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<SEC-DOCUMENT>0000950134-02-001934.txt : 20020415
<SEC-HEADER>0000950134-02-001934.hdr.sgml : 20020415
ACCESSION NUMBER: 0000950134-02-001934
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020308
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ARKANSAS BEST CORP /DE/
CENTRAL INDEX KEY: 0000894405
STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213]
IRS NUMBER: 710673405
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-19969
FILM NUMBER: 02570692
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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d94808e10-k405.txt
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2001
<TEXT>
<PAGE>
UNITED STATES
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, 2001.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
----------- -----------
Commission file number 0-19969
ARKANSAS BEST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 71-0673405
---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3801 Old Greenwood Road, Fort Smith, Arkansas 72903
- ----------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 479-785-6000
Securities registered pursuant to Section 12(b) of the Act:
None
----------------------------
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
<Table>
<Caption>
Name of each exchange
Title of each class on which registered
------------------- ----------------------
<S> <C>
Common Stock, $.01 Par Value ..................................... Nasdaq Stock Market/NMS
</Table>
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 25, 2002, was $579,133,549.
The number of shares of Common Stock, $.01 par value, outstanding as of February
25, 2002, was 24,594,115.
Documents incorporated by reference into the Form 10-K:
1) The following sections of the 2001 Annual Report to Stockholders:
- Market and Dividend Information
- Selected Financial Data
- Management's Discussion and Analysis of Financial Condition and
Results of Operations
- Quantitative and Qualitative Disclosures About Market Risk
- Financial Statements and Supplementary Data
2) Proxy Statement for the Annual Stockholders' meeting to be held April 24,
2002.
INTERNET: www.arkbest.com
1
<PAGE>
ARKANSAS BEST CORPORATION
FORM 10-K
TABLE OF CONTENTS
<Table>
<Caption>
ITEM PAGE
NUMBER NUMBER
<S> <C>
PART I
Item 1. Business .................................................................................... 3
Item 2. Properties .................................................................................. 9
Item 3. Legal Proceedings ........................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ......................................... 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................... 11
Item 6. Selected Financial Data ..................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................................. 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 11
Item 8. Financial Statements and Supplementary Data ................................................. 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................................................ 11
PART III
Item 10. Directors and Executive Officers of the Registrant .......................................... 12
Item 11. Executive Compensation ...................................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management .............................. 12
Item 13. Certain Relationships and Related Transactions .............................................. 12
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................ 13
</Table>
2
<PAGE>
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 herein. 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
Arkansas Best Corporation (the "Company") is a diversified holding company
engaged through its subsidiaries primarily in motor carrier transportation
operations and intermodal transportation operations. Principal subsidiaries are
ABF Freight System, Inc. ("ABF"); Clipper Exxpress Company and related companies
("Clipper"); FleetNet America, LLC; and until August 1, 2001, G.I. Trucking
Company ("G.I. Trucking") (see Note S appearing on page 49 of the registrant's
Annual Report). The Company's operations included the truck tire retreading and
new tire sales operations of Treadco, Inc. ("Treadco") until October 31, 2000
(see Note R appearing on page 48 of the registrant's Annual Report).
HISTORICAL BACKGROUND
The Company was publicly owned from 1966 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 a 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 $2.875
Series A Cumulative Convertible Exchangeable Preferred Stock ("Preferred
Stock"). The Company's Preferred Stock traded on The Nasdaq National Market
("Nasdaq") under the symbol "ABFSP".
On July 10, 2000, the Company purchased 105,000 shares of its Preferred Stock at
$37.375 per share, for a total cost of $3.9 million. All of the shares purchased
were retired. As of December 31, 2000, the Company had outstanding 1,390,000
shares of Preferred Stock.
On August 13, 2001, the Company announced the call for redemption of its
Preferred Stock. As of August 10, 2001, 1,390,000 shares of Preferred Stock were
outstanding. At the end of the extended redemption period on September 14, 2001,
1,382,650 shares of the Preferred Stock were converted to 3,511,439 shares of
Common Stock. A total of 7,350 shares of Preferred Stock were redeemed at the
redemption price of $50.58 per share. The Company paid $0.4 million to the
holders of these shares in redemption of their Preferred Stock. The Company
delisted its preferred stock trading on Nasdaq under the symbol "ABFSP" on
September 12, 2001, eliminating the Company's annual dividend requirement.
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 its subsidiaries in motor carrier
operations. The total purchase price of WorldWay amounted to approximately $76.0
million.
3
<PAGE>
ITEM 1. BUSINESS - continued
During the first half of 1999, the Company acquired 2,457,000 shares of Treadco
common stock for $23.7 million via a cash tender offer pursuant to a definitive
merger agreement. As a result of the transaction, Treadco became a wholly owned
subsidiary of the Company (see Note Q appearing on page 48 of the registrant's
Annual Report). On September 13, 2000, Treadco entered into an agreement with
The Goodyear Tire & Rubber Company ("Goodyear") to contribute its business to a
new limited liability company called Wingfoot Commercial Tire Systems, LLC
("Wingfoot") (see Note R appearing on page 48 of the registrant's Annual
Report). The transaction closed on October 31, 2000.
On August 1, 2001, the Company sold the stock of G.I. Trucking for $40.5 million
in cash to a company formed by the senior executives of G.I. Trucking and Estes
Express Lines ("Estes") (see Note S appearing on page 49 of the registrant's
Annual Report).
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The response to this portion of Item 1 is included in "Note M - Operating
Segment Data" appearing on pages 42 through 44 of the registrant's Annual Report
to Stockholders for the year ended December 31, 2001, and is incorporated herein
by reference under Item 14.
(c) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
During the periods being reported on, the Company operated in four defined
reportable operating segments: (1) ABF; (2) G.I. Trucking (which was sold on
August 1, 2001) (see Note S appearing on page 49 of the registrant's Annual
Report); (3) Clipper; and (4) Treadco (which was contributed to Wingfoot on
October 31, 2000) (see Note R appearing on page 48 of the registrant's Annual
Report). Note M to the Consolidated Financial Statements contains additional
information regarding the Company's operating segments and appears on pages 42
through 44 of the registrant's Annual Report to Stockholders for the year ended
December 31, 2001, and is incorporated herein by reference under Item 14.
DISCONTINUED OPERATIONS
At December 31, 1998, the Company was engaged in international ocean freight
services through its subsidiary, CaroTrans International, Inc. ("Clipper
International"), a non-vessel operating common carrier (N.V.O.C.C.). On February
28, 1999, the Company completed a formal plan to exit its international ocean
freight N.V.O.C.C. services by disposing of the business and assets of Clipper
International. On April 17, 1999, the Company closed the sale of the business
and certain assets of Clipper International, including the trade name "CaroTrans
International, Inc." All of the assets have been liquidated by the Company.
EMPLOYEES
At December 31, 2001, the Company and its subsidiaries had a total of 11,865
employees of which approximately 73% are members of a labor union.
4
<PAGE>
ITEM 1. BUSINESS - continued
MOTOR CARRIER OPERATIONS
LESS-THAN-TRUCKLOAD MOTOR CARRIER OPERATIONS
GENERAL
The Company's less-than-truckload ("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 "ABF") and until August 1, 2001, G.I.
Trucking Company (see Note S appearing on page 49 of the registrant's Annual
Report).
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 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 trailer load. 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.
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, $1,000,000 of each
workers' compensation loss and $200,000 of each general and auto liability loss,
plus an aggregate of $1,870,000 of auto liability losses between $200,000 and
$500,000. The Company maintains insurance adequate to cover losses in excess of
such amounts. However, the Company has experienced situations where excess
insurance carriers have become insolvent (see Note T appearing on page 49 of the
registrant's Annual Report). The Company pays premiums to state guaranty funds,
in states where it has workers' compensation self-insurance authority. In some
of these self-insured states, depending on each states rules, the guaranty funds
will pay excess claims if the insurer can't, due to insolvency. However, there
can be no certainty of the solvency of individual state guaranty funds. The
Company has been able to obtain adequate coverage for 2002 and is not aware of
problems in the foreseeable future which would significantly impair its ability
to obtain adequate coverage at market rates for its motor carrier operations.
5
<PAGE>
ITEM 1. BUSINESS - continued
ABF FREIGHT SYSTEM, INC.
Headquartered in Fort Smith, Arkansas, ABF is the largest subsidiary of the
Company. ABF accounted for more than 84.0% of the Company's consolidated
revenues for 2001. ABF is one of North America's largest national LTL motor
carriers based on revenues for 2001 as reported to the U.S. Department of
Transportation ("D.O.T."). ABF provides direct service to over 98.6% of the
cities in the United States having a population of 25,000 or more. ABF provides
interstate and intrastate direct service to more than 40,000 points through 309
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 offers long-haul, interstate, regional and intrastate transportation of
general commodities through LTL, assured services and expedited 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, 2001, no single customer accounted for more than 3.0% of ABF's
revenues, and the ten largest customers accounted for less than 9.0% of ABF's
revenues.
EMPLOYEES
At December 31, 2001, ABF employed 11,267 persons. Employee compensation and
related costs are the largest components of ABF's operating expenses. In 2001,
such costs amounted to 65.6% of ABF's revenues. Approximately 77% of ABF's
employees are covered under a collective bargaining agreement with the
International Brotherhood of Teamsters ("IBT"). The IBT voted in favor of a new
labor contract on April 9, 1998. The contract was effective April 1, 1998, and
is for a five-year term. The contract provides for an average annual wage and
benefit increase of approximately 2.3% during its term, including a lump-sum
payment of $750 for the first contract year for all active employees who are IBT
members. 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.
6
<PAGE>
ITEM 1. BUSINESS - continued
G.I. TRUCKING COMPANY
On August 1, 2001, the Company sold the stock of G.I. Trucking for $40.5 million
in cash to a company formed by the senior executives of G.I. Trucking and Estes
(see Note S appearing on page 49 of the registrant's Annual Report).
INTERMODAL OPERATIONS
GENERAL
The Company's intermodal transportation operations are conducted through
Clipper, headquartered in Lemont, Illinois. Clipper operates through two
business units: Clipper Freight Management ("CFM") and Clipper LTL, and offers
domestic intermodal freight services, utilizing a variety of transportation
modes including rail and over-the-road.
COMPETITION, PRICING AND INDUSTRY FACTORS
Clipper operates in highly competitive environments. Competition is based on the
most consistent transit times, freight rates, damage-free shipments and on-time
delivery of freight. Clipper competes with other intermodal transportation
operations, freight forwarders and railroads, as well as with other national and
regional LTL and truckload motor carrier operations. Intermodal transportation
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 the state of the overall economy and inclement weather. The
reliability of rail service is also a critical component of Clipper's ability to
provide service to its customers.
CLIPPER
Clipper's revenues accounted for approximately 8.0% of consolidated revenues for
2001. During the year ended December 31, 2001, Clipper's largest customer
accounted for approximately 10.0% of Clipper's revenues.
CFM
CFM provides services through Clipper Express Company and Agricultural Express
of America, Inc. (d/b/a/ Clipper Controlled Logistics). CFM accounted for
approximately 71.0% of Clipper's revenues during 2001.
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 transportation 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. As of December 31, 2001, Clipper
Controlled Logistics owns or leases 594 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
Controlled Logistics' services also include transportation of non-produce loads
requiring protective services and leasing trailers during non-peak produce
seasons.
7
<PAGE>
ITEM 1. BUSINESS - continued
CLIPPER LTL
Clipper LTL operates primarily through Clipper Exxpress Company ("Clipper
Exxpress"). Management believes Clipper Exxpress is one of the largest
intermodal consolidators and forwarders of LTL shipments in the United States.
Clipper LTL accounts for approximately 29.0% of Clipper's 2001 revenues.
Clipper LTL's collection and distribution network consists of 21 service centers
geographically dispersed 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
42.0% of Clipper's LTL revenue. A majority 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 independent
agents, Clipper LTL has an operations and customer service staff located at or
near many of its principal agents' terminals to monitor service levels and
provide an interface between customers and agents.
TREADCO, INC.
On September 13, 2000, Treadco entered into an agreement with Goodyear to form a
new limited liability company called Wingfoot Commercial Tire Systems, LLC (see
Note R appearing on page 48 of the registrant's Annual Report). The transaction
closed on October 31, 2000.
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, or lessees, store fuel for use in tractors and
trucks in approximately 76 underground tanks located in 25 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.
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 $340,000 over the last 12 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, 2001, the Company has accrued approximately $2.4 million to
provide for environmental-related liabilities. The Company's environmental
accrual is based on management's best estimate of the actual liability. The
Company's estimate is founded on management's experience in dealing with similar
environmental matters and on actual testing performed at some sites. Management
believes that the accrual is adequate to cover environmental liabilities based
on the present environmental regulations. Accruals for environmental liability
are included in the balance sheet as accrued expenses.
8
<PAGE>
ITEM 2. PROPERTIES
The Company owns its executive office building in Fort Smith, Arkansas, which
contains approximately 196,000 square feet.
ABF
ABF currently operates out of 309 terminal facilities of which it owns 81,
leases 48 from an affiliate and leases the remainder from non-affiliates. ABF's
principal terminal facilities are as follows:
<Table>
<Caption>
No. of Doors Square Footage (1)
------------ --------------
<S> <C> <C>
Owned:
Dayton, Ohio 330 259,765
Ellenwood, Georgia 227 153,209
South Chicago, Illinois 274 149,610
Carlisle, Pennsylvania (East) 260 156,468
Dallas, Texas 106 95,110
Leased from affiliate, Transport Realty:
North Little Rock, Arkansas 196 148,712
Albuquerque, New Mexico 85 70,980
Carlisle, Pennsylvania (West) 140 66,484
Pico Rivera, California 99 57,460
Leased from non-affiliate:
Winston-Salem, North Carolina 150 160,700
Salt Lake City, Utah 91 42,310
</Table>
(1) Includes shop and driver room square footage.
CLIPPER
Clipper operates from 21 service centers, geographically dispersed throughout
the United States. Nine of the service centers are facilities leased by Clipper
and 12 of the service centers are agent locations.
