INTERMODAL OPERATIONS Cost of services ....................................... $ 152,061 $ 151,799 $ 117,455 Selling, administrative and general .................... 27,892 27,658 18,711 (Gain) on sale of revenue equipment .................... - (21) - Other non-operating (net)............................... 1,851 1,729 1,705 - --------------------------------------------------------------------------------------------------------------------------- $ 181,804 $ 181,165 $ 137,871 =========================================================================================================================== TIRE OPERATIONS Cost of sales........................................... $ 117,373 $ 109,673 $ 108,686 Selling, administrative and general .................... 44,423 37,491 31,642 Other non-operating (net) .............................. 112 (730) 375 - --------------------------------------------------------------------------------------------------------------------------- $ 161,908 $ 146,434 $ 140,703 =========================================================================================================================== SERVICE AND OTHER ........................................ $ 11,235 $ 12,800 $ 6,800 - --------------------------------------------------------------------------------------------------------------------------- $ 1,589,686 $ 1,628,248 $ 1,431,666 ===========================================================================================================================
7
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued - --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES AND COSTS -- Continued OPERATING PROFIT (LOSS) LTL motor carrier operations............................ $ 56,268 $ (18,160) $ (32,915) Truckload motor carrier operations...................... 2,050 4,371 3,031 - --------------------------------------------------------------------------------------------------------------------------- Total motor carrier operations.......................... 58,318 (13,789) (29,884) Intermodal operations .................................. 125 (546) 2,820 Tire operations......................................... (2,996) (4,821) 4,424 Service and other....................................... (1,455) (4,757) (3,446) - --------------------------------------------------------------------------------------------------------------------------- 53,992 (23,913) (26,086) GAIN ON SALE OF CARDINAL FREIGHT CARRIERS, INC. ................................ 8,985 - - INTEREST EXPENSE ......................................... 23,978 30,844 16,352 MINORITY INTEREST ........................................ (1,359) (1,768) 1,297 - --------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES ........................ $ 40,358 $ (52,989) $ (43,735) ===========================================================================================================================
8 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued 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 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- MOTOR CARRIER OPERATIONS: LTL MOTOR CARRIER OPERATIONS Salaries and wages ...................................... 65.4% 69.4% 71.6% Supplies and expenses.................................... 9.9 10.9 11.1 Operating taxes and licenses............................. 3.4 4.0 4.2 Insurance................................................ 1.9 2.4 2.2 Communications and utilities............................. 2.3 2.5 2.5 Depreciation and amortization............................ 2.6 3.5 3.5 Rents and purchased transportation....................... 9.0 7.9 7.1 Other.................................................... 0.7 1.0 0.8 (Gain) on sale of revenue equipment ..................... (0.2) (0.1) (0.3) Other non-operating (net)................................ 0.5 - 0.3 - --------------------------------------------------------------------------------------------------------------------------- Total LTL Motor Carrier Operations.................. 95.5% 101.5% 103.0% - --------------------------------------------------------------------------------------------------------------------------- TRUCKLOAD MOTOR CARRIER OPERATIONS Salaries and wages....................................... 36.4% 36.8% 34.8% Supplies and expenses.................................... 18.4 18.2 16.2 Operating taxes and licenses............................. 9.0 9.5 9.2 Insurance................................................ 4.3 3.0 3.5 Communications and utilities............................. 1.5 1.4 1.5 Depreciation and amortization............................ 4.9 4.8 4.5 Rents and purchased transportation....................... 19.7 19.9 19.1 Other.................................................... 0.6 0.6 0.4 Other non-operating (net) ............................... - (0.1) - - --------------------------------------------------------------------------------------------------------------------------- Total Truckload Operations.......................... 94.8% 94.1% 89.2% =========================================================================================================================== TOTAL MOTOR CARRIER OPERATIONS ............................ 95.5% 101.1% 102.7% =========================================================================================================================== INTERMODAL OPERATIONS Cost of services......................................... 83.6% 84.0% 83.5% Selling, administrative and general...................... 15.3 15.3 13.3 Other non-operating (net)................................ 1.0 1.0 1.2 - --------------------------------------------------------------------------------------------------------------------------- Total Intermodal Operations......................... 99.9% 100.3% 98.0% =========================================================================================================================== TIRE OPERATIONS Cost of sales............................................ 73.9% 77.4% 74.9% Selling, administrative and general...................... 28.0 26.5 21.8 Other non-operating (net)................................ - (0.5) 0.3 - --------------------------------------------------------------------------------------------------------------------------- Total Tire Operations............................... 101.9% 103.4% 97.0% =========================================================================================================================== OPERATING PROFIT LTL operations........................................... 4.5% (1.5)% (3.0)% Truckload operations..................................... 5.2 5.9 10.8 Total motor carrier operations........................... 4.5 (1.1) (2.7) Intermodal operations.................................... 0.1 (0.3) 2.0 Tire operations.......................................... (1.9) (3.4) 3.0 - ---------------------------------------------------------------------------------------------------------------------------
9 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued RESULTS OF OPERATIONS 1997 COMPARED TO 1996 Consolidated revenues from continuing operations of the Company for 1997 were $1,644 million compared to $1,604 million for 1996, representing an increase of 2.5%. The Company had an operating profit from continuing operations of $54.0 million for 1997 compared to an operating loss of $(23.9) million for 1996. Income from continuing operations for 1997 was $21.0 million, or $0.84 per share (diluted), $0.85 per share (basic), compared to losses from continuing operations for 1996 of $(34.2) million, or a loss of $(1.98) per share (basic and diluted). Earnings per common share for 1997 and 1996 give consideration to preferred stock dividends of $4.3 million. Outstanding shares for 1997 and 1996 do not assume conversion of preferred stock to common shares, because the conversion would be anti-dilutive. MOTOR CARRIER OPERATIONS SEGMENT. Less-Than-Truckload Motor Carrier Operations. The Company's LTL motor carrier operations are conducted through ABF and G.I. Trucking. Revenues from the LTL motor carrier operations for 1997 were $1,254 million, with an operating profit of $56.3 million compared to 1996 revenues of $1,199 million, with an operating loss of $(18.2) million. In 1997, ABF accounted for 91% of the LTL revenues. ABF's revenue increased 3.1% from 1996 to 1997. ABF's revenue per hundredweight increased to $17.37 for 1997, a 7.1% increase from 1996. Revenue increases reflect ABF's overall rate increase of 5.5% on January 1, 1997. The increase in revenue per hundredweight was offset by a decrease in tonnage resulting from ABF's emphasis on account profitability. ABF's total tonnage per day decreased 3.7% from 1996 to 1997. On January 1, 1998, ABF implemented an overall rate increase of 5.3%. LTL revenues also increased due to G.I. Trucking's operations for 1997. G.I. Trucking's revenues increased 27.5% from 1996 to 1997. G.I. Trucking continued to replace revenues lost as a result of the ABF/Carolina Freight Carriers ("Carolina") merger in September, 1995. G.I. Trucking's revenue per hundredweight increased to $10.45, a 3.5% increase from 1996. G.I. Trucking's tonnage increased 23.2% from 1996 to 1997. G.I. Trucking's operating ratio, as reported to the D.O.T., was 99.4% for 1997 as compared to 109.4% for 1996. During 1996, ABF discontinued twelve of the regional distribution terminal operations acquired in September 1995 in the Carolina merger. These closings, which occurred during the first two quarters of 1996, returned ABF to its historical terminal system configuration. This reconfiguration allowed ABF to gradually improve its direct labor costs, improve its weight per trailer and reduce its empty miles, beginning in 1996 and continuing through 1997. ABF's operating ratio as reported to the D.O.T. was 94.5% in 1997 compared to 100.8% in 1996. Approximately 80% of ABF's employees are covered under a collective bargaining agreement with the International Brotherhood of Teamsters ("IBT"), which expires on March 31, 1998. A tentative settlement on a new five-year collective bargaining agreement was reached on February 9, 1998, which is subject to ratification by the IBT. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued The decrease in salaries, wages and benefits of 4.0%, as a percentage of revenue, from 1996 to 1997 was the result of productivity improvements by both ABF and G.I. Trucking. ABF's salaries, wages and benefits for unionized employees increased by approximately 3.9% annually effective April 1, 1997, pursuant to ABF's collective bargaining agreement with the IBT employees. The increase in wages and the changes associated with the 1998 agreement are expected to have a somewhat lesser impact on the annual cost for salaries, wages and benefits in 1998, and the remaining term of the contract, than the previous agreement had on an annual basis. Operating supplies and expenses decreased 1% of revenue from 1996 to 1997. Decreases in fuel expenses represent .8% of this decrease. Fuel expenses were lower in 1997 than in 1996 because of lower fuel prices, better fuel economy fleet-wide and 1.9% fewer traveled miles. A decrease in depreciation and amortization of .9% of revenue also resulted from ABF's reconfiguration of its terminal system, which allowed for improved asset utilization and sales of excess assets. ABF also increased its use of leased revenue equipment and outside alternate modes of transportation as reflected in the 1.1% increase in rents and purchased transportation as a percentage of revenue. The cost of insurance, which includes provisions for self insurance of workers' compensation, bodily injury and property damage claims, decreased .5% in 1997 due to fewer and less severe claims, as well as favorable experience in claim settlements compared to 1996. Truckload Motor Carrier Operations. The Company's truckload motor carrier operations were conducted primarily through Cardinal. On July 15, 1997, the Company closed the sale of Cardinal. See Note E to the Consolidated Financial Statements. INTERMODAL OPERATIONS SEGMENT. The Company's intermodal operations are conducted primarily through the Clipper Group (including Clipper Worldwide). Revenues for the intermodal operations segment were $182 million for 1997 compared to $181 million in 1996, an increase of .8%. Through nine months of 1997, greater increases in revenues for the Clipper Group's domestic operation were reported. However, fourth quarter 1997 revenues for the domestic division decreased 9% when compared to the fourth quarter of 1996. The Clipper Group's domestic operations were adversely affected by the much-publicized problems with the U.S. rail system. These problems resulted in lower revenue for Clipper's domestic operations because of customer concerns regarding the reliability of rail service, which is Clipper's principal method of transporting freight. Rail service problems have continued into 1998. It is not possible for Clipper management to determine when rail service problems will be resolved, and it is likely that Clipper will continue to suffer some loss of revenues until these problems are resolved and customers and potential customers return to historical transportation practices. Throughout 1996, the domestic operation of the Clipper Group experienced an increase in its weight per shipment. However, a