9
<PAGE>
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 are expected to have a
material adverse effect on the Company's financial condition, cash flows or
results of operations. The Company maintains insurance against certain risks
arising out of the normal course of its business, subject to certain
self-insured retention limits.
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, 2001.
10
<PAGE>
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 7 of the registrant's Annual Report to Stockholders for the year ended
December 31, 2001, 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 6
of the registrant's Annual Report to Stockholders for the year ended December
31, 2001, 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 8 through 19 of the registrant's Annual Report
to Stockholders for the year ended December 31, 2001, is incorporated by
reference under Item 14 herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
"Quantitative and Qualitative Disclosures About Market Risk," appearing on page
20 of the registrant's Annual Report to Stockholders for the year ended December
31, 2001, 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 21 through 51 of the registrant's
Annual Report to Stockholders for the year ended December 31, 2001, are
incorporated by reference under Item 14 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
11
<PAGE>
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 Plans,"
"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 sets forth certain information with respect to
relations of and transactions by management of the Company and is incorporated
herein by reference.
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following information appearing in the 2001 Annual Report to Stockholders is
incorporated by reference in this Form 10-K Annual Report as Exhibit (13):
<Table>
<Caption>
Page
<S> <C>
Market and Dividend Information 7
Selected Financial Data 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 19
Quantitative and Qualitative Disclosures About Market Risk 20
Report of Independent Auditors 21
Consolidated Financial Statements 22 - 49
Quarterly Results of Operations 47
</Table>
With the exception of the aforementioned information, the 2001 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 2001 Annual
Report to Stockholders.
(a)(2) FINANCIAL STATEMENT SCHEDULES
<Table>
<S> <C>
For the years ended December 31, 2001, 2000, and 1999.
Schedule II - Valuation and Qualifying Accounts and Reserves Page 15
</Table>
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.
(b) REPORTS ON FORM 8-K
The Company filed Form 8-K dated September 24, 2001, for Item No. 5 -
Other Events. The filing announced the results of its call for
redemption of all outstanding shares of its $2.875 Series A Cumulative
Convertible Exchangeable Preferred Stock.
The Company filed Form 8-K dated August 20, 2001, for Item No. 5 -
Other Events. The filing announced of its call for redemption of all
outstanding shares of its $2.875 Series A Cumulative Convertible
Exchangeable Preferred Stock.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
The response to this portion of Item 14 is submitted as a separate
section of this report.
13
<PAGE>
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.
<Table>
<Caption>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William A. Marquard Chairman of the Board, Director March 8, 2002
- ------------------------------------- ---------------------------
William A. Marquard
/s/ Robert A. Young, III Director, Chief Executive Officer March 8, 2002
- ------------------------------------- and President (Principal ---------------------------
Robert A. Young, III Executive Officer)
/s/ David E. Loeffler Vice President - Chief Financial Officer March 8, 2002
- ------------------------------------- and Treasurer ---------------------------
David E. Loeffler
/s/ Frank Edelstein Director March 8, 2002
- ------------------------------------- ---------------------------
Frank Edelstein
/s/ Arthur J. Fritz Director March 8, 2002
- ------------------------------------- ---------------------------
Arthur J. Fritz
/s/ John H. Morris Director March 8, 2002
- ------------------------------------- ---------------------------
John H. Morris
/s/ Alan. J. Zakon Director March 8, 2002
- ------------------------------------- ---------------------------
Alan J. Zakon
</Table>
14
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ARKANSAS BEST CORPORATION
<Table>
<Caption>
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
----------- ---------- ---------- -------------- ------------ -------------
($ thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 2001:
Deducted from asset accounts:
Allowance for doubtful $ 274(D)
accounts receivable............ $ 4,595 $ 2,966 $ 1,104(A) 4,908(B) $ 3,483
============ ============ =========== ========== ===========
Year Ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful $ 6,381(B)
accounts receivable............ $ 5,775 $ 3,797 $ 2,598(A) 1,194(C) $ 4,595
============ ============ =========== ========== ===========
Year Ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful
accounts receivable............ $ 7,051 $ 2,967 $ 2,664(A) $ 6,907(B) $ 5,775
============ ============ =========== ========== ===========
</Table>
Note A - Recoveries of amounts previously written off.
Note B - Uncollectible accounts written off.
Note C - The allowance for doubtful accounts for Treadco, Inc., as of the date
of the contribution of substantially all of Treadco's assets and
liabilities to Wingfoot (see Note R appearing on page 48 of the
registrant's Annual Report).
Note D - The allowance for doubtful accounts for G.I. Trucking., as of the date
of the sale (see Note S appearing on page 49 of the registrant's Annual
Report).
NOTE: ALL INFORMATION REFLECTED IN THE ABOVE TABLE HAS BEEN RESTATED TO
EXCLUDE VALUATION ALLOWANCES OF DISCONTINUED OPERATIONS.
15
<PAGE>
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.
<Table>
<Caption>
EXHIBIT
NO.
<S> <C>
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* 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 as Managing Agent
and Administrative Agent, NationsBank of Texas, N.A. as
Documentation Agent and the Banks named herein as the Banks
(previously filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K, filed with the Commission on February 27, 1997, Commission
File No. 0-19969, and incorporated herein by reference).
10.3* 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 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).
</Table>
16
<PAGE>
FORM 10-K -- ITEM 14(c)
EXHIBIT INDEX
ARKANSAS BEST CORPORATION
(CONTINUED)
<Table>
<Caption>
EXHIBIT
NO.
<S> <C>
10.4*# 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).
10.5* Second Amendment, dated July 15, 1997, to the $346,971,312 Amended
and Restated Credit Agreement among the Company as Borrower, Societe
Generale 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).
10.6* Interest-Rate Swap Agreement effective April 1, 1998 on a notional
amount of $110,000,000 with Societe Generale (previously filed as
Exhibit 10.1 to the Company's Form 10-Q filed with the Commission on
May 13, 1998, Commission File No. 0-19969, and incorporated herein
by reference).
10.7* $250,000,000 Credit Agreement dated as of June 12, 1998 with Societe
Generale as Administrative Agent and Bank of America National Trust
Savings Association and Wells Fargo Bank (Texas), N.A., as
Co-Documentation Agents (previously filed as Exhibit 10.2 to the
Company's Form 10-Q filed with the Commission on August 6, 1998,
Commission File No. 0-19969, and incorporated herein by reference).
10.8*# The Company's Supplemental Benefit Plan (previously filed as Exhibit
4.1 to the Company's Registration Statement on Form S-8 filed with
the Commission on December 22, 1999, Commission File No. 333-93381,
and incorporated herein by reference).
10.9* The Company's National Master Freight Agreement covering
over-the-road and local cartage employees of private, common,
contract and local cartage carriers for the period of April 1, 1998
through March 31, 2003.
10.10* First amendment dated as of February 12, 1999, to the $250,000,000
Credit Agreement dated as of June 12, 1998, among the Company as
Borrower; Societe Generale, Southwest Agency, as Administrative
Agent; and Bank of America National Trust and Savings Association
and Wells Fargo Bank (Texas), N.A., as Co-Documentation Agents.
10.11* Amendment dated March 15, 1999, to Amendment No. 1 dated as of
February 12, 1999, to the $250,000,000 Credit Agreement dated as of
June 12, 1998, among the Company as Borrower; Societe Generale,
Southwest Agency, as Administrative Agent; and Bank of America
National Trust and Savings Association and Wells Fargo Bank (Texas),
N.A., as Co-Documentation Agents.
10.12* Second amendment dated as of August 2, 2000, to the $250,000,000
Credit Agreement dated as of June 12, 1998, among the Company as
Borrower; Wells Fargo Bank (Texas), N.A., as Administrative Agent;
and Bank of America National Trust and Savings Association and Wells
Fargo Bank (Texas), N.A., as Co-Documentation Agents, as amended by
Amendment No. 1 and Consent and Waiver dated as of February 12, 1999
and Amendment to Amendment No. 1 and Consent and Waiver dated as of
March 15, 1999.
</Table>
17
<PAGE>
FORM 10-K -- ITEM 14(c)
EXHIBIT INDEX
ARKANSAS BEST CORPORATION
(CONTINUED)
<Table>
<Caption>
EXHIBIT
NO.
<S> <C>
10.13* Third amendment dated as of September 30, 2000, to the $250,000,000
Credit Agreement dated as of June 12, 1998, among the Company as
Borrower; Wells Fargo Bank (Texas), N.A., as Administrative Agent;
and Bank of America National Trust and Savings Association and Wells
Fargo Bank (Texas), N.A., as Co-Documentation Agents, as amended by
Amendment No. 1 and Consent and Waiver dated as of February 12,
1999, Amendment to Amendment No. 1 and Consent and Waiver dated as
of March 15, 1999, and Amendment No. 2 dated as of August 2, 2000
(as amended, the "Credit Agreement").
10.14* Agreement dated September 13, 2000, by and among The Goodyear Tire &
Rubber Company and Treadco, Inc., a wholly owned subsidiary of
Arkansas Best Corporation.
10.15* Stock Purchase Agreement by and between Arkansas Best Corporation
and Estes Express Lines dated as of August 1, 2001.
10.16# Letter re: Proposal to adopt the Company's 2002 Stock Option Plan
13 2001 Annual Report to Stockholders
21 List of Subsidiary Corporations
23 Consent of Ernst & Young LLP, Independent Auditors
</Table>
* Previously filed with the Securities and Exchange Commission and incorporated
herein by reference.
# Designates a compensation plan for Directors or Executive Officers.
18
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>3
<FILENAME>d94808ex10-16.txt
<DESCRIPTION>LETTER RE: PROPOSAL OF 2002 STOCK OPTION PLAN
<TEXT>
<PAGE>
EXHIBIT 10.16
March 4, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, DC 20549
Re: Arkansas Best Corporation/Definitive Proxy Materials
Ladies and Gentlemen:
On behalf of Arkansas Best Corporation (the "Company"), pursuant to Rule
14a-6(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), enclosed for filing by EDGAR is a copy of the Company's definitive proxy
statement and form of proxy (the "Proxy Materials").
Among the items slated for approval at the Annual Meeting is a proposal to adopt
the Company's 2002 Stock Option Plan. In accordance with Instruction 3 to Item
10 of Schedule 14A, a copy of the plan as proposed to be adopted is included
with this letter via EDGAR as an appendix to the Proxy Statement. Pursuant to
Instruction 5 to the same item, the Company advises the Commission that the
Company intends to register the shares to be issued under the Stock Option Plan
on a registration statement on Form S-8 prior to the exercise of any options to
be granted under the plan.
Copies of the definitive Proxy Materials will be mailed by the Company on or
about March 15, 2002, to its stockholders of record on February 25, 2002.
Please call me at (479) 785-6130 if you have any questions or comments regarding
this filing.
Sincerely,
/s/ Richard F. Cooper
Richard F. Cooper
Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>4
<FILENAME>d94808ex13.txt
<DESCRIPTION>2001 ANNUAL REPORT TO STOCKHOLDERS
<TEXT>
<PAGE>
EXHIBIT 13
Market and Dividend Information
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
<PAGE>
MARKET AND DIVIDEND INFORMATION
The Common Stock of Arkansas Best Corporation ("the Company") trades on The
Nasdaq National Market under the symbol "ABFS." The following table sets forth
the high and low recorded last sale prices of the Common Stock during the
periods indicated as reported by Nasdaq and the cash dividends declared:
<Table>
<Caption>
CASH
HIGH LOW DIVIDEND
---------- ---------- --------
<S> <C> <C> <C>
2001
First quarter ...................................................... $ 24.688 $ 15.625 $ --
Second quarter...................................................... 23.050 15.000 --
Third quarter....................................................... 27.860 19.140 --
Fourth quarter...................................................... 30.230 18.950 --
2000
First quarter ...................................................... $ 13.625 $ 9.313 $ --
Second quarter...................................................... 14.063 9.938 --
Third quarter....................................................... 16.375 10.688 --
Fourth quarter...................................................... 20.125 13.266 --
</Table>
At February 25, 2002, there were 24,594,115 shares of the Company's Common Stock
outstanding, which were held by 495 stockholders 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, excluding dividends on the Company's Preferred Stock,
to $25.0 million in any one calendar year. Restricted payments include payments
for the redemption of subordinated debentures, dividends on Common Stock, and
other distributions that are in payment for the purchase or redemption of any
shares of capital stock. The annual dividend requirements on the Company's
Preferred Stock totaled approximately $2.5 million, $4.1 million, and $4.3
million during 2001, 2000, and 1999, respectively.
On August 13, 2001, the Company announced the call for redemption of its $2.875
Series A Cumulative Convertible Exchangeable Preferred Stock ("ABFSP"). As of
August 10, 2001, 1,390,000 shares of Preferred Stock were outstanding. At the
end of the extended redemption period on September 14, 2001, 1,382,650 shares of
the Preferred Stock were converted to 3,511,439 shares of Common Stock. A total
of 7,350 shares of Preferred Stock were redeemed at the redemption price of
$50.58 per share. The Company paid $0.4 million to the holders of these shares
in redemption of their Preferred Stock. The Company delisted its preferred stock
trading on The Nasdaq National Market under the symbol "ABFSP" on September 12,
2001, eliminating the Company's annual dividend requirement.