decline in revenue per hundredweight without a proportionate reduction in cost produced lower margins on higher revenue. In 1997, the Clipper Group's domestic operation improved yields and decreased costs per shipment, when compared to 1996, by focusing on smaller shipment sizes to improve margins. Effective January 1, 1997, the Clipper Group's domestic division implemented a 5.9% 11 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued rate increase. In the fourth quarter of 1997, Clipper's costs were affected negatively by diversion of some freight from rail to trucks, due to previously described rail service issues. For the fourth quarter of 1997, the Clipper Group's domestic operation had a 100.4% operating ratio compared to 99.3% for the fourth quarter of 1996. This trend will continue until the rail service problems are resolved. On January 1, 1998, the Clipper Group's domestic operations implemented a 5.5% rate increase, with an effective rate of 4.3% on LTL revenues. Clipper Worldwide's revenue declined 6.6% from 1996 to 1997. The decline in revenue for Clipper Worldwide was expected due to actions taken in late 1996 and early 1997 to enhance profitability. During 1996, Clipper Worldwide expanded into some higher cost markets and experienced a shift in market mix to more full container-load freight. Ocean container transportation costs also increased. Clipper Worldwide recorded a charge of $400,000 in 1997 relating to the consolidation of administrative offices and some sales locations with the other Clipper Group members. Each of these factors negatively impacted operating results in the applicable periods. However, other cost reductions, including lower costs for ocean transport in certain lanes, offset these costs, resulting in a lower operating ratio for 1997 of 103.0% compared to 104.3% for 1996. The consolidation of administrative offices and some sales locations is expected to continue to improve the efficiency of Clipper Worldwide in 1998. TIRE OPERATIONS SEGMENT. Revenues for 1997 increased 12.2% to $158.9 million from $141.6 million for 1996. Both "same store" sales and "new store" sales increased approximately 6.0% from 1996 to 1997. "Same store" sales include both production locations and satellite sales locations that have been in existence for all of 1997 and 1996. In 1997, "new store" sales resulted from one new sales location and one new production facility. In 1996, "new store" sales resulted from five new sales locations. Revenues from retreading for 1997 were $65.3 million, a 9.3% increase from $59.8 million in 1996. Revenues from new tires for 1997 were $81.0 million, an 11.9% increase from $72.4 million during 1996. Cost of sales decreased 3.5% from 1996 to 1997. This decrease resulted primarily from lower tread rubber costs and new tire costs of approximately 4.0%. Selling, administrative and general expenses increased 1.5% from 1996 to 1997, resulting primarily from a cost-of-living increase in salaries and wages expense of 1.0%. Treadco's ability to return to historical profitability levels is substantially dependent upon replacement of retread volume, which declined beginning in 1996 primarily due to national account business which was lost to competitors. Also, new business frequently has lower margins than established accounts due to increased competition in Treadco's markets. INTEREST. Interest expense was $24.0 million for 1997 compared to $30.8 million for 1996, primarily due to reductions of outstanding debt, although lower interest rates also impacted interest costs. The average interest rate on the Company's revolving credit agreement was 8.2% on January 1, 1997 and 7.2% on December 31, 1997. INCOME TAXES. The difference between the effective tax rate for 1997 and the federal statutory rate resulted from state income taxes, amortization of goodwill, minority interest, and other nondeductible expenses. In addition, income tax expense for 1997 exceeds the expected amount because of $3.5 million in taxes attributable to a lower tax basis than accounting basis in Cardinal. The basis difference resulted 12 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued from goodwill of approximately $9.5 million allocated to Cardinal as a result of purchase accounting for the 1995 WorldWay acquisition, which included Cardinal (see Note H to the consolidated financial statements). At December 31, 1997, the Company had deferred tax assets of $28.5 million, net of a valuation allowance of $2.6 million, and deferred tax liabilities of $47.4 million. The Company believes that the benefits of the deferred tax assets of $28.5 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 $47.4 million and the presence of significant taxable income in 1997 and the unlimited carryforward period for alternative minimum tax credits 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 and other limitations. Management intends to evaluate the realizability of deferred tax assets on a quarterly basis by assessing the need for any additional valuation allowance. 1996 COMPARED TO 1995 Consolidated revenues from continuing operations of the Company for 1996 were $1,604 million compared to $1,406 million for 1995, representing an increase of 14.0%, primarily due to the subsidiaries acquired in the WorldWay acquisition being included for all of 1996, compared to four and one-half months of 1995. The Company had an operating loss from continuing operations of $(23.9) million (segment basis) for 1996 compared to an operating loss of $(26.1) million for 1995. The loss from continuing operations for 1996 was $(34.2) million, or a loss of $(1.98) per share (basic and diluted), compared to a loss from continuing operations for 1995 of $(30.8) million, or a loss of $(1.80) per share (basic and diluted). 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. MOTOR CARRIER OPERATIONS SEGMENT. Less-Than-Truckload Motor Carrier Operations. The Company's LTL motor carrier operations are conducted through ABF and G.I. Trucking. Revenues from LTL motor carrier operations were $1,199 million for 1996, with an operating loss of $(18.2) million, compared to $1,088 million for 1995, with an operating loss of $(32.9) million. In 1996, ABF accounted for 92% of the LTL segment revenues. Revenues from LTL motor carrier operations for 1996 increased 10.2% over 1995. The increase in revenues was due in part to the fact that 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 and Red Arrow Freight Lines ("Red Arrow") into ABF in September 1995. LTL 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. Trucking had served Carolina customers with deliveries to western states where Carolina did not have terminal operations. ABF serves its customers coast-to-coast. Fourth quarter 1996 revenues for G.I. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Trucking were 44% higher than the fourth quarter of 1995, which reflected the substantial decrease in G.I. Trucking's revenue caused by the merger. Effective with the ABF/Carolina merger, ABF inherited Carolina'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 regional distribution terminal operations acquired in September, 1995 in the Carolina merger. 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. The decrease in salaries, wages and benefits of 2.2% as a percentage of revenue from 1995 to 1996 was the result of ABF's productivity improvements. Salaries, wages and benefits increased 3.8% annually effective April 1, 1996, pursuant to ABF's collective bargaining agreement with its Teamsters employees. Truckload Motor Carrier Operations. The Company's truckload motor carrier operations were conducted primarily through Cardinal. Cardinal's revenues increased 166.5% 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. Supplies and expenses were affected negatively in 1996 because higher fuel prices per gallon resulted in higher-than-expected fuel costs which were only partially recovered by fuel surcharges, as well as higher-than-normal maintenance costs due to aging of revenue equipment. INTERMODAL OPERATIONS SEGMENT. The Company's intermodal operations are conducted primarily through the Clipper Group (including Clipper Worldwide). Comparisons for 1996 were affected by the WorldWay acquisition in August 1995. Revenues for the intermodal operations segment were $181 million for 1996, compared to $141 million in 1995, representing an increase of 28.4%. The increase in revenue results primarily from the inclusion of Clipper Worldwide for the full year and a 6% increase in revenues for the Clipper Group's domestic operations. Throughout 1996, the domestic operation of the Clipper Group experienced an increase in its weight per shipment. However, a decline in revenue per hundredweight without a proportionate reduction in cost produced lower margins on higher revenue. Clipper Worldwide 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. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued 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 Treadco that unless Treadco used the Bandag process exclusively, Bandag would not renew any of Treadco's franchise agreements when they expired. Treadco'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 as much as 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 was required to spend time with the conversion at the expense of normal daily operations. Treadco has experienced 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 2.5% primarily due to expenses incurred during the conversion. Selling, administrative and general expenses as a percent of revenue increased 4.7%. This increase resulted from several factors, including costs associated with the conversion from Bandag, representing 2.4% of the increase and increases in administrative and general expenses of 2.3%, including self-insurance costs, expenses associated with employee medical benefits and service-related expenses. 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 for the Company 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 H to the consolidated financial statements). 15 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for 1997 was $76.2 million compared to net cash provided by operations of $30.2 million in 1996. The increase is due primarily to the improvement in operating results from 1996 to 1997. In addition to cash provided by operations, 1997 sales of excess property and equipment provided cash of $37.3 million and the sales of Cardinal, The Complete Logistics Company and Integrated Distribution, Inc. provided cash of $39.0 million. The Company has a 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 11 other participating banks. The Credit Agreement originally included a $72 million term loan and provides for up to $275 million of revolving credit loans (including letters of credit). Revolving credit advances bear interest at variable rates determined under the Credit Agreement. At December 31, 1997, the average interest rate on the Credit Agreement was 7.2%. At December 31, 1997, there were $111 million of Revolver Advances and approximately $19.8 million of outstanding letters of credit. The Credit Agreement, which had an expiration date of August, 1998, was extended during 1997 and expires in August, 1999. At December 31, 1997, the Company had approximately $144 million of availability under the Credit Agreement. 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 Treadco accounts receivable and inventory. Borrowings under the agreement bear interest at variable rates. At December 31, 1997, Treadco had $4.0 million outstanding under the Revolving Credit Agreement. The average interest rate during 1997 was 7.9%. The Treadco Credit Agreement was amended and restated on September 30, 1997, primarily to extend the termination date until September 30, 2001, and to revise certain financial covenants and Treadco's interest rate on advances. As of December 31, 1997, Treadco was in compliance with the covenants. 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 $20 million as of December 31, 1997 to $2.5 million as of October 1999. As of December 31, 1997, 1996 and 1995, the LIBOR rate was 5.8%, 5.5% and 5.5%, 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 (using 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 interest rate cap arrangement had no fair value at December 31, 1997. In February 1998, the Company entered into an interest rate swap effective April 1, 1998, on a notional amount of $110 million. The purpose of the swap was to limit the Company's exposure to increases in interest rates from current levels on $110 million of bank borrowings over the seven-year term of the swap. The interest rate under the swap will be 5.845% plus the Credit Agreement margin (currently 1%). 16 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued The following table sets forth the Company's historical capital expenditures (net of equipment trade-ins) for the periods indicated below:
- --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ millions) LTL motor carrier operations.................................. $ 25.8 $ 13.0 $ 75.0 Truckload motor carrier operations............................ 0.7 0.8 2.1 - --------------------------------------------------------------------------------------------------------------------------- Total motor carrier operations................................ 26.5 13.8 77.1 Intermodal operations ........................................ 4.1 0.4 0.4 Tire operations............................................... 4.4 23.0 4.5 Service and other............................................. 1.1 4.4 17.4 - --------------------------------------------------------------------------------------------------------------------------- 36.1 41.6 99.4 Less: Operating leases..................................... (21.9) - (24.6) - --------------------------------------------------------------------------------------------------------------------------- Total......................................................... $ 14.2 $ 41.6 $ 74.8 ===========================================================================================================================
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 1998, the Company forecasts total spending of approximately $68 million for capital expenditures net of proceeds from equipment sales. Of the $68 million, ABF is budgeted for approximately $43.6 million to be used primarily for revenue equipment and facilities. Treadco is budgeted for $9.2 million of expenditures for retreading and service equipment and facilities, Clipper Group is budgeted for approximately $2.6 million to be used primarily for revenue equipment and G. I. Trucking is budgeted for $10.8 million of expenditures to be used primarily for revenue equipment. Cash from operations and the sale of assets and subsidiaries resulted in reduction of debt of approximately $146.9 million in 1997. Management believes, based upon the Company's current levels of operations, the Company's cash, capital resources, borrowings available under the Credit Agreement and cash flow from operations will be sufficient to finance current and future operations and meet all present and future debt service requirements. SEASONALITY Motor carrier operations are affected by seasonal fluctuations, which affect tonnage to be transported. Freight shipments, operating costs and earnings are also affected adversely by inclement weather conditions. The third calendar quarter of each year usually has the highest tonnage levels while the first quarter has the lowest. Intermodal operations are similar to the 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 six months of the calendar year generally having the highest levels of sales. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued ENVIRONMENTAL MATTERS The Company's subsidiaries store some fuel for their tractors and trucks in approximately 114 underground tanks located in 30 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, 1997, 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 and has not been reduced by any future recoveries from insurance or other sources unless such recovery is assured. 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. 18 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Little Rock, Arkansas January 28, 1998 19
ARKANSAS BEST CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------------------------------------------------- DECEMBER 31 1997 1996 --------------------------------------- ($ thousands) ASSETS CURRENT ASSETS Cash and cash equivalents.................................................... $ 7,203 $ 2,427 Trade receivables less allowances (1997--$7,603,000; 1996--$5,077,000)...................................... 175,693 178,766 Inventories.................................................................. 30,685 33,811 Prepaid expenses ............................................................ 14,456 12,869 Deferred income taxes ....................................................... 5,584 16,490 Federal and state income taxes refundable ................................... - 7,320 Other ....................................................................... 3,275 - - --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS ..................................................... 236,896 251,683 PROPERTY, PLANT AND EQUIPMENT Land and structures ......................................................... 212,847 228,051 Revenue equipment ........................................................... 207,471 253,009 Manufacturing equipment ..................................................... 18,891 18,815 Service, office and other equipment ......................................... 64,598 61,987 Leasehold improvements ...................................................... 7,281 8,899 - --------------------------------------------------------------------------------------------------------------------------- 511,088 570,761 Less allowances for depreciation and amortization ........................... (225,733) (214,195) - --------------------------------------------------------------------------------------------------------------------------- 285,355 356,566 OTHER ASSETS ................................................................... 41,999 60,630 ASSETS HELD FOR SALE ........................................................... 3,342 9,148 GOODWILL, less amortization (1997 -- $31,867,000; 1996 -- $28,006,000)............................................................ 130,747 150,154 - --------------------------------------------------------------------------------------------------------------------------- $ 698,339 $ 828,181 ===========================================================================================================================
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ARKANSAS BEST CORPORATION CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------------------------------------------------- DECEMBER 31 1997 1996 --------------------------------------- ($ thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank overdraft .............................................................. $ 13,801 $ - Bank drafts payable ......................................................... 1,172 502 Trade accounts payable ...................................................... 77,403 77,338 Accrued expenses............................................................. 157,622 179,918 Federal and state income taxes............................................... 1,222 - Current portion of long-term debt ........................................... 16,484 37,197 - --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES ................................................ 267,704 294,955 LONG-TERM DEBT, less current portion ........................................... 202,604 317,874 OTHER LIABILITIES .............................................................. 21,921 21,423 DEFERRED INCOME TAXES .......................................................... 24,448 22,479 MINORITY INTEREST .............................................................. 32,600 34,020 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 1997: 19,596,213 shares; 1996: 19,504,473 shares ................................................. 196 195 Additional paid-in capital .................................................. 192,910 192,328 Retained earnings (deficit) ................................................. (44,059) (55,108) - --------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY ............................................... 149,062 137,430 COMMITMENTS AND CONTINGENCIES .................................................. - --------------------------------------------------------------------------------------------------------------------------- $ 698,339 $ 828,181 ===========================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 21
ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1997 1996 1995 ------------------------------------------------------ ($ thousands, except per share data) OPERATING REVENUES LTL motor carrier operations ................................. $ 1,253,691 $ 1,199,437 $ 1,088,416 Truckload motor carrier operations ........................... 39,366 74,623 27,992 Intermodal operations ........................................ 181,929 180,619 140,691 Tire operations .............................................. 158,912 141,613 145,127 Service and other ............................................ 9,780 8,043 3,354 - --------------------------------------------------------------------------------------------------------------------------- 1,643,678 1,604,335 1,405,580 - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES AND COSTS LTL motor carrier operations .................................. 1,191,378 1,216,398 1,116,622 Truckload motor carrier operations ............................ 37,313 70,248 24,952 Intermodal operations ......................................... 179,953 179,436 136,166 Tire operations ............................................... 161,796 147,164 140,328 Service and other ............................................. 10,330 9,097 5,433 - --------------------------------------------------------------------------------------------------------------------------- 1,580,770 1,622,343 1,423,501 - --------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS)........................................... 62,908 (18,008) (17,921) OTHER INCOME (EXPENSE) Net gains (losses) on sale of property and non-revenue equipment .................................. (3,536) 1,856 237 Gain on sale of Cardinal Freight Carriers ..................... 8,985 - - Interest expense .............................................. (23,978) (30,843) (16,352) Minority interest in subsidiary ............................... 1,359 1,768 (1,297) Other, net .................................................... (5,380) (7,762) (8,402) - --------------------------------------------------------------------------------------------------------------------------- (22,550) (34,981) (25,814) - --------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.............................. 40,358 (52,989) (43,735) FEDERAL AND STATE INCOME TAXES (CREDIT) Current ....................................................... 3,079 (15,016) (4,011) Deferred ...................................................... 16,310 (3,766) (8,914) - --------------------------------------------------------------------------------------------------------------------------- 19,389 (18,782) (12,925) - --------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS ......................... 20,969 (34,207) (30,810) - ---------------------------------------------------------------------------------------------------------------------------
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ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS -- Continued - --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands, except per share data) DISCONTINUED OPERATIONS: Loss from discontinued operations (net of tax benefits of $1,476, $1,353 and $1,270 for the years ended December 31, 1997, 1996 and 1995, respectively) .................................. $ (2,529) $ (2,396) $ (1,982) Loss on disposal of discontinued operations (net of tax benefits of $605).................................. (3,093) - - - --------------------------------------------------------------------------------------------------------------------------- LOSS FROM DISCONTINUED OPERATIONS ................................ (5,622) (2,396) (1,982) - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) ................................................ 15,347 (36,603) (32,792) Preferred stock dividends ..................................... 4,298 4,298 4,298 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) FOR COMMON SHAREHOLDERS ...................................... $ 11,049 $ (40,901) $ (37,090) =========================================================================================================================== EARNINGS (LOSS) PER COMMON SHARE BASIC: Continuing operations ......................................... $ 0.85 $ (1.98) $ (1.80) Discontinued operations ....................................... (0.29) (0.12) (0.10) - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER SHARE ...................................... $ 0.56 $ (2.10) $ (1.90) - --------------------------------------------------------------------------------------------------------------------------- DILUTED: Continuing operations ......................................... $ 0.84 $ (1.98) $ (1.80) Discontinued operations ....................................... (0.28) (0.12) (0.10) - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER SHARE ...................................... $ 0.56 $ (2.10) $ (1.90) - --------------------------------------------------------------------------------------------------------------------------- CASH DIVIDENDS PAID PER COMMON SHARE ............................. $ - $ .01 $ .04 ===========================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 23
ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONAL RETAINED PREFERRED COMMON PAID-IN EARNINGS STOCK STOCK CAPITAL (DEFICIT) - ------------------------------------------------------------------------------------------------------------------------------------ ($ thousands) BALANCES AT JANUARY 1, 1995 ........................ $ 15 $ 195 $ 192,265 $ 24,130 Net loss ....................................... - - - (32,792) Issuance of common stock ....................... - - 171 - Adjustment to minimum pension liability ........ - - - (1,041) Dividends paid ................................. - - - (5,079) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1995....................... 15 195 192,436 (14,782) Net loss........................................ - - - (36,603) Retirement of common stock ..................... - - (108) - Adjustment to minimum pension liability ....... - - - 770 Dividends paid.................................. - - - (4,493) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1996....................... 15 195 192,328 (55,108) Net income ..................................... - - - 15,347 Issuance of common stock ...................... - 1 582 - Dividends paid.................................. - - - (4,298) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1997....................... $ 15 $ 196 $ 192,910 $ (44,059) ===================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 24
ARKANSAS BEST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) OPERATING ACTIVITIES Net income (loss) ................................................... $ 15,347 $ (36,603) $ (32,792) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization .................................... 44,316 56,389 46,627 Amortization of intangibles ...................................... 4,629 4,609 5,135 Other amortization ............................................... 4,139 3,740 1,044 Provision for losses on accounts receivable ...................... 2,956 9,489 4,185 Provision (credit) for deferred income taxes ..................... 16,310 (3,735) (8,995) Net gain on sales of assets and subsidiaries ..................... (4,560) (3,334) (3,194) Minority interest in subsidiary .................................. (1,359) (1,768) 1,297 Changes in operating assets and liabilities, net of acquisition: Receivables ................................................... (7,646) 13,540 (23,795) Inventories and prepaid expenses .............................. 28 3,165 3,529 Other assets .................................................. (8,826) 9,203 (11,751) Accounts payable, bank drafts payable, taxes payable, accrued expenses and other liabilities ...................... 10,865 (24,499) (47,514) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities ..................... 76,199 30,196 (66,224) INVESTING ACTIVITIES Purchases of property, plant and equipment excluding capital leases .......................................... (11,645) (27,747) (49,690) Proceeds from sales of subsidiaries.................................. 39,031 - - Proceeds from asset sales ........................................... 37,340 65,313 15,748 Acquisition of WorldWay.............................................. - - (81,566) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ....................... 64,726 37,566 (115,508) FINANCING ACTIVITIES Deferred financing costs and expenses ............................... (1,165) (3,512) (4,578) Borrowings under revolving credit facilities ........................ 463,135 272,585 238,275 Borrowings under term loan facilities ............................... - - 75,000 Payments under revolving credit facilities .......................... (545,635) (288,285) (30,275) Payments on long-term debt .......................................... (16,652) (24,704) (31,844) Payment under term loan facilities .................................. (42,948) (34,052) - Payments under receivables purchase agreement ....................... - - (40,000) Dividends paid to minority shareholders of subsidiary ............... (330) (440) (462) Dividends paid ...................................................... (4,298) (4,493) (5,079) Net increase (decrease) in bank overdraft ........................... 13,801 - (5,989) Other ............................................................... (2,057) 621 171 - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ....................... (136,149) (82,280) 195,219 - --------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................................... 4,776 (14,518) 13,487 Cash and cash equivalents at beginning of year ...................... 2,427 16,945 3,458 =========================================================================================================================== CASH AND CASH EQUIVALENTS AT END OF YEAR ............................... $ 7,203 $ 2,427 $ 16,945 ===========================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 25 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 - -------------------------------------------------------------------------------- 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 P). Principal subsidiaries are ABF Freight System, Inc. ("ABF"); Treadco, Inc. ("Treadco"); Clipper Exxpress Company, CaroTrans International, Inc. ("Clipper Worldwide") and related companies (collectively "Clipper Group"); G.I. Trucking Company ("G.I. Trucking"); FleetNet America, Inc. (formerly Carolina Breakdown Service, Inc.); and, until July 15, 1997, Cardinal Freight Carriers, Inc. ("Cardinal"). Approximately 80% of ABF's employees are covered under a collective bargaining agreement with the International Brotherhood of Teamsters ("IBT"), which expires on March 31, 1998. On February 9, 1998, a tentative settlement on a new five-year collective bargaining agreement was reached with the IBT. The tentative settlement is subject to ratification by the IBT membership. At December 31, 1997, 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 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Current assets ..................................................................... $ 55,644 $ 57,829 Property, plant and equipment, net ................................................. 31,329 33,186 Other assets ....................................................................... 13,485 14,401 - --------------------------------------------------------------------------------------------------------------------------- Total assets................................................................... $ 100,458 $ 105,416 =========================================================================================================================== Current liabilities ................................................................ $ 28,372 $ 23,786 Long-term debt and other ........................................................... 13,251 19,682 Stockholders' equity ............................................................... 58,835 61,948 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity..................................... $ 100,458 $ 105,416 =========================================================================================================================== 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Sales ........................................................... $ 161,276 $ 144,154 $ 147,906 Operating expenses and costs .................................... 163,785 149,337 142,920 Interest expense ................................................ 1,256 900 510 Other (income) expense ......................................... 112 (731) 374 Income taxes (credit) ........................................... (1,373) (2,093) 1,711 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) .......................................... $ (2,504) $ (3,259) $ 2,391 ===========================================================================================================================
26 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- NOTE B - 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 Clipper Worldwide. 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 12 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 C), 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 have been replaced by WorldWay facilities. The Company recorded writedowns of $1.6 million in 1997, $1.5 million in 1996 and $2.1 million in 1995 to net realizable value for company properties reclassified to assets held for sale. Writedowns are included in gains or losses on sales of property. 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. Total assets held for sale at December 31, 1996 were $9.1 million. In 1997, additional assets of $6.1 million were identified and reclassified to assets held for sale. During 1997, $10.3 million were sold, resulting in a loss of $1.9 million. 27 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- 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 will 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 (basic earnings per share) or common equivalent shares outstanding (diluted earnings per share) 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, 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 M) DERIVATIVE FINANCIAL INSTRUMENTS: The Company has, from time to time, entered into interest-rate swap agreements and interest-rate cap agreements 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 28 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- accounting method). Any related amount payable to or receivable from counterparties is included in accrued liabilities or other receivables. 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. RECLASSIFICATIONS: Certain reclassifications have been made to the prior year financial statements to conform to the current year's presentation. NOTE C - ACQUISITION In August 1995, pursuant to a tender offer, a wholly owned subsidiary of the Company purchased the outstanding shares of common stock of WorldWay Corporation ("WorldWay"), at a price of $11 per share (the "Acquisition"). WorldWay was a publicly-held company engaged through subsidiaries in motor carrier operations. The total purchase price of WorldWay amounted to approximately $76 million. The WorldWay acquisition was accounted for under the purchase method. The accompanying financial statements include the results of operations for WorldWay and its subsidiaries from August 12, 1995. Assets with a fair value of approximately $313 million were acquired and liabilities with a fair value of approximately $252 million were assumed. Final purchase price allocations for the WorldWay acquisition resulted in approximately $15 million of goodwill. During 1997, this goodwill was eliminated as a result of the sale of Cardinal, which had been assigned approximately $9 million of goodwill, and reductions in deferred tax liabilities related to WorldWay. NOTE D - DISCONTINUED OPERATIONS As of June 30, 1997 and prior periods since 1995, the Company was engaged in providing logistics services, including warehousing and distribution, through two wholly owned subsidiaries, The Complete Logistics Company ("CLC") and Integrated Distribution, Inc. ("IDI"). On August 8, 1997, the Company completed the sale of all of the outstanding shares of CLC for approximately $2.5 million in cash. The sale of CLC resulted in a pre-tax loss of $1.3 million. In September 1997, the Company completed a formal plan to exit the logistics segment by disposing of IDI. As of September 30, 1997, the Company recorded a loss for the disposal of IDI of $2.2 million, net of tax benefits of $100,000. On October 31, 1997, the Company closed the sale of IDI for proceeds of approximately $600,000, subject to purchase price adjustments. 29 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- Results of operations of the logistics segment have been reported as discontinued operations for the year ended December 31, 1997 and the statements of operations for all prior periods have been restated to remove the revenue and expenses of the logistics segment. Results of the logistics operations segment included in discontinued operations are summarized as follows:
YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Revenues ........................................................ $ 29,812 $ 54,849 $ 31,699 Operating loss................................................... (3,516) (2,835) (2,599) Pre-tax loss .................................................... (4,005) (3,749) (3,252)
The balance sheet at December 31, 1996, has been reclassified to include net assets of discontinued operations of approximately $3.5 million in other noncurrent assets. NOTE E - SALE OF CARDINAL FREIGHT CARRIERS, INC. On July 15, 1997, the Company sold Cardinal for approximately $38 million in cash. The sale resulted in a pre-tax gain of approximately $9 million. The net proceeds from the sale were used to pay down bank debt. Results of operations for Cardinal included in the statements of operations are summarized as follows:
YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Revenues ........................................................ $ 39,366 $ 74,623 $ 27,992 Operating income ............................................... 2,087 4,388 3,040 Pre-tax income ................................................. 1,710 3,585 2,614