<PAGE>
SELECTED FINANCIAL DATA
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001(1) 2000(1) 1999 1998 1997(1)
------------ ------------ ------------ ------------ ------------
($ thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues .......................... $ 1,526,206 $ 1,839,567 $ 1,721,586 $ 1,607,403 $ 1,593,218
Operating income ............................ 75,934 140,152 109,707 69,977 64,503
Minority interest income (expense) in
Treadco, Inc. ............................. -- -- 245 (3,257) 1,359
Other (income) expenses, net ................ 1,221 (647) 3,920 3,255 8,814
Gain on sale of Cardinal Freight
Carriers, Inc. ............................ -- -- -- -- 8,985
Fair value net gain - Wingfoot
Commercial Tire Systems, LLC (2) .......... -- 5,011 -- -- --
Gain on sale of G.I. Trucking Company (7) ... 4,642 -- -- -- --
Settlement of litigation (3) ................ -- -- -- 9,124 --
Interest expense, net ....................... 12,636 16,687 18,395 18,146 23,765
Income from continuing
operations before income taxes ............ 66,719 129,123 87,637 54,443 42,268
Provision for income taxes .................. 25,315 52,968 36,455 23,192 20,086
Income from continuing operations ........... 41,404 76,155 51,182 31,251 22,182
Loss from discontinued operations,
net of tax ................................ -- -- (786) (2,576) (6,835)
Net income .................................. 41,404 76,155 50,396 28,675 15,347
Income per common share from continuing
operations (diluted) ...................... 1.66 3.17 2.14 1.32 0.91
Net income per common share (diluted) ....... 1.66 3.17 2.11 1.21 0.56
Cash dividends paid per common share (4) .... -- -- -- -- --
BALANCE SHEET DATA:
Total assets ................................ 723,153 797,124 731,929 707,330 693,649
Current portion of long-term debt ........... 14,834 23,948 20,452 17,504 16,484
Long-term debt (including capital leases
and excluding current portion) ............ 115,003 152,997 173,702 196,079 202,604
OTHER DATA:
Gross capital expenditures (5) .............. 74,670 93,585 76,209 86,446 14,135
Net capital expenditures (6) ................ 64,538 83,801 61,253 70,243 (23,775)
Depreciation and amortization ............... 50,315 52,186 45,242 40,674 44,316
Goodwill amortization ....................... 4,053 4,051 4,195 4,515 4,629
Other amortization (8) ...................... 180 217 324 2,420 4,139
</Table>
(1) Selected financial data is not comparable to the prior years'
information due to the sale of Cardinal Freight Carriers, Inc. on July
15, 1997, the contribution of Treadco's assets and liabilities to
Wingfoot Commercial Tire Systems, LLC ("Wingfoot") on October 31, 2000,
(see Note R to the Consolidated Financial Statements) and the sale of
G.I. Trucking Company ("G.I. Trucking") on August 1, 2001 (see Note S).
(2) Fair value net gain on the contribution of Treadco's assets and
liabilities to Wingfoot.
(3) Income results from the settlement of Treadco litigation.
(4) Cash dividends on its Common Stock were indefinitely suspended by
Arkansas Best Corporation as of the second quarter of 1996.
(5) Does not include revenue equipment placed in service under operating
leases, which amounted to $21.9 million in 1997. There were no
operating leases for revenue equipment entered into for 2001, 2000,
1999 and 1998.
(6) Capital expenditures, net of proceeds from the sale of property, plant
and equipment.
(7) Gain on the sale of G.I. Trucking on August 1, 2001.
(8) Deferred financing cost amortization.
<PAGE>
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 and intermodal transportation operations. Principal subsidiaries are
ABF Freight System, Inc. ("ABF"); Clipper Exxpress Company and related companies
("Clipper"); FleetNet America, LLC; and until August 1, 2001, G.I. Trucking
Company ("G.I. Trucking") (see Note S). The Company's operations included the
truck tire retreading and new tire sales operations of Treadco, Inc. ("Treadco")
until October 31, 2000 (see Note R).
See Note Q to the Consolidated Financial Statements regarding the acquisition of
non-ABC-owned Treadco shares and subsequent merger resulting in Treadco becoming
a wholly owned subsidiary of the Company in 1999. See Note R regarding the
contribution of substantially all of Treadco's assets and liabilities to
Wingfoot Commercial Tire Systems, LLC ("Wingfoot"). See Note A regarding the
consolidation of Treadco in the Company's Consolidated Financial Statements for
1999. See Note C regarding the Company's discontinuation of Clipper
International. See Note S regarding the sale of G.I. Trucking.
The Company utilizes tractors and trailers primarily in its motor carrier
transportation operations. Tractors and trailers are commonly referred to as
"revenue equipment" in the transportation business.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
The Company's accounting policies (see Note B) that are "critical," or the most
important, to understand the Company's financial condition and results of
operations and that require management of the Company to make the most difficult
judgments are described as follows:
The Company's accounting policy for revenue recognition is a method prescribed
by the Emerging Issues Task Force ("EITF") 91-9 for motor carrier transportation
companies, where revenue is recognized based on relative transit times in each
reporting period with expenses being recognized as incurred. Management of the
Company utilizes a bill-by-bill analysis to establish the associated revenue to
recognize in each reporting period.
The Company's accounting policy for its allowance for doubtful accounts is based
on the Company's historical write-offs, as well as trends and factors
surrounding the credit risk of specific customers. In order to gather
information regarding these trends and factors, the Company performs ongoing
credit evaluations of its customers. The Company's allowance for revenue
adjustments is based on the Company's historical revenue adjustments. Actual
write-offs or adjustments could differ from the allowance estimates the Company
makes as a result of a number of factors. These factors include unanticipated
changes in the overall economic environment or factors and risks surrounding a
particular customer. The Company continually updates the history it uses to make
these estimates to reflect the most recent trends, factors and other information
available. Actual write-offs and adjustments are charged against the allowances
for doubtful accounts and revenue adjustments.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Under its accounting policy for property, plant and equipment, management
establishes appropriate depreciable lives and salvage values for the Company's
revenue equipment (tractors and trailers) based on their estimated useful lives
and estimated fair values to be received when the equipment is sold or traded
in. Management has a policy of purchasing its revenue equipment or entering into
capital leases rather than utilizing off-balance sheet financing.
The Company has elected to follow Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees and related interpretations in
accounting for stock options because the alternative fair value accounting
provided for under FASB Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123") requires the 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 and director options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company is self-insured up to certain limits for workers' compensation and
certain property damage and liability claims. These claims liabilities recorded
in the financial statements totaled $46.3 million at December 31, 2001. The
Company does not discount its claims liabilities. Under the Company's accounting
policy for claims, management annually estimates the development of the claims
based upon the Company's historical development factors over a number of years.
The Company utilizes a third party to calculate the development factors and
analyze historical trends. Actual payments may differ from management's
estimates as a result of a number of factors. These factors include increases in
medical costs and the overall economic environment, as well as many other
factors. The actual claims payments are charged against the Company's accrued
claims liabilities.
The Company hedged its interest rate risk by entering into a fixed rate interest
rate swap on $110.0 million of revolving Credit Agreement borrowings. The
Company's accounting policy for derivative financial instruments is as
prescribed by FAS 133, Accounting for Derivative Financial Instruments and
Hedging Activities. The Company's fixed rate interest rate swap is an effective
hedge on $110.0 million of revolving Credit Agreement borrowings in accordance
with its accounting policy. As a result, the fair value of the swap ($5.4)
million is recorded on the Company's balance sheet through other comprehensive
income rather than through the income statement. If the swap terminated at
December 31, 2001, the Company would have had to pay $5.4 million. Future
changes in the fair value of the swap will also be reflected in other
comprehensive income as long as the swap remains in place and is effectively
hedged.
The Company's accounting policy for its 19% investment in Wingfoot Commercial
Tire Systems, LLC ("Wingfoot") is the equity method of accounting, similar to a
partnership investment. Under the terms of the LLC operating agreement, the
Company does not share in the profits or losses of Wingfoot during the term of
the Company's "Put" option. Therefore, the Company's investment balance of $59.3
million at December 31, 2001 should not change during the "Put" period. If the
Company "puts" its interest to The Goodyear Tire & Rubber Company ("Goodyear"),
the Company will record a pre-tax gain in the amount of $14.1 million in the
quarter its interest is "put." If Goodyear "calls" the Company's interest in
Wingfoot, the Company will record a pre-tax gain of $19.1 million during the
quarter the "call" is made by Goodyear (see Note R).
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Under
Statement 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually for impairment. Statement 142 was effective
for the Company on January 1, 2002, and as of that date, the Company no longer
amortizes its goodwill, but reviews it annually for impairment. At December 31,
2001, the Company's assets included goodwill of $101.3 million of which $63.8
million is from a 1988 leveraged buyout transaction and $37.5 million was from
the 1994 acquisition of Clipper. The Company's annual goodwill amortization
expense for 2001 was $4.1 million. Statement 142 requires that the Company
perform transitional impairment testing on its goodwill during the first six
months of 2002 based on January 1, 2002 values. The Company has performed the
first phase of impairment testing on its leveraged buyout goodwill, which is
based on ABF's operations and fair value. There is no indication of impairment
with respect to this goodwill. The Company has performed both the first and
second phases of the transitional impairment testing on its Clipper goodwill and
will recognize a non-cash impairment loss of $23.9 million, net of taxes, as a
change in accounting principle as provided in Statement 142, in the first
quarter of 2002. This will eliminate all of the $37.5 million of Clipper
goodwill from the Company's balance sheet. The impairment loss results from the
change in the method of determining recoverable goodwill from using undiscounted
cash flows, as prescribed by FAS 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, to the fair value method
determined by using quoted market prices or other valuation techniques,
including the present value of discounted cash flows, as prescribed by Statement
142.
On August 15, 2001, the FASB issued Statement 143, Accounting for Asset
Retirement Obligations. Statement 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. This Statement applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. The Statement is
effective for the Company in 2003. The Company is evaluating the impact, if any,
the Statement will have on its financial statements and related disclosures.
On October 3, 2001, the FASB issued Statement 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Statement 144 supersedes Statement 121 and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. The Statement is effective for the
Company January 1, 2002. The impact on the Company's financial statements and
related disclosures of the adoption of Statement 144 is expected to be
immaterial.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations of $64.8 million, proceeds from asset sales of $10.1
million, gross proceeds from the sale of G.I. Trucking of $40.5 million and
available cash were used primarily to purchase revenue equipment and other
property and equipment totaling $74.7 million, reduce outstanding debt,
including the retirement of $24.9 million in face value of the Company's
WorldWay 6 1/4% Convertible Subordinated Debentures (see Note G), and pay
approximately $33.0 million in tax and interest payments to the IRS, related to
a tax pension issue (see Note F). Cash provided by operations of $127.7 million
and proceeds from asset sales of $9.8 million were used primarily to purchase
revenue equipment and other property and equipment totaling $93.6 million,
reduce outstanding debt and purchase preferred stock of $3.9 million during
2000. Revenue equipment includes tractors and trailers used primarily in the
Company's motor carrier transportation operations.
On August 13, 2001, the Company announced the call for redemption of its $2.875
Series A Cumulative Convertible Exchangeable Preferred Stock ("ABFSP"). As of
August 10, 2001, 1,390,000 shares of Preferred Stock were outstanding. At the
end of the extended redemption period on September 14, 2001, 1,382,650 shares of
Preferred Stock were converted to 3,511,439 shares of Common Stock. A total of
7,350 shares of Preferred Stock were redeemed at the redemption price of $50.58
per share. The Company paid $0.4 million to the holders of these shares in
redemption of their Preferred Stock. As a result of this transaction, the
Company no longer has an obligation to pay Preferred Stock dividends, which
approximated $4.0 million per year. Outstanding shares of Preferred Stock had
historically been included in the Company's diluted earnings per share on an
as-converted basis. Therefore, the conversion of preferred shares into common
did not result in an increase in the Company's diluted common shares.
The Company is party to a $250 million credit agreement (the "Credit Agreement")
with Wells Fargo Bank ("Texas"), N.A., as Administrative Agent and with Bank of
America National Trust and Savings Association and Wells Fargo Bank ("Texas"),
N.A., as Co-Documentation Agents. The Credit Agreement provides for up to $250
million of revolving credit loans (including letters of credit) and extends into
2003.
At December 31, 2001, there were $110.0 million of Revolver Advances and
approximately $23.6 million of letters of credit outstanding. At December 31,
2001, the Company had approximately $116.4 million of borrowing availability
under the Credit Agreement. The Credit Agreement contains various covenants,
which limit, among other things, indebtedness, distributions and dispositions of
assets and require the Company to meet certain quarterly financial ratio tests.
As of December 31, 2001, the Company was in compliance with the covenants.
The Company's Credit Agreement contains two pricing grids. One of the grids is
based on a leverage ratio and the other grid is based on the Company's senior
debt rating agency ratings. The Company may choose whichever pricing grid to use
at any time. The effect of a senior debt rating increase or decrease could
potentially impact the Company's Credit Agreement pricing. In addition, if the
Company achieves certain senior debt ratings, which it has, the Company's Credit
Agreement provides for no collateral filings, an increase in restricted payments
allowed and no capital expenditure covenant. In January 2002, Standard & Poor's
upgraded the Company's senior debt rating to BBB from BBB-. This upgrade
represents a higher investment grade rating. The Company has no downward rating
triggers that would accelerate the maturity of its debt.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The Company is in the process of negotiating a new credit facility that will
replace its existing Credit Agreement, which expires in June 2003. The Company
expects to have its new credit facility in place by the end of June 2002.
The Company is party to an interest rate swap on a notional amount of $110.0
million. The purpose of the swap is to limit the Company's exposure to increases
in interest rates on $110.0 million of bank borrowings over the seven-year term
of the swap. The interest rate under the swap is fixed at 5.845% plus the Credit
Agreement margin, which is currently 0.575%. The fair value of the Company's
interest rate swap was ($5.4) million and ($0.1) million at December 31, 2001
and December 31, 2000, respectively. The fair value of the swap is impacted by
changes in rates of similarly termed Treasury instruments. The Company
recognized this liability on its balance sheet in accordance with Statement No.
133, at December 31, 2001, through other comprehensive income, net of income tax
benefits.
The Company's primary subsidiary, ABF, maintains ownership of most all of its
larger terminals or distribution centers. Both ABF and Clipper lease certain
terminal facilities. At December 31, 2001, the Company has future minimum rental
commitments, net of noncancellable subleases totaling $44.5 million for terminal
facilities, and $1.6 million primarily for revenue equipment.
The following is a table providing the aggregate annual obligations of the
Company including debt, capital lease maturities and future minimum rental
commitments:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------
($ thousands)
LESS THAN 1-3 4-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Long-term debt (1) $ 114,940 $ 24 $ 110,054 $ 51 $ 4,811(2)
Capital lease obligations 14,896 14,810 86 -- --
Minimum rental commitments under
operating leases, net of subleases 46,124 11,214 15,233 10,011 9,666
Unconditional purchase obligations -- -- -- -- --
Other long-term debt obligations -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 175,960 $ 26,048 $ 125,373 $ 10,062 $ 14,477
========== ========== ========== ========== ==========
</Table>
(1) The Company is negotiating a new revolving credit facility that it
expects to have in place by June 2002, which would extend the maturity
of the $110.0 million due in years 1-3.
(2) Subsequent to year end, the Company called for redemption, the
remaining WorldWay Corporation 6 1/4% Convertible Subordinated
Debentures (see Note U).
The Company has guaranteed $0.5 million of payments related to a former
subsidiary of the Company. The Company's exposure to this guarantee should
decline by $60,000 per year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The following table sets forth the Company's historical capital expenditures for
the periods indicated below. Proceeds from the sale of property and equipment
have not been netted against the capital expenditures:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
-------- -------- --------
($ thousands)
<S> <C> <C> <C>
CAPITAL EXPENDITURES (GROSS)
ABF Freight System, Inc. ............................ $ 62,332 $ 71,337 $ 49,342
G.I. Trucking Company (see Note S) .................. 4,537 11,693 7,946
Clipper ............................................. 3,582 4,346 5,309
Treadco, Inc. (see Note R) .......................... -- 3,916 9,801
Other ............................................... 4,219 2,293 3,811
-------- -------- --------
Total consolidated capital expenditures (gross) .. $ 74,670 $ 93,585 $ 76,209
======== ======== ========
</Table>
The amounts presented in the table include equipment purchases financed with
capital leases of $26.1 million in 1999. No capital lease obligations were
incurred in the years ended December 31, 2001 or 2000.
In 2002, the Company forecasts total spending of approximately $45.0 million for
capital expenditures, net of proceeds from equipment and real estate sales. Of
the $45.0 million, ABF is budgeted for approximately $40.0 million primarily for
revenue equipment and facilities.
The Company has two principal sources of available liquidity, which are its
operating cash and the $116.4 million it has available under its revolving
Credit Agreement at December 31, 2001. The Company has generated between $60.0
million and $130.0 million of operating cash for the years 1999 through 2001,
and it expects cash from operations and its available revolver to continue to be
principal sources of cash to finance its annual debt maturities and lease
commitments; fund its 2002 capital expenditures, which includes a commitment to
purchase $25.6 million of revenue equipment; and pay income taxes.
The Company has not historically entered into financial instruments for trading
purposes, nor has the Company historically engaged in hedging fuel prices. No
such instruments were outstanding during 2001 or 2000. The Company has no
relationships with special-purpose entities or financial partnerships.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
OPERATING SEGMENT DATA
The following table sets forth, for the periods indicated, a summary of the
Company's operating expenses by segment as a percentage of revenue for the
applicable segment. Note M to the Consolidated Financial Statements contains
additional information regarding the Company's operating segments:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC
Salaries and wages ................... 65.6% 62.4% 64.1%
Supplies and expenses ................ 13.0 12.6 11.0
Operating taxes and licenses ......... 3.2 3.0 3.0
Insurance ............................ 1.4 1.6 1.6
Communications and utilities ......... 1.2 1.1 1.2
Depreciation and amortization ........ 3.1 2.6 2.4
Rents and purchased transportation ... 6.1 6.8 8.0
Other ................................ 0.2 0.2 0.4
(Gain) on sale of equipment .......... -- -- (0.1)
---- ---- ----
93.8% 90.3% 91.6%
==== ==== ====
G.I. TRUCKING COMPANY (see Note S)
Salaries and wages ................... 51.8% 47.0% 46.8%
Supplies and expenses ................ 9.7 9.4 8.0
Operating taxes and licenses ......... 2.4 2.1 2.4
Insurance ............................ 2.4 2.5 2.7
Communications and utilities ......... 1.4 1.3 1.3
Depreciation and amortization ........ 3.4 3.0 2.6
Rents and purchased transportation ... 26.4 30.0 32.3
Other ................................ 2.5 2.3 2.5
(Gain) on sale of equipment .......... (0.1) -- (0.1)
---- ---- ----
99.9% 97.6% 98.5%
==== ==== ====
CLIPPER
Cost of services ..................... 87.3% 85.5% 85.9%
Selling, administrative and general .. 12.3 13.3 12.8
---- ---- ----
99.6% 98.8% 98.7%
==== ==== ====
TREADCO, INC. (see Note R)
Cost of sales ........................ -- 66.6% 68.8%
Selling, administrative and general .. -- 30.4 29.3
---- ---- ----
-- 97.0% 98.1%
==== ==== ====
OPERATING INCOME
ABF Freight System, Inc. ................. 6.2% 9.7% 8.4%
G.I. Trucking Company (see Note S) ....... 0.1 2.4 1.5
Clipper .................................. 0.4 1.2 1.3
Treadco, Inc. (see Note R) ............... -- 3.0 1.9
</Table>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
Consolidated revenues from continuing operations of the Company in 2001 were
$1,526.2 million compared to $1,839.6 million in 2000, representing a decrease
of 17.0%, due primarily to decreases in revenues for Treadco and G.I. Trucking.
On October 31, 2000, substantially all of the assets and liabilities of Treadco
were contributed to Wingfoot (see Note R) and on August 1, 2001, the Company
sold the stock of G.I. Trucking (see Note S). In addition, there were declines
in revenues for ABF and Clipper for 2001 compared to 2000, as a result of a
decline in the U.S. economy beginning in mid-2000. This economic decline was
further accelerated by the September 11 terrorist attacks on the World Trade
Center and on the Pentagon. Operating income decreased 45.8% to $75.9 million in
2001 from $140.2 million in 2000. The decrease in operating income is due
primarily to a decline in operating income for ABF, which relates primarily to
the previously discussed revenue declines. Income from continuing operations for
2001 was $41.4 million, or $1.66 per diluted common share, compared to $76.2
million, or $3.17 per diluted common share, for 2000. The decrease in income
from continuing operations reflects primarily the decrease in operating income
offset, in part, by a pre-tax gain of $4.6 million from the sale of G.I.
Trucking, lower interest expense from lower average debt levels and a tax
benefit of $1.9 million resulting from the resolution of certain tax
contingencies arising in prior years. Income from continuing operations for 2000
includes a fair value net gain on the Treadco/Wingfoot transaction (see Note R)
of $5.0 million.
Tonnage levels for 2001 at ABF, the Company's primary subsidiary, continued to
be impacted by the decline in the U.S. economy, as discussed above. The declines
in tonnage increased by approximately 2.0% to 3.0% following the September 11
terrorist attacks. Tonnage levels in early 2002 continue to be impacted by the
decline in the U. S. economy. The Company expects this impact to continue
through the first quarter of 2002 and potentially further into 2002.
The Company's 2001 results included seven months of operations for G.I. Trucking
(see Note S). The Company's 2000 results included ten months of operations for
Treadco (see Note R) and a full twelve months of operations for G.I. Trucking.
Reliance Insurance Company ("Reliance") insured the Company's workers'
compensation claims in excess of $300,000 ("excess claims") for the period from
1993 through 1999. According to an Official Statement by the Pennsylvania
Insurance Department on October 3, 2001, Reliance was determined to be
insolvent, with total admitted assets of $8.8 billion and liabilities of $9.9
billion, or a negative surplus position of $1.1 billion, as of March 31, 2001.
As of December 31, 2001, the Company estimates its workers' compensation claims
insured by Reliance to be approximately $5.8 million. The Company has been in
contact with and has received either written or verbal confirmation from a
number of state guaranty funds that they will accept excess claims, representing
a total of approximately $2.5 million of the $5.8 million. Based upon the
limited available Reliance financial information, the Company estimates its
current exposure to Reliance to be $0.5 million, for which it established
reserves in the third quarter of 2001. In evaluating that same financial
information, the Company anticipates receiving, from guaranty funds or through
orderly liquidation, partial reimbursement for future claims payments, a process
that could take several years.
The Company's defined benefit pension plans experienced returns on assets that
were below the 9.0% to 10.0% return on assets assumed for calculating its
pension expense under FASB Statement No. 87, Employers' Accounting for Pensions.
As a result of this and other factors relating to normal plan cost fluctuations,
the Company's net periodic pension cost increased to an expense of $3.8 million
from a credit of $2.5 million in
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
2000. If the same stock market trends continue into 2002, the Company could
experience additional increases in its pension expense.
ABF FREIGHT SYSTEM, INC.
Effective August 1, 2001 and August 14, 2000, ABF implemented general rate
increases of 4.9% and 5.7%, respectively, in part, to cover known and expected
cost increases.
Revenues for 2001 declined 7.0% to $1,282.3 million from $1,379.3 million in
2000. ABF generated operating income for 2001 of $79.4 million compared to
$133.8 million in 2000.
ABF's decline in revenue is due to a decrease in LTL tonnage and fuel
surcharges, which was partially offset by an increase in revenue per
hundredweight. ABF's LTL tonnage decreased 9.3% in 2001, compared to 2000. ABF's
performance for 2001 was affected by less available freight, due to decreased
business levels at customer facilities, primarily as a result of a decline in
the U.S. economy. The decrease in tonnage was offset, in part, by an LTL revenue
per hundredweight increase of 2.3% to $21.62 in 2001 compared to $21.13 in 2000,
as the pricing environment remained relatively firm.
ABF implemented a fuel surcharge on July 7, 1999, based on the increase in
diesel fuel prices compared to an index price. The fuel surcharge in effect
during 2001 averaged 3.3% of revenue. The fuel surcharge in effect during 2000
averaged 4.1% of revenue.
ABF's operating ratio increased to 93.8% for 2001 from 90.3% in 2000, primarily
as a result of tonnage declines and changes in certain operating expense
categories as follows:
Salaries and wages expense for 2001 increased 3.2% as a percent of revenue
compared to 2000. The increase results from the annual general International
Brotherhood of Teamsters ("IBT") contractual wage and benefit rate increase on
April 1, 2001 of approximately 3.0%, as well as an increase in wages and
benefits costs for road drivers, resulting from ABF's decision to utilize
additional road drivers and company-owned equipment to move freight in certain
poor service rail lanes rather than rail. In addition, portions of such costs
are primarily fixed in nature and increase as a percent of revenue with
decreases in revenue levels.
Supplies and expenses increased 0.4% as a percent of revenue for 2001, compared
to 2000. Equipment repair costs have increased due to ABF's older trailer fleet.
This increase was offset by a decline in fuel costs, excluding taxes that on a
price-per-gallon basis declined to $0.87 for 2001 from $0.95 in 2000.
Operating taxes and licenses increased 0.2% as a percent of revenue for 2001,
compared to 2000, due primarily to an increase of approximately 200 road
trailers owned by the Company. In addition, portions of such costs are primarily
fixed in nature and increase as a percent of revenue with decreases in revenue
levels.
Insurance expense decreased 0.2% as a percent of revenue for 2001, compared to
2000. This improvement was due primarily to favorable claims experience for
property damage and liability claims and cargo claims.
Depreciation and amortization expense increased 0.5% as a percent of revenue for
2001, compared to 2000, due primarily to the purchase of 500 road tractors
during 2001. The road tractors purchased were to replace older tractors in the
fleet that have been transferred to city use, including some that were under
operating leases in the first quarter of 2000. In addition, portions of such
costs are primarily fixed in nature and increase as a percent of revenue with
decreases in revenue levels.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Rents and purchased transportation expense decreased 0.7% as a percent of
revenue for 2001, compared to 2000. This is due primarily to a decline in rail
utilization to 13.5% of total miles for 2001, compared to 15.6% in 2000, as the
Company is utilizing more company-owned equipment and road drivers for certain
linehaul moves, as previously discussed. In addition, rents and purchased
transportation costs decreased due to the disposal of some tractors under
operating leases, as previously mentioned.
As previously mentioned, ABF's general rate increase of 4.9% on August 1, 2001
was put in place to cover known and expected cost increases for the next twelve
months. ABF's ability to retain this rate increase is dependent on the pricing
environment, which, in 2001, remained relatively firm. The pricing environment
could potentially worsen in 2002, if the U.S. economy continues to decline, and
it could become firmer if the U.S. economy improves. ABF will experience an
effective annual general contractual wage and benefit increase for 2002, of an
estimated 3.0% under its agreement with the IBT. The base wage and pension cost
portion of the increase will occur on April 1, 2002 and the health and welfare
cost portion of the increase will occur on August 1, 2002. In addition, ABF
could be impacted by fluctuating fuel prices during 2002. Although fuel prices
stabilized during the latter part of 2001, there can be no assurances that they
will remain stable. ABF's fuel surcharges on revenue are intended to offset any
fuel cost increases. ABF's insurance premium costs for 2002 will increase, in
part, because of the terrorist acts of September 11. The increase is
approximately 180.0% or $7.0 million, from its 2001 premiums. In 2001, insurance
premiums represented only 10% of ABF's total insurance costs. In 2002, it is
anticipated that insurance premiums will represent approximately 29.0% of total
insurance costs. During 2001, ABF experienced increases in its nonunion benefit
costs of 41.0%, representing increased medical, prescription drug and pension
costs. These costs represented approximately 2.0% of ABF's revenue in 2001.
Based on recent trends, these costs could continue to increase during 2002 as
well, although there can be no certainty of this.
G.I. TRUCKING COMPANY
On August 1, 2001, the Company sold the stock of G.I. Trucking for $40.5 million
in cash to a company formed by the senior executives of G.I. Trucking and Estes
Express Lines ("Estes") (see Note S). The Company recognized a pre-tax gain on
the sale of $4.6 million in the third quarter of 2001. Cash proceeds from the
sale, net of costs and income taxes, of approximately $33.0 million were used to
pay down the Company's outstanding debt. The Company retained ownership of three
California terminal facilities and has agreed to lease them for an aggregate
amount of $1.6 million per year to G.I. Trucking for a period of up to four
years. G.I. Trucking has an option at any time during the four-year lease term
to purchase these terminals for $19.5 million. The facilities have a net book
value of approximately $6.0 million. If the terminal facilities are sold to G.I.
Trucking, the Company will recognize a pre-tax gain of approximately $14.0
million in the period they are sold.