NOTE F - RECENT ACCOUNTING PRONOUNCEMENTS In December 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share. Under the new requirements for computing basic earnings per share, the dilutive effect of stock options is excluded. The dilutive effect of common stock equivalents is included in the calculation of diluted earnings per share under SFAS No. 128. The new statement has been applied retroactively. The effect of adoption is not material. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income. The Statement requires the classification components of other comprehensive income by their nature in a financial statement and display of the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the consolidated financial statements. The Statement is effective for the Company in 1998. The Company does not anticipate that adoption of this Statement will have a material impact on the current presentation of its financial statements. 30 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. The proposal superseded FASB Statement No. 14 on segments. The Statement is effective for the Company in 1998. The Company is currently evaluating the impact that the Statement will have on its business segment reporting. NOTE G - INVENTORIES
DECEMBER 31 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Finished goods...................................................................... $ 22,392 $ 24,029 Materials........................................................................... 4,934 6,267 Repair parts, supplies and other.................................................... 3,359 3,515 - --------------------------------------------------------------------------------------------------------------------------- $ 30,685 $ 33,811 ===========================================================================================================================
NOTE H - 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 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Deferred tax liabilities: Depreciation and basis differences for property, plant and equipment............................................. $ 32,208 $ 44,058 Revenue recognition.............................................................. 3,360 1,405 Basis difference on asset and stock sale......................................... 3,313 3,281 Prepaid expenses................................................................. 5,173 4,135 Other ........................................................................... 3,351 1,330 - --------------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities............................................... 47,405 54,209 Deferred tax assets: Accrued expenses................................................................. 18,586 19,946 Postretirement benefits other than pensions...................................... 1,216 1,663 Net operating loss carryovers.................................................... 9,204 21,597 Alternative minimum tax credit carryovers........................................ 1,825 5,629 Other............................................................................ 310 558 - --------------------------------------------------------------------------------------------------------------------------- Total deferred tax assets.................................................... 31,141 49,393 Valuation allowance for deferred tax assets...................................... (2,600) (1,173) - --------------------------------------------------------------------------------------------------------------------------- Net deferred tax assets...................................................... 28,541 48,220 - --------------------------------------------------------------------------------------------------------------------------- Net deferred tax liabilities........................................................ $ 18,864 $ 5,989 ===========================================================================================================================
31 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- Significant components of the provision for income taxes are as follows:
DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Current (credit): Federal.................................................... $ 1,913 $ (15,016) $ (4,011) State...................................................... 1,166 - - - --------------------------------------------------------------------------------------------------------------------------- Total current (credit).................................. 3,079 (15,016) (4,011) Deferred (credit): Federal.................................................... 14,793 (1,149) (6,863) State...................................................... 1,517 (2,617) (2,051) - --------------------------------------------------------------------------------------------------------------------------- Total deferred (credit)................................. 16,310 (3,766) (8,914) - --------------------------------------------------------------------------------------------------------------------------- Total income tax expense (credit)............................. $ 19,389 $ (18,782) $ (12,925) ===========================================================================================================================
A reconciliation between the effective income tax rate, as computed on income from continuing operations, and the statutory federal income tax rate is presented in the following table:
YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Income tax (benefit) at the statutory federal rate of 35%............................. $ 14,125 $ (18,546) $ (15,307) Federal income tax effects of: State income taxes ..................................... (941) 913 720 Nondeductible goodwill ................................ 1,262 2,548 1,680 Other nondeductible expenses............................ 555 1,389 1,398 Minority interest ...................................... (476) (619) 454 Undistributed earnings or losses of Treadco ............ (80) (99) 77 Nondeductible goodwill included in assets of Cardinal ................................ 3,078 - - Resolution of tax contingencies......................... - (1,573) - Other................................................... (817) (178) 104 - --------------------------------------------------------------------------------------------------------------------------- Federal income taxes (benefit)............................. 16,706 (16,165) (10,874) State income taxes (benefit)............................... 2,683 (2,617) (2,051) - --------------------------------------------------------------------------------------------------------------------------- $ 19,389 $ (18,782) $ (12,925) =========================================================================================================================== Effective tax rate......................................... 48.0% (35.5)% (29.6)% ===========================================================================================================================
Income taxes of $2,400,000 were paid in 1997. No income taxes were paid in 1996, and $9,900,000 was paid in 1995. Income tax refunds amounted to $8,500,000 in 1997 and $28,825,000 in 1996. As of December 31, 1997, the Company had state net operating loss carryovers of $87,000,000. State net operating loss carryovers expire generally in five to ten years. The Company had alternative minimum tax credits of approximately $1,825,000 at December 31, 1997 which carry over indefinitely. 32 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- For financial reporting purposes, a valuation allowance of approximately $2,600,000 has been established for certain state net operating loss carryovers for which realization is uncertain. During 1997, the Company evaluated its previous estimates of state net operating losses. As a result of this process, available state net operating losses were determined by the Company to be greater than previously estimated by $25,000,000. Because substantially all of these additional state net operating losses are in subsidiaries in which realization of the benefits of carryovers is uncertain, the Company increased its valuation allowance by $1,487,000. NOTE I - LONG-TERM DEBT AND CREDIT AGREEMENTS
DECEMBER 31 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Revolving Credit and Term Loan Facility (1).......................................... $ 110,800 $ 227,948 Subordinated Debentures (2).......................................................... 42,657 44,855 Corporate Facility Credit Agreement (3).............................................. 13,000 15,000 Treadco Credit Agreement (4)......................................................... 4,000 10,300 Capitalized Lease Obligations (5).................................................... 41,809 52,511 Other ............................................................................... 6,822 4,457 - --------------------------------------------------------------------------------------------------------------------------- 219,088 355,071 Less current portion................................................................. 16,484 37,197 - --------------------------------------------------------------------------------------------------------------------------- $ 202,604 $ 317,874 ===========================================================================================================================
(1) The Company is party to a 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 11 other participating banks. The Credit Agreement provides for up to $275 million of revolving credit loans (including letters of credit). Revolving Credit advances bear interest at variable rates determined under the Credit Agreement. At December 31, 1997, the average interest rate on the Credit Agreement was 7.2%. At December 31, 1997, there were $111 million of Revolver Advances and approximately $19.8 million of outstanding 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 in outstanding letters of credit. Term advances were paid in 1997. 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 borrowing base amounted to $275 million at December 31, 1997. The Company has pledged substantially all accounts receivable, revenue equipment, real property and other assets not already pledged under other debt obligations. The Credit Agreement, which was originally scheduled to terminate in 1998, was extended during 1997 to August, 1999. 33 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- 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, 1997, the Company was in compliance with all covenants. (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 $44,883,000 at December 31, 1997. The debentures are payable April 15, 2011. The Company may redeem all outstanding debentures at 100% of par at any time and is required to redeem through a mandatory sinking fund 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. In November, 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. In November and December, 1997, the Company purchased debentures with a par value of $300,000 and $2,181,000, respectively, at purchase prices of $232,500 and $1,798,500, respectively plus accrued interest. These debentures were transferred to the Trustee to satisfy the mandatory sinking fund payment due by April 15, 1998. (3) The Company entered into a ten-year, $20 million corporate facility credit agreement dated 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%, with quarterly 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 Treadco accounts receivable and inventory. Borrowings under the agreement bear interest at a variable rate based on the terms of the Treadco Credit Agreement. At December 31, 1997, Treadco had $4.0 million outstanding under the Revolving Credit Agreement. The average interest rate during 1997 was 7.9%. The Treadco Credit Agreement was amended and restated on September 30, 1997, primarily to extend the termination date until September 30, 2001, to revise certain financial covenants and to revise Treadco's interest rate on advances. As of December 31, 1997, Treadco was in compliance with the covenants. 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. 34 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- (5) Includes approximately $34,538,000 relative to leases of carrier revenue equipment with an aggregate net book value of approximately $35,179,000 at December 31, 1997. These leases have a weighted average interest rate of approximately 6.7%. Also includes approximately $7,271,000 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 6.8%. The net book value of the related assets was approximately $15,067,000 at December 31, 1997. Annual maturities on long-term debt, excluding capitalized lease obligations (see Note L), in 1998 through 2002 aggregate approximately $3,523,000; $116,691,000; $5,973,000; $9,702,000 and $4,786,000, respectively. Interest paid, net of interest capitalized, was $24,564,000 in 1997, $32,174,000 in 1996, and $21,986,000 in 1995. Interest capitalized totaled $487,000 and $230,000 in 1996 and 1995, respectively. The Company is a party to an interest rate cap arrangement to reduce the impact of increases in interest rates on its variable-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 $20 million as of December 31, 1997 to $2.5 million as of October 1999. As of December 31, 1997, 1996 and 1995, the LIBOR rates were 5.8%, 5.5% and 5.5%, 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. In February 1998, the Company entered into an interest rate swap effective April 1, 1998, on a notional amount of $110 million. The purpose of the swap was to limit the Company's exposure to increases in interest rates from current levels on $110 million of bank borrowings over the seven-year term of the swap. The interest rate under the swap will be 5.845% plus the Credit Agreement margin (currently 1%).