The Company's revenue and operating income includes seven months of operations
for G.I. Trucking for 2001. Revenues for G.I. Trucking for 2001 were $95.5
million, compared to $161.9 million in 2000. Operating income was $0.1 million
for 2001, compared to $3.9 million in 2000 (see Note M).
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
CLIPPER
Effective August 13, 2001 and August 1, 2000, Clipper implemented general rate
increases of 4.9% and 5.9%, respectively, for LTL shipments. Revenues for
Clipper decreased 2.3% to $127.3 million in 2001 from $130.2 million in 2000.
LTL revenue per shipment increased 5.5% for 2001, compared to 2000. LTL
shipments declined 18.5% for 2001, compared to 2000. LTL shipment declines
reflect Clipper's movement away from unprofitable LTL business and lower
business levels, resulting from the decline in the U.S. economy, including the
impact of the September 11, 2001 terrorist attacks. In addition, the LTL
division suffered from changes in the shipping pattern of a large customer,
which reduced the LTL shipments handled by Clipper.
Intermodal revenue per shipment increased only 0.8% for 2001, when compared to
2000, due to increased competition for business, resulting from unused capacity
in the over-the-road truckload industry, which impacted the intermodal pricing
environment. The number of intermodal shipments increased 14.8% for 2001,
compared to 2000, due primarily to increased shipment volumes from existing
customers.
Clipper's operating ratio increased to 99.6% for 2001, from 98.8% in 2000.
Clipper's operating ratio increased as a result of several factors. Clipper's
LTL division experienced steep shipment declines during 2001, as discussed
above. In addition, a change in the mix of shipments handled by the LTL division
contributed to a decline in rail utilization, which increased linehaul costs.
Clipper's rail utilization was 57.1% of total miles for 2001, compared to 63.8%
in 2000. For Clipper, rail costs per mile are generally less expensive than
over-the-road costs per mile. Finally, Clipper's Controlled Logistics division
experienced increased trailer maintenance costs on its older 45-foot
refrigerated trailers. Clipper plans to either dispose of or move these trailers
out of its rail operations during 2002.
TREADCO, INC.
On September 13, 2000, Treadco entered into an agreement with Goodyear to form a
new limited liability company called Wingfoot Commercial Tire Systems, LLC (see
Note R). The transaction closed on October 31, 2000. Effective October 31, 2000,
Treadco contributed substantially all of its assets and liabilities to Wingfoot
in a non-taxable transaction in exchange for a 19% ownership in Wingfoot. For
the year ended December 31, 2000, tire operations included the operations of
Treadco for the ten months ended October 31, 2000 only. Revenue and operating
income for Treadco for the ten months ended October 31, 2000 were $158.3 million
and $4.7 million, respectively (see Note M). There were no operations for
Treadco during 2001.
In the last half of the 1990's, changes were occurring in the traditional
relationship between tire retreaders and raw materials franchisors and new tire
suppliers in Treadco's truck tire retreading and new tire sales business. As a
result of these changes, in the first quarter of 1998, the Company began
evaluating its then 46% investment in Treadco. This evaluation resulted in the
Company's January 1999 proposal to Treadco's Board of Directors for the Company
to acquire all outstanding Treadco common stock. The Company believed this would
lower costs associated with Treadco being a small public company, lower state
income tax costs and other tax benefits available to the Company if Treadco were
a wholly owned subsidiary, and maximize its flexibility in managing Treadco in
this changing environment. As these changes continued to evolve throughout 1999
and 2000, the Company concluded that an alliance of Treadco with one of the
major new tire manufacturers, who were expanding their presence in the retread
industry, provided Treadco the best opportunity at long-term survival and
maximized its current value to the Company. In September 2000, the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Company entered into its agreement with Goodyear, which created Wingfoot and
gave the Company the right to "put" its interest to Goodyear for $73.4 million,
as described below.
Under the agreement with Goodyear, the Company has the right, at any time after
April 30, 2003 and before April 30, 2004, to sell its interest in Wingfoot to
Goodyear for a cash "Put Price" equal to approximately $73.4 million. Goodyear
has the right, at any time after April 30, 2003 until October 31, 2004, to
purchase the Company's entire interest, for cash, at a "Call Price" equal to the
"Put Price" plus $5.0 million. As provided in the agreement between Goodyear and
Treadco, the Company will not share in the profits or losses of Wingfoot during
the term of the "Put." If the Company does not exercise its right to sell its
19% interest in Wingfoot, the Company will account for its share of Wingfoot's
profits or losses beginning May 1, 2004, as provided in the Wingfoot Operating
Agreement. If the Company "puts" its interest to Goodyear, the Company will
record a pre-tax gain in the amount of $14.1 million in the quarter its interest
is "Put." If Goodyear "calls" the Company's interest in Wingfoot, the Company
will record a pre-tax gain of $19.1 million during the quarter the "call" is
made by Goodyear (see Note R).
INTEREST
Interest expense was $12.6 million for 2001 compared to $16.7 million for 2000.
The decline resulted from lower average debt levels when 2001 is compared to
2000.
INCOME TAXES
The difference between the effective tax rate for 2001 and the federal statutory
rate resulted from state income taxes, amortization of nondeductible goodwill
and other nondeductible expenses, as well as the impact of the $1.9 million tax
benefit resulting from the resolution of certain tax contingencies arising in
prior years (see Note F).
At December 31, 2001, the Company had deferred tax assets of $45.0 million, net
of a valuation allowance of $3.4 million, and deferred tax liabilities of $54.5
million. The Company believes that the benefits of the deferred tax assets of
$45.0 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 deferred tax
liabilities of $54.5 million and the presence of significant taxable income in
2001 and 2000. 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 and for the excess tax basis in the investment in
Wingfoot.
Management intends to evaluate the realizability of deferred tax assets on a
quarterly basis by assessing the need for any additional valuation allowance.
ACCOUNTS RECEIVABLE
Accounts receivable decreased $57.1 million from December 31, 2000 to December
31, 2001, due primarily to a decrease in revenue levels and the sale of G.I.
Trucking on August 1, 2001 (see Note S).
INVESTMENT IN WINGFOOT
The investment in Wingfoot relates to the contribution of substantially all of
the assets and liabilities of Treadco to Wingfoot on October 31, 2000 (see Note
R).
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
OTHER NONCURRENT ASSETS
Other assets increased $8.2 million from December 31, 2000 to December 31, 2001,
due to incentive pay deferrals and matching contributions made to the Company's
Voluntary Savings Plan assets, which are held in a trust account, and as a
result of the Company paying off $13.2 million of life insurance loans which
were netted against the cash surrender value on the policies included in other
assets. These increases were offset by a decline in the Company's pension asset
of $6.4 million, which was due to the sale of G.I. Trucking on August 1, 2001
(see Note S) and $3.8 million in net periodic pension cost recorded in 2001 (see
Note L).
GOODWILL
The Company's assets include goodwill, net of amortization, of $101.3 million,
representing 14.0% of total assets and 30.0% of total stockholder's equity.
Goodwill includes $63.8 million resulting from a 1988 leveraged buyout
transaction and $37.5 million resulting from the 1994 acquisition of Clipper.
The Company's accounting policy for reviewing the carrying amount of its
goodwill for impairment is reflected in Note B to the Consolidated Financial
Statements. No indications of impairment existed at December 31, 2001. However,
the Company is required to test its goodwill for impairment under the new
goodwill accounting rules prescribed by Statement 142. These rules were
effective for the Company on January 1, 2002.
ACCRUED EXPENSES
Accrued expenses decreased $47.2 million from December 31, 2000 to December 31,
2001, due primarily to a decrease in incentive pay accruals as a result of a
decline in profits, a decrease in the required reserves for loss, injury, damage
and workers' compensation claims, which resulted from better claims experience
and a reduction in the required reserves related to a company acquired in 1995,
a decrease in accrued interest due to the payment of interest to the IRS (see
Note F) and due to the sale of G.I. Trucking on August 1, 2001 (see Note S).
OTHER LIABILITIES
Other liabilities increased $9.0 million from December 31, 2000 to December 31,
2001, due to incentive pay deferrals and matching contributions made to the
Company's Voluntary Savings Plan assets, which are held in a trust account. In
addition, other liabilities increased due to an increase in the accruals for
supplemental pension benefits.
2000 COMPARED TO 1999
Consolidated revenues from continuing operations of the Company for 2000 were
$1,839.6 million compared to $1,721.6 million for 1999, representing an increase
of 6.9%, due primarily to increases in revenue for ABF, G.I. Trucking and
Clipper, offset by a decline in revenues for Treadco as a result of the
contribution of substantially all of the Treadco assets and liabilities to
Wingfoot on October 31, 2000 (see Note R). The Company's operating income from
continuing operations for 2000 increased 27.8% to $140.2 million from $109.7
million in 1999. Increases in operating income from continuing operations for
2000 were attributable to improved operating income for ABF, G.I. Trucking,
Clipper and Treadco. Income from continuing operations for 2000 was $76.2
million, or $3.17 per diluted common share, compared to $51.2 million, or $2.14
per diluted common share, for 1999. The improvements in income from continuing
operations reflect improvements in operating income, lower interest costs and a
fair value net gain on the Treadco/Wingfoot transaction (see Note R) of $5.0
million, or $0.12 per diluted common share.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The Company experienced a slowdown in business levels, resulting from a decline
in the economy, beginning in mid-2000. As a result, LTL tonnage levels for ABF,
the Company's largest subsidiary, declined 4.3% on a per-day basis in the fourth
quarter of 2000 from the fourth quarter 1999. G.I. Trucking's fourth quarter
2000 tonnage increased at a slower pace than previous quarters of 2000 and
Clipper's fourth quarter 2000 LTL and intermodal shipment levels declined
relative to the same period in 1999, where previous quarters of 2000 showed
primarily increases.
ABF FREIGHT SYSTEM, INC.
Effective August 14, 2000, ABF implemented a general rate increase of 5.7%.
Previous overall rate increases effective January 1, 1999 and September 13, 1999
were 5.5% and 5.1%, respectively. Revenues for 2000 increased 8.0% to $1,379.3
million from $1,277.1 million for 1999. ABF generated operating income for 2000
of $133.8 million compared to $107.0 million for 1999.
ABF's increase in revenue is due primarily to an increase in LTL revenue per
hundredweight of 8.0% to $21.13 for 2000 compared to $19.57 in 1999, reflecting
a favorable pricing environment. ABF's revenue increase also results from a
slight increase in LTL tonnage of 0.6% for 2000 compared to 1999. However, total
tonnage for ABF declined from 1999 by 0.5%. LTL tonnage per day for the fourth
quarter of 2000 declined 4.3% when compared to the fourth quarter of 1999. ABF's
fourth quarter 2000 performance was affected by less available freight due to
decreased business levels at customer facilities. In addition, tonnage declines
reflect declining density in ABF's freight mix and the fact that customers were
shipping more heavily in the fourth quarter of 1999 to prepare for the "Year
2000."
ABF implemented a fuel surcharge on July 7, 1999, based on the increase in
diesel fuel prices compared to an index price. The fuel surcharge in effect
during 2000 ranged from 1.5% to 6.0% of revenue. The fuel surcharge in effect
during the third and fourth quarters of 1999 ranged from 0.5% to 2.0% of
revenue.
ABF's operating ratio improved to 90.3% for 2000 from 91.6% in 1999. The
improvements are the result of the revenue yield improvements previously
described and as a result of changes in certain operating expense categories as
follows:
Salaries and wages expense for 2000 declined 1.7% as a percent of revenue
compared to 1999. The decline results primarily from the revenue yield
improvements previously discussed. These improvements were offset, in part, by
the annual general union wage and benefit rate increase on April 1, 2000 of
approximately 3.0%, and an increase in incentive pay amounts.
Supplies and expenses increased 1.6% as a percent of revenue for 2000 compared
to 1999. This change is due primarily to higher diesel fuel prices, which
increased 61.2% on an average price-per-gallon basis, net of fuel taxes, when
the year 2000 is compared to 1999. The previously mentioned fuel surcharge on
revenue is intended to offset the fuel cost increase.
Depreciation and amortization expense increased 0.2% as a percent of revenue for
the year 2000 compared to 1999, due primarily to the purchase of 608 road
tractors during 2000. The road tractors purchased include approximately 101
additions with the remaining units replacing older tractors in the fleet,
including many which were under operating leases in the same periods of 1999.
Rents and purchased transportation expense decreased 1.2% as a percent of
revenue for 2000 compared to 1999, due to the disposal of tractors under
operating leases, as previously mentioned. In addition, total rail
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
costs decreased as a percent of revenue, as a result of a decline in the
utilization of rail for 2000. Rail utilization was 15.6% of total miles compared
to 18.3% during 1999.
G.I. TRUCKING COMPANY
Effective September 1, 2000 and October 1, 1999, G.I. Trucking implemented a
general rate increase of 5.9% and 5.5%, respectively. G.I. Trucking revenues for
2000 increased 17.8% to $161.9 million from $137.4 million in 1999. The revenue
increase resulted from an increase in G.I. Trucking's tonnage of 13.2% for 2000
from 1999. In addition, revenue per hundredweight increased 4.1% from the same
period in 1999. During the early part of first quarter 2000, G.I. Trucking
expanded its operational capabilities in the states of Texas, New Mexico,
Oklahoma, Kansas and parts of Missouri, in preparation for adding new business
from an existing carrier partner. In addition, G.I. Trucking increased its sales
management and sales staff throughout its system by nearly 50% over 1999 levels.
G.I. Trucking implemented a fuel surcharge during the last week of August 1999,
based upon a West Coast average fuel index. The fuel surcharge in effect during
2000 ranged from 2.6% to 7.3% of revenue, while the fuel surcharge in effect for
the last four months of 1999 ranged from 1.6% to 2.4% of revenue.
G.I. Trucking's operating ratio improved to 97.6% for 2000 from 98.5% in 1999,
as a result of the increases in tonnage and revenue yield improvements
previously described. In addition, the change in the operating ratio results
from changes in certain operating expenses as follows:
Salaries and wages expense increased 0.2% as a percent of revenue during 2000
compared to 1999. This increase is due primarily to increased salaries and
benefits related to the addition of sales staff described above and unfavorable
workers' compensation claims experience offset, in part, by lower pension costs.