NOTE J - ACCRUED EXPENSES DECEMBER 31 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Accrued salaries, wages and incentive plans ........................................ $ 19,726 $ 16,519 Accrued vacation pay ............................................................... 31,241 31,449 Accrued interest ................................................................... 2,568 3,154 Taxes other than income ............................................................ 8,017 8,541 Loss, injury, damage and workers' compensation claims reserves ..................... 83,272 101,453 Pension costs ...................................................................... 502 5,851 Other .............................................................................. 12,296 12,951 - --------------------------------------------------------------------------------------------------------------------------- $ 157,622 $ 179,918 ===========================================================================================================================
35 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- NOTE K - 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 1997, 1996 and 1995. 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 the 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 option 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. 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 1997, 1996 and 1995, respectively: risk-free interest rates of 6.7%, 5.8% and 7.3%; dividend yields of .01%, .01% and .01%; volatility factors of the expected market price of the Company's Common Stock of .45, .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 employee stock options. 36 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- 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):
DECEMBER 31 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) - as reported .................................................. $ 15,347 $ (36,603) =========================================================================================================================== Net income (loss) - pro forma .................................................... $ 14,693 $ (37,379) =========================================================================================================================== Net income (loss) per share - as reported (basic) ................................ $ .56 $ (2.10) =========================================================================================================================== Net income (loss) per share - as reported (diluted) .............................. $ .56 $ (2.10) =========================================================================================================================== Net income (loss) per share - pro forma (basic) .................................. $ .53 $ (2.14) =========================================================================================================================== Net income (loss) per share - pro forma (diluted) ................................ $ .52 $ (2.14) ===========================================================================================================================
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding - beginning of year .......... 1,790,200 $ 8.21 688,700 $ 11.05 628,900 $ 10.95 Granted .................................. 312,000 5.44 1,101,500 6.44 75,500 11.84 Exercised ............................... (91,740) 6.38 - - (15,700) 10.88 Forfeited ................................ (170,980) 6.38 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding - end of year................ 1,839,480 $ 8.01 1,790,200 $ 8.21 688,700 $ 11.05 ==================================================================================================================================== Exercisable at end of year............... 781,776 $ 9.99 476,280 $ 10.92 338,540 $ 10.87 ==================================================================================================================================== Estimated weighted-average fair value per share of options granted to employees during the year... $ 3.65 $ 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 - --------------------------------------------------------------------------------------------------------------------------- $4 - $6 288,000 9.2 $ 5.08 - $ - $6 - $8 816,280 8.1 $ 6.41 163,256 $ 6.41 $8 - $10 80,500 6.6 $ 9.18 42,700 $ 9.40 $10 - $12 545,000 4.8 $ 10.88 521,000 $ 10.88 $12 - $14 109,700 6.6 $ 12.64 54,820 $ 12.65 - --------------------------------------------------------------------------------------------------------------------------- 1,839,480 781,776 ===========================================================================================================================
37 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- SHAREHOLDERS' RIGHTS PLAN. Each issued and outstanding share of Common Stock has associated with it one Common Stock right to purchase a share of Common Stock from the Company at a price of $60.00. The rights are not exercisable, but could become exercisable if certain events occur relating to the acquisition of 15% or more of the outstanding Common Stock of the Company. Upon distribution, the rights will entitle holders, other than an acquirer in a non-permitted transaction, to receive Common Stock with a market value of two times the exercise price of the right. The rights will expire in 2002 unless extended. NOTE L - LEASES AND COMMITMENTS Rental expense amounted to approximately $122,542,000 in 1997, $114,600,000 in 1996 and $84,751,000 in 1995. Those amounts included purchased transportation and amounts for month-to-month rentals of revenue equipment. The future minimum rental commitments, net of future minimum rentals to be received under noncancellable subleases, as of December 31, 1997 for all noncancellable operating leases are as follows:
TERMINALS EQUIPMENT AND RETREAD AND PERIOD TOTAL PLANTS OTHER - --------------------------------------------------------------------------------------------------------------------------- ($ THOUSANDS) 1998 .................................................. $ 26,594 $ 10,092 $ 16,502 1999 .................................................. 14,066 7,000 7,066 2000 .................................................. 8,460 5,052 3,408 2001 .................................................. 4,938 3,967 971 2002 ................................................... 3,366 3,072 294 Thereafter ............................................. 7,350 7,326 24 - --------------------------------------------------------------------------------------------------------------------------- $ 64,774 $ 36,509 $ 28,265 ===========================================================================================================================
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 $2,097,000 at December 31, 1997. The future minimum payments under capitalized leases at December 31, 1997, consisted of the following ($ thousands): 1998 ......................................................................... $ 15,447 1999 ......................................................................... 13,320 2000 ......................................................................... 9,344 2001 ......................................................................... 4,953 2002 ......................................................................... 2,677 Thereafter .................................................................... 1,905 - ------------------------------------------------------------------------------------------------------------- Total minimum lease payments .................................................. 47,646 Amounts representing interest ................................................. 5,837 - ------------------------------------------------------------------------------------------------------------- Present value of net minimum lease included in long-term debt - Note I .......................................... $ 41,809 =============================================================================================================
38 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- Assets held under capitalized leases are included in property, plant and equipment as follows:
DECEMBER 31 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Revenue equipment ............................................................... $ 68,854 $ 70,747 Land and structures ............................................................. 12,754 13,723 - --------------------------------------------------------------------------------------------------------------------------- 81,608 84,470 Less accumulated amortization ................................................... 31,362 26,155 - --------------------------------------------------------------------------------------------------------------------------- $ 50,246 $ 58,315 ===========================================================================================================================
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 $ 2,584,000, $6,470,000, and $25,118,000 were incurred for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE M - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS AND OTHER EVENTS 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, 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 their tractors and trucks in approximately 114 underground tanks located in 30 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, 1997, 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 39 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- 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 had 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. The arbitration hearing is expected to be held in 1998. NOTE N - 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, but which would be material. 40 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- 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 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Defined Benefit Plans Service cost - benefits earned during the year................. $ 7,761 $ 8,025 $ 5,075 Interest cost on projected benefit obligations................. 10,483 11,028 8,095 Actual return on plan assets (gain) loss....................... (33,418) (17,324) (25,632) Net amortization and deferral.................................. 19,787 4,765 17,906 - --------------------------------------------------------------------------------------------------------------------------- Net pension cost of defined benefit plans................... 4,613 6,494 5,444 Multiemployer Plans............................................... 65,237 60,930 51,951 - --------------------------------------------------------------------------------------------------------------------------- Total pension expense.......................................... $ 69,850 $ 67,424 $ 57,395 ===========================================================================================================================
Assumptions used in determining net periodic pension cost for the defined benefit plans were:
YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Weighted average discount rate.................................... 7.50% 7.10% 7.80% to 8.73% Annual compensation increases..................................... 3.00% TO 4.00% 3.00% 3.00% Expected long-term rates of return on assets...................... 9.00% TO 9.40% 8.00% to 9.00% 8.00% to 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:
1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- 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..................... $ (121,867) $ (2,444) $ (95,853) $ (22,891) =================================================================================================================================== Accumulated benefit obligation................ $ (133,157) $ (3,100) $ (104,475) $ (24,282) =================================================================================================================================== Projected benefit obligation ..................... $ (151,952) $ (3,685) $ (121,132) $ (24,941) Plan assets at fair value ........................ 171,413 3,589 137,093 21,399 - ----------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation (in excess of) or less than plan assets ...................... 19,461 (96) 15,961 (3,542) Unrecognized net loss ............................ 84 306 7,460 933 Prior service benefit not yet recognized in net periodic pension cost .................. 1,149 31 757 524 Unrecognized net asset at January 1, 1987, net of amortization ............................ (55) (2) (59) (3) Adjustment required to recognize minimum liability .............................. - (40) - (796) - ----------------------------------------------------------------------------------------------------------------------------------- Net pension asset (liability) .................... $ 20,639 $ 199 $ 24,119 $ (2,884) ===================================================================================================================================
41 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- On December 31, 1997, the net pension asset is reflected in the accompanying financial statements as an accrued liability of $502,000 and a noncurrent asset of $21,340,000 included in other assets. 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. The following assumptions were used in determining the pension obligation:
DECEMBER 31 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Weighted average discount rate ........................................................ 7.03% 7.50% Annual compensation increases.......................................................... 3.00% TO 4.00% 3.00%