Supplies and expenses increased 1.4% as a percent of revenue for 2000 compared
to 1999. The increase is due primarily to higher fuel costs, which increased in
total dollars by 73.7% in 2000 compared to 1999 and as a result of more miles
run on company-owned equipment rather than by third-party purchased
transportation providers. G.I. Trucking's fuel surcharge on revenue is intended
to offset the fuel cost increase.
Operating taxes and licenses expense decreased 0.3% as a percent of revenue for
2000 compared to 1999, due primarily to the fact that a portion of such costs is
primarily fixed in nature and declines as a percent of revenue with increases in
revenue levels.
Insurance expense decreased 0.2% as a percent of revenue for 2000 compared to
1999. This decrease is due to favorable claims experience for property damage
and liability claims during 2000 as compared to 1999.
Depreciation and amortization increased 0.4% as a percent of revenue for 2000
compared to 1999, due primarily to G.I. Trucking adding 307 trailers and 29
tractors to their fleet during 2000 as a result of revenue growth and an effort
to utilize company-owned equipment rather than purchased transportation for
certain linehaul moves.
Rents and purchased transportation expenses decreased 2.3% as a percent of
revenue for 2000 compared to 1999. G.I. Trucking has decreased its purchased
transportation costs by utilizing company-owned equipment for specific linehaul
moves during 2000 compared to 1999, as previously discussed.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
CLIPPER
Clipper implemented a general rate increase of 5.9% for LTL shipments as of
August 1, 2000. Revenues for Clipper increased 16.0% to $130.2 million for 2000
from $112.2 million in 1999. Intermodal revenue per shipment increased 26.7%
during 2000 compared to 1999. However, intermodal shipments declined 5.8% during
2000 compared to 1999. LTL revenue per shipment increased 3.9% during 2000
compared to 1999 while LTL shipments declined 2.1% in 2000 compared to 1999. LTL
and intermodal shipment declines reflect Clipper's movement away from
unprofitable business and lower business levels.
Revenues for Clipper in the fourth quarter 2000 increased only 1.9% on a per-day
basis from the same period in 1999. Intermodal revenue per shipment increased
41.5% during the fourth quarter 2000 compared to fourth quarter 1999. However,
intermodal shipments declined 18.9% during the fourth quarter 2000 compared to
fourth quarter 1999. LTL revenue per shipment decreased 3.1% and LTL shipments
declined 16.1% in the fourth quarter 2000 compared to fourth quarter 1999. Both
the intermodal and LTL divisions continued to move away from some unprofitable
business during the fourth quarter of 2000. The intermodal division was able to
add some new business with improved profit margins. The LTL division was not
able to readily replace its lost revenue. In addition, the LTL division suffered
from changes in the shipping pattern of a large customer, which reduced the LTL
shipments handled by Clipper.
Clipper's operating ratio increased slightly to 98.8% for 2000 from 98.7% in
1999, due primarily to an increase in selling, administrative and general costs
of 0.5% as a percent of revenue for the year 2000. Clipper experienced a
higher-than-normal increase in bad debt expense, resulting from bankruptcies
during 2000. Additional costs were also incurred for information technology
improvements and lease termination charges. These increases were offset, in
part, by gross margin improvements on its intermodal and produce shipments.
Clipper's gross margins improved, in part, as a result of a higher level of rail
utilization for the year 2000. Clipper's rail utilization was 63.8% of total
miles for 2000 compared to 59.3% during 1999. For Clipper, rail costs per mile
are less expensive than over-the-road costs per mile.
TREADCO, INC.
Effective October 31, 2000, Treadco contributed substantially all of its assets
and liabilities to Wingfoot in a non-taxable transaction in exchange for a 19%
ownership in Wingfoot (see Note R). For the year ended December 31, 2000, tire
operations included the operations of Treadco for the ten months ended October
31, 2000 only. Revenue and operating income for Treadco for the ten months ended
October 31, 2000 were $158.3 million and $4.7 million, respectively. Revenue and
operating income for Treadco for 1999 were $186.6 million and $3.6 million,
respectively (see Note M).
INTEREST
Interest expense was $16.7 million for 2000 compared to $18.4 million for 1999.
The decline resulted from lower average debt levels when 2000 is compared to
1999.
INCOME TAXES
The difference between the effective tax rate for the year ended December 31,
2000 and the federal statutory rate resulted from state income taxes,
amortization of nondeductible goodwill and other nondeductible expenses (see
Note F).
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
SEASONALITY
ABF is affected by seasonal fluctuations which affects its tonnage to be
transported. Freight shipments, operating costs and earnings are also affected
adversely by inclement weather conditions. The third calendar quarter of each
year usually has the highest tonnage levels while the first quarter has the
lowest. Clipper's operations are similar to operations at ABF with revenues
being weaker in the first quarter and stronger during the months of September
and October.
ENVIRONMENTAL MATTERS
The Company's subsidiaries, or lessees, store fuel for use in tractors and
trucks in approximately 76 underground tanks located in 25 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.
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 $340,000 over the last 12 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, 2001, the Company has accrued approximately $2.4 million to
provide for environmental-related liabilities. The Company's environmental
accrual is based on management's best estimate of the actual liability. The
Company's estimate is founded on management's experience in dealing with similar
environmental matters and on actual testing performed at some sites. Management
believes that the accrual is adequate to cover environmental liabilities based
on the present environmental regulations. Accruals for environmental liability
are included in the balance sheet as accrued expenses.
FORWARD-LOOKING STATEMENTS
Statements contained in the Management's Discussion and Analysis section of this
report that are not based on historical facts are "forward-looking statements."
Terms such as "estimate," "forecast," "expect," "predict," "plan," "anticipate,"
"believe," "intend," "should," "would," "scheduled," and similar expressions and
the negatives of such terms are intended to identify forward-looking statements.
Such statements are by their nature subject to uncertainties and risks,
including, but not limited to, union relations; availability and cost of
capital; shifts in market demand; weather conditions; the performance and needs
of industries served by Arkansas Best's subsidiaries; actual future costs of
operating expenses such as fuel and related taxes; self-insurance claims and
employee wages and benefits; actual costs of continuing investments in
technology; the timing and amount of capital expenditures; competitive
initiatives and pricing pressures; general economic conditions; and other
financial, operational and legal risks and uncertainties detailed from time to
time in the Company's Securities and Exchange Commission ("SEC") public filings.
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE INSTRUMENTS
The Company has historically been subject to market risk on all or a part of its
borrowings under bank credit lines, which have variable interest rates.
In February 1998, the Company entered into an interest rate swap effective April
1, 1998. The swap agreement is a contract to exchange variable interest rate
payments for fixed rate payments over the life of the instrument. The notional
amount is used to measure interest to be paid or received and does not represent
the exposure to credit loss. The purpose of the swap is to limit the Company's
exposure to increases in interest rates on the notional amount of bank
borrowings over the term of the swap. The fixed interest rate under the swap is
5.845% plus the Credit Agreement margin (currently 0.575%). On January 1, 2001,
this instrument was recorded on the balance sheet of the Company. Details
regarding the swap, as of December 31, 2001, are as follows:
<Table>
<Caption>
NOTIONAL RATE RATE FAIR
AMOUNT MATURITY PAID RECEIVED VALUE (2)(3)
-------- -------- ---- -------- ------------
<S> <C> <C> <C> <C>
$110.0 million April 1, 2005 5.845% Plus Credit Agreement LIBOR rate (1) ($5.4) million
Margin (currently 0.575%) Plus Credit Agreement
Margin (currently 0.575%)
</Table>
(1) LIBOR rate is determined two London Banking Days prior to the first day
of every month and continues up to and including the maturity date.
(2) The fair value is an amount estimated by Societe Generale ("process
agent") that the Company would have paid at December 31, 2001 to
terminate the agreement.
(3) The swap value declined from ($0.1) million at December 31, 2000. The
fair value is impacted by changes in rates of similarly termed Treasury
instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for all financial instruments, except for the
interest-rate swap agreement disclosed above and capitalized leases:
CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance sheets
for cash and cash equivalents approximates its fair value.
LONG- AND SHORT-TERM DEBT. The carrying amounts of the Company's borrowings
under its Revolving Credit Agreements approximate their fair values, since the
interest rate under these agreements is variable. Also, the carrying amount of
long-term debt was estimated to approximate their fair values, with the
exception of the Subordinated Debentures, which are estimated using current
market rates.
The carrying amounts and fair value of the Company's financial instruments at
December 31 are as follows:
<Table>
<Caption>
2001 2000
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
($ thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents .. $ 14,860 $ 14,860 $ 36,742 $ 36,742
Short-term debt ............ $ 24 $ 24 $ 21 $ 21
Long-term debt ............. $ 114,917 $ 114,498 $ 138,814 $ 137,831
</Table>
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued
Borrowings under the Company's Credit Agreement in excess of $110.0 million are
subject to market risk. During 2001, outstanding debt obligations under the
Credit Agreement periodically exceeded $110.0 million. The Company's highest
borrowings during 2001 reached $134.0 million, and the average borrowings during
the year were $111.7 million. A 100-basis-point change in interest rates on
Credit Agreement borrowings above $110.0 million would change annual interest
cost by $100,000 per $10.0 million of borrowings.
The Company is subject to market risk for increases in diesel fuel prices;
however, this risk is mitigated by fuel surcharges which are included in the
revenues of ABF and Clipper based on increases in diesel fuel prices compared to
relevant indexes.
The Company does not have a formal foreign currency risk management policy. The
Company's foreign operations are not significant to the Company's total revenues
or assets. Revenue from non-U.S. operations amounted to less than 1.0% of total
revenues for 2001. Accordingly, foreign currency exchange rate fluctuations have
never had a significant impact on the Company, and they are not expected to in
the foreseeable future.
The Company has not historically entered into financial instruments for trading
purposes, nor has the Company historically engaged in hedging fuel prices. No
such instruments were outstanding during 2001 or 2000.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders 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, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States. 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, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
Little Rock, Arkansas
January 18, 2002,
except for Note D and Note U, as to which the date is February 25, 2002
<PAGE>
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31
2001 2000
---------- ----------
($ thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 14,860 $ 36,742
Accounts receivable, less allowances
(2001 - $3,483; 2000 - $4,595) ............................ 116,430 173,485
Prepaid expenses ............................................ 6,803 8,325
Deferred income taxes ....................................... 22,193 11,442
Federal and state income taxes prepaid ...................... 2,647 --
Other ....................................................... 4,027 4,459
---------- ----------
TOTAL CURRENT ASSETS ..................................... 166,960 234,453
PROPERTY, PLANT AND EQUIPMENT
Land and structures ......................................... 214,856 208,220
Revenue equipment ........................................... 334,622 347,388
Service, office and other equipment ......................... 79,268 74,397
Leasehold improvements ...................................... 12,359 12,693
---------- ----------
641,105 642,698
Less allowances for depreciation and amortization ........... 306,928 296,679
---------- ----------
334,177 346,019
INVESTMENT IN WINGFOOT ......................................... 59,341 59,341
OTHER ASSETS ................................................... 58,949 50,792
ASSETS HELD FOR SALE ........................................... 2,402 1,101
GOODWILL, less amortization (2001 - $44,469; 2000 - $40,416) ... 101,324 105,418
---------- ----------
$ 723,153 $ 797,124
========== ==========
</Table>
<PAGE>
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31
2001 2000
------------ ------------
($ thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft and drafts payable ............................... $ 6,515 $ 24,667
Accounts payable ................................................ 50,366 59,999
Accrued expenses ................................................ 121,423 168,625
Federal and state income taxes .................................. -- 4,127
Current portion of long-term debt ............................... 14,834 23,948
------------ ------------
TOTAL CURRENT LIABILITIES .................................... 193,138 281,366
LONG-TERM DEBT, less current portion ............................... 115,003 152,997
FAIR VALUE OF INTEREST RATE SWAP ................................... 5,383 --
OTHER LIABILITIES .................................................. 40,097 31,052
DEFERRED INCOME TAXES .............................................. 31,736 39,519
FUTURE MINIMUM RENTAL COMMITMENTS, NET (NOTE J)
(2001 - $46,124; 2000 - $49,769) ............................... -- --
OTHER COMMITMENTS AND CONTINGENCIES ................................ -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 10,000,000 shares;
issued and outstanding 2000: 1,390,000 shares ............... -- 14
Common stock, $.01 par value, authorized 70,000,000 shares;
issued 2001: 24,542,163 shares; 2000: 20,219,137 shares .... 245 202
Additional paid-in capital ...................................... 204,463 194,211
Retained earnings ............................................... 137,635 98,718
Treasury stock, at cost, 2001 and 2000: 59,782 shares ........... (955) (955)
Accumulated other comprehensive loss ............................ (3,592) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................... 337,796 292,190
------------ ------------
$ 723,153 $ 797,124
============ ============
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
------------ ------------ ------------
($ thousands, except per share data)
<S> <C> <C> <C>
OPERATING REVENUES
Transportation operations ............................... $ 1,526,206 $ 1,683,212 $ 1,537,271
Tire operations ......................................... -- 156,355 184,315
------------ ------------ ------------
1,526,206 1,839,567 1,721,586
------------ ------------ ------------
OPERATING EXPENSES AND COSTS
Transportation operations ............................... 1,450,272 1,546,847 1,430,294
Tire operations ......................................... -- 152,568 181,585
------------ ------------ ------------
1,450,272 1,699,415 1,611,879
------------ ------------ ------------
OPERATING INCOME ........................................... 75,934 140,152 109,707
OTHER INCOME (EXPENSE)
Net gains on sales of property and other ................ 918 2,608 871
Gain on sale of G.I. Trucking Company ................... 4,642 -- --
Fair value net gain - Wingfoot .......................... -- 5,011 --
Interest expense ........................................ (12,636) (16,687) (18,395)
Minority interest in Treadco, Inc. ...................... -- -- 245
Other, net .............................................. (2,139) (1,961) (4,791)
------------ ------------ ------------
(9,215) (11,029) (22,070)
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................................... 66,719 129,123 87,637
FEDERAL AND STATE INCOME TAXES
Current ................................................. 25,367 42,851 33,327
Deferred ................................................ (52) 10,117 3,128
------------ ------------ ------------
25,315 52,968 36,455
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS .......................... 41,404 76,155 51,182
------------ ------------ ------------
DISCONTINUED OPERATIONS
Loss from discontinued operations (net of tax benefits
of $472) ............................................... -- -- (786)
------------ ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS .......................... -- -- (786)
------------ ------------ ------------
NET INCOME ................................................. 41,404 76,155 50,396
Preferred stock dividends ............................... 2,487 4,122 4,298
------------ ------------ ------------
NET INCOME FOR COMMON STOCKHOLDERS ......................... $ 38,917 $ 72,033 $ 46,098
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Continuing operations ................................... $ 1.79 $ 3.62 $ 2.38
Discontinued operations ................................. -- -- (0.04)
------------ ------------ ------------
NET INCOME PER SHARE (BASIC) ............................... $ 1.79 $ 3.62 $ 2.34
============ ============ ============
DILUTED:
Continuing operations ................................... $ 1.66 $ 3.17 $ 2.14
Discontinued operations ................................. -- -- (0.03)
------------ ------------ ------------
NET INCOME PER SHARE (DILUTED) ............................. $ 1.66 $ 3.17 $ 2.11
============ ============ ============
CASH DIVIDENDS PAID PER COMMON SHARE ....................... $ -- $ -- $ --
============ ============ ============
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED OTHER
--------------- --------------- PAID-IN EARNINGS COMPREHENSIVE TREASURY TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) LOSS STOCK EQUITY
------ ------ ------ ------ ---------- --------- -------------- -------- ------
(thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1999 ................ 1,495 $ 15 19,610 $ 196 $ 193,117 $ (19,413) -- -- $ 173,915
Net income .............................. -- -- -- 50,396 -- -- 50,396
---------
Comprehensive income ............... 50,396
---------
Tax effect of stock options exercised ... -- -- 7 -- -- -- 7
Issuance of common stock ................ -- 142 1 1,031 -- -- -- 1,032
Dividends paid on preferred stock ....... -- -- -- (4,298) -- -- (4,298)
------ ----- ------ ------ --------- --------- -------- ------ ---------
BALANCES AT DECEMBER 31, 1999 .............. 1,495 15 19,752 197 194,155 26,685 -- -- 221,052
Net income .............................. -- -- -- 76,155 -- -- 76,155
---------
Comprehensive income ............... 76,155
---------
Issuance of common stock ................ -- 467 5 3,829 -- -- -- 3,834
Tax effect of stock options exercised ... -- -- 150 -- -- -- 150
Purchase of preferred stock ............. (105) (1) -- (3,923) -- -- -- (3,924)
Purchase of treasury stock .............. -- -- -- -- -- (955) (955)
Dividends paid on preferred stock ....... -- -- -- (4,122) -- -- (4,122)
------ ----- ------ ------ --------- --------- -------- ------ ---------
BALANCES AT DECEMBER 31, 2000 .............. 1,390 14 20,219 202 194,211 98,718 -- (955) 292,190
Net income .............................. -- -- -- 41,404 -- -- 41,404
Fair value of interest rate swap (a) ... -- -- -- -- (3,289) -- (3,289)
Foreign currency translation (a) ....... -- -- -- -- (303) -- (303)
---------
Comprehensive income ............... 37,812
---------
Issuance of common stock ................ -- 811 8 7,638 -- -- -- 7,646
Tax effect of stock options exercised ... -- -- 1,510 -- -- -- 1,510
Purchase of preferred stock ............. (7) -- -- (414) -- -- -- (414)
Conversion of preferred stock
to common ........................... (1,383) (14) 3,512 35 (21) -- -- -- --
Dividends paid on preferred stock ....... -- -- -- (2,487) -- -- (2,487)
Fair value of G.I. Trucking and Treadco
officer stock options and other ... -- -- 1,539 -- -- -- 1,539
------ ----- ------ ------ --------- --------- -------- ------ ---------
BALANCES AT DECEMBER 31, 2001 .............. -- $ -- 24,542 $ 245 $ 204,463 $ 137,635 $ (3,592) $ (955) $ 337,796
====== ===== ====== ====== ========= ========= ======== ====== =========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
(a) Net of tax benefits of $2.1 million relating to the fair value of the
interest rate swap and $0.2 million relating to the foreign currency
translation.
<PAGE>
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
---------- ---------- ----------
($ thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .......................................................... $ 41,404 $ 76,155 $ 50,396
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization .................................... 50,315 52,186 45,242
Amortization of intangibles ...................................... 4,053 4,051 4,195
Other amortization ............................................... 180 217 324
Provision for losses on accounts receivable ...................... 2,966 3,797 2,967
Provision for deferred income taxes .............................. (52) 10,117 3,128
Gain on sales of assets and other ................................ (2,322) (3,250) (1,786)
Gain on sale of G.I. Trucking Company ............................ (4,642) -- --
Fair value net gain - Wingfoot ................................... -- (5,011) --
Minority interest in Treadco, Inc. ............................... -- -- (245)
Changes in operating assets and liabilities,
net of acquisitions and exchange:
Receivables ................................................... 35,236 (12,568) (24,284)
Prepaid expenses .............................................. (136) (929) 5,406
Other assets .................................................. (10,892) (8,023) (2,912)
Accounts payable, bank drafts payable, taxes payable,
accrued expenses and other liabilities ...................... (51,263) 10,996 31,969
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............................. 64,847 127,738 114,400
---------- ---------- ----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment, less capitalized leases . (74,670) (93,585) (50,085)
Capitalization of internally developed software ..................... (4,672) (3,660) (2,505)
Proceeds from asset sales ........................................... 10,132 9,784 14,956
Proceeds from the sale of G.I. Trucking Company ..................... 40,455 -- --
Purchase of Treadco, Inc. stock ..................................... -- -- (23,673)
Other ............................................................... 1,855 161 (486)
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES .................................. (26,900) (87,300) (61,793)
---------- ---------- ----------
FINANCING ACTIVITIES
Deferred financing costs and expenses ............................... -- -- (137)
Borrowings under revolving credit facilities ........................ 92,800 110,000 428,750
Payments under revolving credit facilities .......................... (92,800) (101,300) (448,300)
Payments on long-term debt .......................................... (23,234) (16,359) (21,348)
Retirement of bonds ................................................. (23,174) (4,781) (4,768)
Purchase of preferred stock ......................................... (414) (3,924) --
Dividends paid on preferred stock ................................... (2,487) (4,122) (4,298)
Net (decrease) increase in bank overdraft ........................... (18,165) 9,441 (3,769)
Other, net .......................................................... 7,645 3,030 1,039
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES .................................. (59,829) (8,015) (52,831)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .................................................... (21,882) 32,423 (224)
Cash and cash equivalents at beginning of period .................... 36,742 4,319 4,543
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 14,860 $ 36,742 $ 4,319
========== ========== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and intermodal transportation operations. Principal subsidiaries are
ABF Freight System, Inc. ("ABF"); Clipper Exxpress Company and related companies
("Clipper"); FleetNet America, LLC; and until August 1, 2001, G.I. Trucking
Company ("G.I. Trucking") (see Note S). The Company's operations included the
truck tire retreading and new tire sales operations of Treadco, Inc. ("Treadco")
until October 31, 2000 (see Note R).
Approximately 77% of ABF's employees are covered under a five-year collective
bargaining agreement that began on April 1, 1998 with the International
Brotherhood of Teamsters ("IBT").
During the first half of 1999, the Company acquired 2,457,000 shares of Treadco
for $23.7 million via a cash tender offer pursuant to a definitive merger
agreement. As a result of the transaction, Treadco became a wholly owned
subsidiary of the Company (see Note Q). Prior to Treadco becoming a wholly owned
subsidiary, the Company's Consolidated Financial Statements reflected full
consolidation of the accounts of Treadco, with the ownership interests of the
other stockholders of Treadco reflected as minority interest because the Company
controlled Treadco through stock ownership, board representation and management
services, provided under a transition services agreement. On September 13, 2000,
Treadco entered into an agreement with The Goodyear Tire & Rubber Company
("Goodyear") to contribute its business to a new limited liability company
called Wingfoot Commercial Tire Systems, LLC ("Wingfoot") (see Note R). The
transaction closed on October 31, 2000.
On August 1, 2001, the Company sold the stock of G.I. Trucking for $40.5 million
in cash to a company formed by the senior executives of G.I. Trucking and Estes
Express Lines ("Estes") (see Note S).
The Company utilizes tractors and trailers primarily in its motor carrier
transportation operations. Tractors and trailers are commonly referred to as
"revenue equipment" in the transportation business.
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 that 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. ABF, the Company's largest
subsidiary, which represented more than 84.0% of the Company's annual revenues
for 2001, had no single customer representing more than 3.0% of its revenues
during 2001 and no single customer representing more than 1.0% of its accounts
receivable balance during 2001. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. The Company provides
an allowance for doubtful accounts based upon historical trends and factors
surrounding the credit risk of specific customers. Historically, credit losses
have been within management's expectations.
ALLOWANCES: The Company maintains allowances for doubtful accounts, revenue
adjustments and deferred tax assets. The Company's allowance for doubtful
accounts represents an estimate of potential accounts receivable write-offs
associated with recognized revenue based on historical trends and factors
surrounding the credit risk of specific customers. The Company's allowance for
revenue adjustments represents an estimate of potential
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
revenue adjustments associated with recognized revenue based upon historical
trends. The Company's valuation allowance against deferred tax assets is
established by evaluating whether the benefits of its deferred tax assets will
be realized through the reduction of future taxable income.
IMPAIRMENT ASSESSMENT OF LONG-LIVED ASSETS: The Company reviews its long-lived
assets, including property, plant, equipment, capitalized software and goodwill,
that are held and used in its motor carrier operations and intermodal operations
businesses for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable as is required by
FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("FAS 121"). If such an event or change in
circumstances is present, the Company will estimate the undiscounted future cash
flows, less the future cash outflows necessary to obtain those inflows, expected
to result from the use of the asset and its eventual disposition. If the sum of
the undiscounted future cash flows is less than the carrying amount of the
related assets, the Company will recognize an impairment loss or review its
depreciation policies as may be appropriate. No such events or circumstances
were present, indicating the Company's long-lived assets, including goodwill,
would not be recoverable at December 31, 2001. Assets to be disposed of are
reclassified as assets held for sale at the lower of their carrying amount or
fair value less cost to sell.
PROPERTY, PLANT AND EQUIPMENT INCLUDING REPAIRS AND MAINTENANCE: 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 20 years; revenue equipment -- 3
to 10 years; other equipment -- 3 to 10 years; and leasehold improvements -- 4
to 20 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. Unless fair value can be determined, 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. Repair and maintenance costs associated
with property, plant and equipment are expensed as incurred if the costs do not
extend the useful life of the asset. If such costs do extend the useful life of
the asset, the costs are capitalized and depreciated over the appropriate useful
life.
ASSETS HELD FOR SALE: Assets held for sale represent primarily non-operating
freight terminals and other properties held by ABF, and the Company's Other
operating segment, which are carried at the lower of their carrying value or
fair value, less cost to sell, as prescribed by FAS 121. Write-downs to fair
value, less cost to sell, are included in gains or losses on sales of property.
Assets held for sale are expected to be disposed of by selling the properties to
a third party within the next 12 to 24 months.
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, INCLUDING WEBSITE
DEVELOPMENT COSTS: The Company adopted Statement of Position ("SOP") 98-1,
Accounting for Costs of Computer Software Developed for or Obtained for Internal
Use, January 1, 1999. As a result, the Company capitalizes qualifying computer
software costs incurred during the "application development stage." For
financial reporting purposes, capitalized software costs are amortized by the
straight-line method over 24 to 60 months. The amount of costs capitalized
within any period is dependent on the nature of software development activities
and projects in each period. In March 2000, the Emerging Issues Task Force
("EITF") issued EITF No. 00-2, Accounting for Website Development Costs. EITF
00-2 did not change the Company's practices, described above, with respect to
website development costs.
GOODWILL: The excess cost over fair value of net assets acquired (goodwill) is
amortized on a straight-line basis over 30 to 40 years. As prescribed by FAS 121
and Accounting Principles Board ("APB") Opinion 17, Intangible Assets, the
carrying value of goodwill is reviewed for impairment whenever changes or
circumstances indicate that the carrying amount may not be recoverable, such as
a significant adverse change in
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
legal factors or the business climate or an adverse assessment by a regulator or
a current period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that demonstrates
continuing losses. 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. No changes or circumstances indicated that the Company's goodwill
was impaired, and, therefore, no reduction in goodwill has been recorded as of
December 31, 2001 (see Note D).
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 a 1995
acquisition, as well as to 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. In
accordance with the Securities and Exchange Commission's ("SEC's") Staff
Accounting Bulletin ("SAB") 101, in the fourth quarter of 2000, the Company
changed Clipper's revenue recognition method from a method of recognizing
revenue when freight was received from the shipper with the accrual of the
estimated direct costs to complete the delivery of freight in transit, to a
method where Clipper's revenue is recognized based on relative transit time in
each reporting period with expenses recognized as incurred. This method conforms
Clipper's revenue recognition method to the Company's motor carrier revenue
recognition method prescribed by EITF 91-9. The change was a change in
accounting principle under Accounting Principles Board ("APB") Opinion No. 20.
The impact of the change was immaterial. Tire operations revenue has been
recognized generally at the point when goods or services are provided to the
customers (see Note R).
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 dilutive effect of Common Stock equivalents is excluded from basic
earnings per share and included in the calculation of diluted earnings per
share. The calculation of basic earnings per share reduces income available to
common stockholders by Preferred Stock dividends paid or accrued during the
period (see Note I).
STOCK-BASED COMPENSATION: 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") and related
interpretations, including Financial Accounting Standards Board ("FASB")
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions involving
Stock Compensation.
ACCOUNTING FOR SALES OF STOCK BY SUBSIDIARIES: The Company recognizes gains and
losses on sales of subsidiary stock when incurred.