The Company has deferred compensation agreements with certain executives for which liabilities aggregating $1,991,000 and $1,565,000 as of December 31, 1997 and 1996, 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, 1997 and 1996, the Company has a liability of $2,553,000 and $2,692,000, respectively, for future costs under this plan reflected in the accompanying consolidated financial statements in other liabilities. 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 $6,278,000 and $6,641,000 as of December 31, 1997 and 1996, respectively, for future costs under this plan reflected as other liabilities in the accompanying consolidated financial statements. The Company 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. 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 1997. 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 $1,253,000 for 1997, $1,431,000 for 1996 and $1,412,000 for 1995. The Company sponsors plans that provide supplemental postretirement medical benefits, life insurance and accident and vision care to full-time officers of the Company. The plans are noncontributory, with the Company paying up to 80% of covered charges incurred by participants of the plan. 42 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- The following table represents the amounts recognized in the Company's consolidated balance sheets:
DECEMBER 31 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Accumulated postretirement benefit obligation: Retirees.......................................................................... $ (2,497) $ (2,606) Fully eligible active plan participants........................................... (2,227) (1,301) Other active plan participants.................................................... (1,810) (1,626) - --------------------------------------------------------------------------------------------------------------------------- (6,534) (5,533) Unrecognized net (gain) loss ........................................................ 1,023 (68) Unrecognized prior service cost ..................................................... 951 1,082 Unrecognized transition obligation................................................... 2,018 2,153 - --------------------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost.................................................. $ (2,542) $ (2,366) ===========================================================================================================================
Net periodic postretirement benefit cost includes the following components:
1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Service cost ...................................................... $ 142 $ 68 $ 51 Interest cost ...................................................... 361 321 282 Amortization of transition obligation over 20 years................. 135 135 135 Amortization of net gain ........................................... (69) (35) - Amortization of prior service cost ................................. 131 - - - --------------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost............................ $ 700 $ 489 $ 468 ===========================================================================================================================
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 1998 and 1997 and is assumed to decrease gradually to 4.5% to 5.0% 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, 1997, by $993,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by $81,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.03% at December 31, 1997 and 7.5% at December 31, 1996. 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 $67,031,000, $72,397,000 and $63,500,000 for the years ended December 31, 1997, 1996, and 1995, respectively. In October 1995, the Company adopted a performance award program. Upon award, the units will be valued equal to the closing price per share of the Company's common stock on the date awarded. The vesting provisions and the return on equity target will be set upon award. No awards have been granted under this program. 43
ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - --------------------------------------------------------------------------------------------------------------------------- NOTE O - OPERATING EXPENSES AND COSTS YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) LESS-THAN-TRUCKLOAD MOTOR CARRIER OPERATIONS Salaries and wages............................................ $ 820,299 $ 832,474 $ 779,453 Supplies and expenses......................................... 124,591 130,330 120,439 Operating taxes and licenses ................................. 42,045 47,552 45,906 Insurance .................................................... 24,237 28,393 24,122 Communications and utilities ................................. 28,457 29,897 26,776 Depreciation and amortization ................................ 32,274 41,755 37,822 Rents and purchased transportation ........................... 113,374 95,169 76,823 Other......................................................... 8,379 12,296 8,219 (Gain) on sale of carrier operating property.................. (2,278) (1,468) (2,938) - --------------------------------------------------------------------------------------------------------------------------- 1,191,378 1,216,398 1,116,622 TRUCKLOAD MOTOR CARRIER OPERATIONS Salaries and wages ........................................... 14,319 27,483 9,746 Supplies and expenses......................................... 7,257 13,552 4,530 Operating taxes and licenses ................................. 3,543 7,060 2,571 Insurance .................................................... 1,677 2,208 980 Communications and utilities ................................. 589 1,038 420 Depreciation and amortization ................................ 1,911 3,580 1,249 Rents and purchased transportation ........................... 7,741 14,880 5,348 Other ........................................................ 274 434 108 Loss on sale of carrier operating property ................... 2 13 - - --------------------------------------------------------------------------------------------------------------------------- 37,313 70,248 24,952 INTERMODAL OPERATIONS Cost of services ............................................. 152,061 151,799 117,455 Selling, administrative and general .......................... 27,892 27,658 18,711 (Gain) on sale of carrier operating property ................. - (21) - - --------------------------------------------------------------------------------------------------------------------------- 179,953 179,436 136,166 TIRE OPERATIONS Cost of sales ................................................ 117,373 109,673 108,686 Selling, administrative and general .......................... 44,423 37,491 31,642 - --------------------------------------------------------------------------------------------------------------------------- 161,796 147,164 140,328 SERVICE AND OTHER ............................................... 10,330 9,097 5,433 - --------------------------------------------------------------------------------------------------------------------------- $ 1,580,770 $ 1,622,343 $ 1,423,501 ===========================================================================================================================
44 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- NOTE P - BUSINESS SEGMENT DATA The Company operates in three defined business segments: 1) Motor carrier, which includes LTL operations conducted by ABF and G.I. Trucking, and truckload operations which were conducted primarily by Cardinal, which was sold in July 1997; 2) Intermodal operations, which includes the Clipper Group including CaroTrans; 3) Tire operations which includes the operation of Treadco. The segment information for 1996 and 1995 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 reflects selected business segment information:
YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) OPERATING REVENUES LTL motor carrier operations ..................................... $ 1,253,691 $ 1,199,437 $ 1,088,416 Truckload motor carrier operations ............................... 39,366 74,623 27,992 - --------------------------------------------------------------------------------------------------------------------------- Total for motor carrier operations ............................... 1,293,057 1,274,060 1,116,408 Intermodal operations ............................................ 181,929 180,619 140,691 Tire operations .................................................. 158,912 141,613 145,127 Service and other ................................................ 9,780 8,043 3,354 - --------------------------------------------------------------------------------------------------------------------------- $ 1,643,678 $ 1,604,335 $ 1,405,580 =========================================================================================================================== OPERATING PROFIT (LOSS) LTL motor carrier operations...................................... $ 56,268 $ (18,160) $ (32,915) Truckload motor carrier operations................................ 2,050 4,371 3,031 - --------------------------------------------------------------------------------------------------------------------------- Total motor carrier operations.................................... 58,318 (13,789) (29,884) Intermodal operations ............................................ 125 (546) 2,820 Tire operations................................................... (2,996) (4,821) 4,424 Service and other................................................. (1,455) (4,757) (3,446) - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING PROFIT (LOSS) ....................................... 53,992 (23,913) (26,086) GAIN ON SALE OF CARDINAL FREIGHT CARRIERS, INC. ..................... 8,985 - - INTEREST EXPENSE..................................................... 23,978 30,844 16,352 MINORITY INTEREST.................................................... (1,359) (1,768) 1,297 - --------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES.................................... $ 40,358 $ (52,989) $ (43,735) =========================================================================================================================== IDENTIFIABLE ASSETS LTL motor carrier operations...................................... $ 470,387 $ 520,644 $ 675,412 Truckload motor carrier operations................................ - 37,566 31,365 - --------------------------------------------------------------------------------------------------------------------------- Total motor carrier operations ................................... 470,387 558,210 706,777 Intermodal operations............................................. 72,758 74,549 75,754 Tire operations................................................... 101,806 108,058 94,658 Other ............................................................ 19,148 42,596 37,416 - --------------------------------------------------------------------------------------------------------------------------- 664,099 783,413 914,605 - --------------------------------------------------------------------------------------------------------------------------- General corporate assets.......................................... 34,240 44,768 47,572 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS......................................................... $ 698,339 $ 828,181 $ 962,177 ===========================================================================================================================
45
ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ($ THOUSANDS) DEPRECIATION AND AMORTIZATION EXPENSE LTL motor carrier operations................................ $ 34,779 $ 44,640 $ 40,045 Truckload motor carrier..................................... 1,911 3,574 1,249 - --------------------------------------------------------------------------------------------------------------------------- Total motor carrier operations ............................. 36,690 48,214 41,294 Intermodal operations....................................... 2,963 3,079 2,779 Tire operations............................................. 6,266 5,315 4,082 Other....................................................... 7,165 8,130 4,651 - --------------------------------------------------------------------------------------------------------------------------- $ 53,084 $ 64,738 $ 52,806 =========================================================================================================================== CAPITAL EXPENDITURES LTL motor carrier operations................................ $ 7,830 $ 14,105 $ 61,250 Truckload motor carrier operations.......................... 652 838 2,127 - --------------------------------------------------------------------------------------------------------------------------- Total motor carrier operations ............................. 8,482 14,943 63,377 Intermodal operations....................................... 186 374 426 Tire operations............................................. 4,409 23,082 5,429 Other....................................................... 1,059 3,200 5,576 - --------------------------------------------------------------------------------------------------------------------------- $ 14,136 $ 41,599 $ 74,808 ===========================================================================================================================
NOTE Q - 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 corporate facility credit agreement which are estimated using current market rates. The carrying amounts and fair value of the Company's financial instruments at December 31 are as follows:
1997 1996 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- ($ thousands) Cash and cash equivalents.............................. $ 7,203 $ 7,203 $ 2,427 $ 2,427 Short-term debt........................................ $ 3,431 $ 2,794 $ 25,778 $ 25,731 Long-term debt......................................... $ 173,847 $ 165,889 $ 281,318 $ 276,811
46 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- NOTE R - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- NUMERATOR: Numerator for basic earnings per share -- Net income (loss) .................................... $ 15,347 $ (36,603) $ (32,792) Preferred stock dividends ............................ (4,298) (4,298) (4,298) - --------------------------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share -- net income (loss) available to common shareholders .................................. 11,049 (40,901) (37,090) Effect of dilutive securities ........................... - - - - --------------------------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share -- net income (loss) available to common shareholders .................................. $ 11,049 $ (40,901) $ (37,090) =========================================================================================================================== DENOMINATOR: Denominator for basic earnings per share -- weighted-average shares ...................... 19,540,118 19,510,589 19,520,756 Effect of dilutive securities: Employee stock options ................................ 260,849 - - - --------------------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions........................ 19,800,967 19,510,589 19,520,756 =========================================================================================================================== EARNINGS (LOSS) PER COMMON SHARE BASIC: Continuing operations .................................. $ 0.85 $ (1.98) $ (1.80) Discontinued operations ................................. (0.29) (0.12) (0.10) - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER SHARE ................................ $ 0.56 $ (2.10) $ (1.90) - --------------------------------------------------------------------------------------------------------------------------- AVERAGE COMMON SHARES OUTSTANDING (BASIC) ................................... 19,540,118 19,510,589 19,520,756 =========================================================================================================================== DILUTED: Continuing operations .................................. $ 0.84 $ (1.98) $ (1.80) Discontinued operations.................................. (0.28) (0.12) (0.10) - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER SHARE ................................ $ 0.56 $ (2.10) $ (1.90) - --------------------------------------------------------------------------------------------------------------------------- AVERAGE COMMON SHARES OUTSTANDING (DILUTED): .................................. 19,800,967 19,510,589 19,520,756 =========================================================================================================================== CASH DIVIDENDS PAID PER COMMON SHARE ....................... $ - $ .01 $ .04 ===========================================================================================================================
47 ARKANSAS BEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- NOTE S - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The tables below present unaudited quarterly financial information for 1997 and 1996:
1997 THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ---------------------------------------------------------------------------------------------------------------------------------- ($ thousands, except per share data) Operating revenues ................................. $ 394,613 $ 423,680 $ 425,289 $ 400,096 Operating expenses and costs ....................... 385,663 403,286 403,641 388,180 - ---------------------------------------------------------------------- ----------------------------------------------------------- Operating income .................................. 8,950 20,394 21,648 11,916 Other expense - net ................................ (8,514) (9,188) (991) (3,857) Income taxes (credit) .............................. (144) 4,930 11,399 3,204 - ---------------------------------------------------------------------- ----------------------------------------------------------- Income from continuing operations ................. 580 6,276 9,258 4,855 Loss from discontinued operations .................. (898) (1,268) (3,456) - - ---------------------------------------------------------------------- ----------------------------------------------------------- Net income (loss) .................................. $ (318) $ 5,008 $ 5,802 $ 4,855 ====================================================================== =========================================================== Earnings (loss) per common share, basic: (1) Continuing operations .......................... (.03) .27 .42 .19 Discontinued operations ........................ (.04) (.07) (.18) - - ---------------------------------------------------------------------- ----------------------------------------------------------- Net income per share ............................... $ (.07) $ .20 $ .24 $ .19 - ---------------------------------------------------------------------------------------------------------------------------------- Average shares outstanding ......................... 19,504,473 19,504,473 19,556,633 19,594,880 ====================================================================== =========================================================== Earnings (loss) per common share, diluted: (2) Continuing operations .......................... (.03) .26 .39 .19 Discontinued operations ........................ (.04) (.06) (.15) - - ---------------------------------------------------------------------- ----------------------------------------------------------- Net income per share ............................... $ (.07) $ .20 $ .24 $ .19 - -------------------------------------------------------------------------------- Average shares outstanding ......................... 19,506,821 19,570,220 23,824,477 20,099,304 ====================================================================== ===========================================================
1996 THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ---------------------------------------------------------------------- ----------------------------------------------------------- ($ thousands, except per share data) Operating revenues ................................. $ 388,144 $ 400,218 $ 414,506 $ 401,467 Operating expenses and costs ....................... 396,129 405,675 416,747 403,792 - ---------------------------------------------------------------------- ----------------------------------------------------------- Operating loss ..................................... (7,985) (5,457) (2,241) (2,325) Other expense - net ............................... (6,020) (8,248) (9,004) (11,709) Income taxes (credit) .............................. (4,982) (5,222) (3,589) (4,989) - ---------------------------------------------------------------------- ----------------------------------------------------------- Loss from continuing operations .................... (9,023) (8,483) (7,656) (9,045) Loss from discontinued operations .................. (537) (302) (830) (727) - ---------------------------------------------------------------------- ----------------------------------------------------------- Net loss ........................................... $ (9,560) $ (8,785) $ (8,486) $ (9,772) ====================================================================== =========================================================== Loss per common share: basic and diluted: (1) Continuing operations .......................... (0.52) (0.49) (0.45) (0.52) Discontinued operations ........................ (0.02) (0.02) (0.04) (0.04) - ---------------------------------------------------------------------- ----------------------------------------------------------- Net loss per share ................................. $ (0.54) $ (0.51) $ (0.49) $ (0.56) - ---------------------------------------------------------------------------------------------------------------------------------- Average shares outstanding.......................... 19,516,539 19,512,367 19,508,620 19,504,830 ====================================================================== ===========================================================
(1) Gives consideration to preferred stock dividends of $1.1 million per quarter. (2) In the first, second and fourth quarters, consideration is given to preferred stock dividends of $1.1 million per quarter. In the third quarter, conversion of preferred shares into common is assumed. Conversion would be anti-dilutive for all other periods presented. EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 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 ABF Cartage, Inc. Delaware 100 Land-Marine Cargo, Inc. Puerto Rico 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 G.I. Trucking Company California 100 CaroTrans International, Inc. North Carolina 100 Motor Carrier Insurance, Ltd. Bermuda 100 FleetNet America, Inc. North Carolina 100 Subsidiary of ABF Freight System, Inc.: ABF Freight System (B.C.), Ltd. British Columbia 100
EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Arkansas Best Corporation of our report dated January 28, 1998, included in the 1997 Annual Report to Stockholders. Our audit also included the financial statement schedule of Arkansas Best Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-31475) pertaining to the Arkansas Best Corporation Stock Option Plan, the Registration Statement (Form S-8 No. 33-66694), pertaining to the Arkansas Best Corporation Disinterested Director Stockholder Plan and the Registration Statement (Form S-8, No. 33-52877), pertaining to the Arkansas Best Corporation Employees' Investment Plan, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Arkansas Best Corporation for the year ended December 31, 1997. Ernst & Young LLP Little Rock, Arkansas March 23, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Annual Report on Form 10-K for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 0000894405 ARKANSAS BEST CORPORATION 1,000 12-MOS DEC-31-1997 DEC-31-1997 7,203 0 175,693 7,603 30,685 236,896 511,088 225,733 698,339 267,704 202,604 0 15 196 148,851 698,339 158,912 1,643,678 117,373 1,580,770 0 2,956 23,978 40,358 19,389 20,969 (5,622) 0 0 15,347 .56 .56
EX-27.2 6 RESTATED FDS QUARTER END 3/31/97
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 as restated for discontinued operations and is qualified in its entirety by reference to such financial statements. 0000894405 ARKANSAS BEST CORPORATION 1,000 3-MOS DEC-31-1997 MAR-31-1997 1,266 0 179,088 5,173 32,607 253,772 556,292 218,620 807,713 298,323 295,691 0 15 195 135,829 807,713 32,094 394,613 24,475 385,663 0 1,114 7,085 436 (144) 580 (898) 0 0 (318) (.07) (.07)
EX-27.3 7 RESTATED FDS QUARTER END 6/30/97
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 as restated for discontinued operations and is qualified in its entirety by reference to such financial statements. 0000894405 ARKANSAS BEST CORPORATION 1,000 6-MOS DEC-31-1997 JUN-30-1997 133 0 186,930 4,440 32,855 260,216 542,412 221,149 785,859 286,973 274,903 0 15 195 139,762 785,859 73,108 818,293 54,526 788,949 0 2,036 13,840 11,642 4,786 6,856 (2,166) 0 0 4,690 0.13 0.13
EX-27.4 8 RESTATED FDS QUARTER END 9/30/97
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, as restated to retroactively apply FAS 128 to EPS data and is qualified in its entirety by reference to such financial statements. 0000894405 ARKANSAS BEST CORPORATION 1,000 9-MOS DEC-31-1997 SEP-30-1997 0 0 195,640 5,481 31,531 263,863 510,871 218,207 744,232 283,236 223,859 0 15 196 145,025 744,232 119,277 1,243,582 87,908 1,192,591 0 833 19,100 32,300 16,185 16,115 (5,622) 0 0 10,493 .37 .37
EX-27.5 9 RESTATED FDS QUARTER END 3/31/96
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 as restated for discontinued operations and is qualified in its entirety by reference to such financial statements. 0000894405 ARKANSAS BEST CORPORATION 1,000 3-MOS DEC-31-1996 MAR-31-1996 1,360 0 191,174 17,396 35,356 286,009 594,528 197,340 916,439 280,375 364,010 0 15 195 166,798 916,439 31,613 388,144 24,915 396,129 0 1,094 7,455 (14,005) (4,982) (9,023) (537) 0 0 (9,560) (.54) (.54)
EX-27.6 10 RESTATED FDS QUARTER END 6/30/96
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 as restated for discontinued operations and gain (loss) on sale of revenue equipment and is qualified in its entirety by reference to such financial statements. 0000894405 ARKANSAS BEST CORPORATION 1,000 6-MOS DEC-31-1996 JUN-30-1996 1,567 0 192,409 12,015 33,600 286,693 599,780 206,020 901,343 297,209 349,671 0 15 195 156,911 901,343 67,118 788,362 56,398 801,804 0 4,114 14,840 (27,710) (10,204) (17,506) (839) 0 0 (18,345) (1.05) (1.05)
EX-27.7 11 RESTATED FDS QUARTER END 9/30/96
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 as restated for discontinued operations and gain (loss) on sale of revenue equipment and is qualified in its entirety by reference to such financial statements. 0000894405 ARKANSAS BEST CORPORATION 1,000 9-MOS DEC-31-1996 SEP-30-1996 816 0 195,629 6,756 32,607 294,532 591,936 209,241 907,815 321,590 348,563 0 15 195 147,323 907,815 106,606 1,202,868 83,182 1,218,551 0 6,820 22,496 (38,955) (13,793) (25,162) (1,669) 0 0 (26,831) (1.54) (1.54)
EX-27.8 12 RESTATED FDS YEAR ENDED DECEMBER 31, 1996
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Annual Report on Form 10-K for the year ended December 31, 1996 as restated for discontinued operations 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 2,427 0 178,766 5,077 33,811 251,683 570,761 214,195 828,181 294,955 317,874 0 15 195 137,220 828,181 141,613 1,604,335 109,673 1,622,343 0 9,489 30,843 (52,989) (18,782) (34,207) (2,396) 0 0 (36,603) (2.10) (2.10)
EX-27.9 13 RESTATED FDS YEAR ENDED DECEMBER 31, 1995
5 The schedule contains summary financial information extracted from the Arkansas Best Corporation Annual Report on Form 10-K for the year ended December 31, 1995 as restated for discontinued operations and is qualified in its entirety by reference to such financial statements. 0000894405 ARKANSAS BEST CORPORATION 1,000 12-MOS DEC-31-1995 DEC-31-1995 17,334 0 195,650 19,166 36,758 312,692 577,668 185,629 962,176 288,427 391,475 0 15 195 177,654 962,176 145,127 1,405,580 108,686 1,423,501 0 4,185 16,352 (43,735) (12,925) (30,810) (1,982) 0 0 (32,792) (1.90) (1.90)
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