CLAIMS LIABILITIES: The Company is self-insured up to certain limits for
workers' compensation, certain property damage and liability claims and cargo
loss and damage claims. Above these limits, the Company has purchased insurance
coverage, which management considers to be adequate. The Company records an
estimate of its liability for self-insured workers' compensation and property
damage and liability claims which includes the incurred claim amount plus an
estimate of future claim development calculated by applying the Company's
historical claims development factors to its incurred claims amounts. The
Company's liability also includes an estimate of incurred, but not reported,
claims. Netted against this liability are amounts the Company expects to recover
from insurance carriers. The Company records an estimate of its potential
self-insured cargo loss and damage claims by estimating the amount of potential
claims based on the Company's historical trends and certain event-specific
information. The Company's claims liabilities have not been discounted.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
INSURANCE-RELATED ASSESSMENTS: The Company adopted SOP 97-3, Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments, January 1,
1999. At December 31, 2001 and 2000, the Company has recorded estimated
liabilities of $0.6 million incurred for state guaranty fund assessments and
other insurance-related assessments. Management has estimated the amounts
incurred, using the best available information about premiums and guaranty
assessments by state. These amounts are expected to be paid within a period not
to exceed one year. The liabilities recorded have not been discounted.
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 is not discounted or reduced for possible recoveries from insurance
carriers or other third parties (see Note K).
DERIVATIVE FINANCIAL INSTRUMENTS: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts and hedging activities. In June 1999, the FASB issued Statement
No. 137, which deferred for one year the implementation date of FASB Statement
No. 133. The Company adopted Statement No. 133 on January 1, 2001 (see Note E).
The Company has, from time to time, entered into interest-rate swap agreements
(see Notes G and N) and interest-rate cap agreements designated to modify the
interest characteristic of outstanding debt or limit exposure to increasing
interest rates in accordance with its interest rate risk management policy. 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
method of accounting). The related amount payable or receivable from
counter-parties is included in other current liabilities or current assets. In
connection with the Company's adoption of Statement No. 133, the Company is
required to recognize all derivatives on its balance sheet at fair value.
Derivatives that are not hedges will be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Hedge ineffectiveness associated with interest-rate swap agreements
will be reported by the Company in interest expense.
COSTS OF START-UP ACTIVITIES: The Company expenses certain costs associated with
start-up activities as they are incurred.
COMPREHENSIVE INCOME: The Company reports the classification components of other
comprehensive income by their nature in the financial statements and displays
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the consolidated statement of
stockholders' equity. Comprehensive income refers to revenues, expenses, gains
and losses that are included in comprehensive income but excluded from net
income. At December 31, 2001, other comprehensive income consists of changes in
the fair value of the Company's interest rate swap, net of taxes (see Note N)
and foreign currency translation adjustments, net of taxes.
SEGMENT INFORMATION: The Company uses the "management approach" for determining
appropriate segment information to disclose. The management approach is based on
the way management organizes the segments within the Company for making
operating decisions and assessing performance.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
INVESTMENT IN WINGFOOT: The Company's investment in Wingfoot represents a 19%
interest in Wingfoot Commercial Tire Systems, LLC (see Note R). The transaction,
which created Wingfoot, was accounted for at fair value, as prescribed by the
Emerging Issues Task Force ("EITF") Issue 00-5, Determining Whether a
Nonmonetary Transaction is an Exchange of Similar Productive Assets. The
Company's investment is accounted for under the equity method, similar to a
partnership investment. However, the Company does not share in the profits or
losses of Wingfoot during the term of the Company's "Put" option, based upon the
terms of the operating agreement.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 - DISCONTINUED OPERATIONS
At December 31, 1998, the Company was engaged in international ocean freight
services through its subsidiary, CaroTrans International, Inc. ("Clipper
International"), a non-vessel operating common carrier (N.V.O.C.C.). On February
28, 1999, the Company completed a formal plan to exit its international ocean
freight N.V.O.C.C. services by disposing of the business and assets of Clipper
International. On April 17, 1999, the Company closed the sale of the business
and certain assets of Clipper International, including the trade name "CaroTrans
International, Inc." All of the remaining assets have been liquidated. The
aggregate of the selling price of these assets and the estimated liquidation
value of the retained Clipper International assets was approximately $5.0
million, which was approximately equal to the Company's net investment in the
related assets.
Results of operations of Clipper International have been reported as
discontinued operations and the statements of operations for all prior periods
have been restated to remove the revenue and expenses of this segment. Results
of Clipper International included in discontinued operations are summarized as
follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
---------- ---------- ------------
($ thousands)
<S> <C> <C> <C>
Clipper International:
Revenues ............ $ -- $ -- $ 6,777
Operating loss ...... $ -- $ -- $ (1,314)
Pre-tax loss ........ $ -- $ -- $ (1,258)
</Table>
NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, Goodwill and Other Intangible Assets ("Statement No. 142").
Under Statement No. 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment. Statement No. 142 was
effective for the Company on January 1, 2002, and as of that date, the Company
no longer amortizes its goodwill, but reviews it annually for impairment. At
December 31, 2001, the Company's assets include goodwill of $101.3 million of
which $63.8 million is from a 1988 leveraged buyout transaction and $37.5
million is from the 1994 acquisition of Clipper. The Company's annual goodwill
amortization expense for 2001 was $4.1 million. Statement No. 142 requires that
the Company perform transitional impairment testing on its goodwill during the
first six months of 2002 based on January 1, 2002 values. The Company has
performed the first phase of impairment testing on its leveraged buyout
goodwill, which is based on ABF's
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
operations and fair value. There is no indication of impairment with respect to
this goodwill. The Company has performed both the first and second phases of the
transitional impairment testing on its Clipper goodwill and will recognize a
non-cash impairment loss of $23.9 million, net of taxes, as a change in
accounting principle as provided in Statement No. 142, in the first quarter of
2002. This will eliminate all of the $37.5 million of Clipper goodwill from the
Company's balance sheet. The impairment loss results from the change in the
method of determining recoverable goodwill from using undiscounted cash flows,
as prescribed by FAS No. 121, Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, to the fair value method determined by
using quoted market prices or other valuation techniques including the present
value of discounted cash flows, as prescribed by Statement No. 142.
On August 15, 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. Statement No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. This Statement applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. The Statement is
effective for the Company in 2003. The Company is evaluating the impact, if any,
the Statement will have on its financial statements and related disclosures.
On October 3, 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement No. 144 supersedes
Statement No. 121 and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. The
Statement is effective for the Company January 1, 2002. The impact on the
Company's financial statements and related disclosures of the adoption of
Statement No. 144 is expected to be immaterial.
NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts and hedging activities. In June 1999, the FASB issued Statement
No. 137, which deferred for one year the implementation date of FASB Statement
No. 133. The Company adopted Statement No. 133 on January 1, 2001. The adoption
did not materially affect the Company's financial statements.
The Company has, from time to time, entered into interest-rate swap agreements
(see Notes G and N) and interest-rate cap agreements designated to modify the
interest characteristic of outstanding debt or limit exposure to increasing
interest rates in accordance with its interest rate risk management policy. 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
method of accounting). The related amount payable or receivable from
counter-parties is included in other current liabilities or current assets. In
connection with the Company's adoption of Statement No. 133, the Company is
required to recognize all derivatives on its balance sheet at fair value.
Derivatives that are not hedges will be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Hedge ineffectiveness associated with interest-rate swap agreements
will be reported by the Company in interest expense.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The Company entered into an interest-rate swap agreement on February 23, 1998
with an effective date of April 1, 1998 and a termination date of April 1, 2005
on a notional amount of $110.0 million. The Company's interest rate strategy is
to hedge its variable 30-day LIBOR-based interest rate for a fixed interest rate
of 5.845% (plus the current Credit Agreement margin of 0.575%) on $110.0 million
of Credit Agreement borrowings for the term of the interest rate swap to protect
the Company from potential interest rate increases. The Company has designated
its benchmark variable 30-day LIBOR-based interest rate on $110.0 million of
borrowings under the Company's Credit Agreement as a hedged item under a cash
flow hedge. If the Company had terminated the interest rate swap on December 31,
2001, it would have had to pay an estimated $5.4 million. The Company recognized
this liability on its balance sheet in accordance with Statement No. 133, at
December 31, 2001, through other comprehensive income, net of income tax
benefits.
The Company reported no gain or loss during the year ended December 31, 2001 as
a result of hedge ineffectiveness, other derivative instruments' gain or loss or
the discontinuance of a cash flow hedge. Future changes in the swap arrangement
(including termination of the swap agreement), swap notional amount, hedged
portion or forecasted Credit Agreement borrowings below $110.0 million may
result in a reclassification of any gain or loss reported in other comprehensive
income, into earnings.
NOTE F- FEDERAL AND STATE INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<Table>
<Caption>
DECEMBER 31
2001 2000
---------- ----------
($ thousands)
<S> <C> <C>
Deferred tax liabilities:
Amortization, depreciation and basis differences
for property, plant and equipment and other long-lived assets .. $ 39,434 $ 40,807
Revenue recognition ............................................... 4,453 5,960
Prepaid expenses .................................................. 4,489 4,454
Other ............................................................. 6,146 7,625
---------- ----------
Total deferred tax liabilities .................................. 54,522 58,846
Deferred tax assets:
Accrued expenses .................................................. 35,952 24,087
Fair value of interest rate swap .................................. 2,093 --
Postretirement benefits other than pensions ....................... 1,439 1,223
State net operating loss carryovers ............................... 2,175 2,579
Basis difference in investment in Wingfoot ........................ 1,112 1,112
Other ............................................................. 5,600 3,983
---------- ----------
Total deferred tax assets ....................................... 48,371 32,984
Valuation allowance for deferred tax assets ..................... (3,392) (2,215)
---------- ----------
Net deferred tax assets ........................................ 44,979 30,769
---------- ----------
Net deferred tax liabilities ......................................... $ 9,543 $ 28,077
========== ==========
</Table>
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Significant components of the provision for income taxes are as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
---------- ---------- ----------
($ thousands)
<S> <C> <C> <C>
Current:
Federal ................... $ 23,297 $ 37,439 $ 28,797
State ..................... 2,070 5,412 4,530
---------- ---------- ----------
Total current .......... 25,367 42,851 33,327
---------- ---------- ----------
Deferred:
Federal ................... (2,274) 7,302 2,023
State ..................... 2,222 2,815 1,105
---------- ---------- ----------
Total deferred ......... (52) 10,117 3,128
---------- ---------- ----------
Total income tax expense ..... $ 25,315 $ 52,968 $ 36,455
========== ========== ==========
</Table>
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:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
---------- ---------- ----------
($ thousands)
<S> <C> <C> <C>
Income tax at the
statutory federal rate of 35% ......... $ 23,352 $ 45,193 $ 30,673
Federal income tax effects of:
State income taxes .................. (1,502) (2,879) (1,972)
Nondeductible goodwill .............. 841 841 963
Other nondeductible expenses ........ 623 1,704 1,364
Minority interest ................... -- -- (85)
Resolution of tax contingencies ..... (1,943) -- --
Other ............................... (348) (118) (123)
---------- ---------- ----------
Federal income taxes ................... 21,023 44,741 30,820
State income taxes ..................... 4,292 8,227 5,635
---------- ---------- ----------
Total income tax expense ............... $ 25,315 $ 52,968 $ 36,455
========== ========== ==========
Effective tax rate ..................... 37.9% 41.0% 41.6%
========== ========== ==========
</Table>
Income taxes of $39.9 million were paid in 2001, $48.7 million were paid in 2000
and $29.9 million were paid in 1999. Income tax refunds amounted to $7.6 million
in 2001, $2.9 million in 2000 and $1.4 million in 1999.
As of December 31, 2001, the Company had state net operating loss carryovers of
approximately $41.4 million. State net operating loss carryovers expire
generally in five to fifteen years.
For financial reporting purposes, the Company had a valuation allowance of
approximately $2.3 million for certain state net operating loss carryovers and
federal tax credits for which realization is uncertain. In addition, the Company
had a valuation allowance of approximately $1.1 million related to the excess
tax basis in its investment in Wingfoot (see Note R). During 2001, the net
change in the valuation allowance was a $1.2 million increase, all of which
related to changes in the valuation allowance for state net operating loss
carryovers and federal tax credits.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
During 2001, certain issues relating to the utilization of net operating losses
and credits arising in prior years were resolved, resulting in a non-recurring
tax benefit of approximately $1.9 million.
In March 1999, the Tenth Circuit Court of Appeals ruled against an appealing
taxpayer regarding the timing of the deductibility of contributions to
multiemployer pension plans. The Internal Revenue Service ("IRS") has raised the
same issue with respect to the Company. There are certain factual differences
between those present in the Tenth Circuit case and those relating specifically
to the Company. The Company has been involved in the administrative appeals
process with the IRS regarding those factual differences. Based on the most
recent information available, it is likely that the Company will receive an
unfavorable decision from the IRS on the issues involved. During 2001, the
Company paid approximately $33.0 million, which represents a substantial portion
of the tax and interest that would be due if all the issues involved were
decided adversely to the Company and which was accounted for in prior years as a
part of the Company's net deferred tax liability and accrued expenses. The
Company continues to contest the issues and will pursue judicial remedies if
appropriate. Because of the complex issues and the fact that multiple tax years
and IRS examinations of the Company and an acquired company are involved,
management believes the final resolution of this matter will occur over an
extended future period. In the opinion of management, any additional liability
that may arise has been accrued for and will not have a material adverse effect
on the Company's results of operations, financial position and cash flows in any
future period.
NOTE G - LONG-TERM DEBT AND CREDIT AGREEMENTS
<Table>
<Caption>
DECEMBER 31
2001 2000
---------- ----------
($ thousands)
<S> <C> <C>
Revolving credit agreement (1) ..... $ 110,000 $ 110,000
Subordinated debentures (2) ........ 4,811 28,685
Capitalized lease obligations (3) .. 14,896 38,109
Other .............................. 130 151
---------- ----------
129,837 176,945
Less current portion ............... 14,834 23,948
---------- ----------
$ 115,003 $ 152,997
========== ==========
</Table>
(1) On June 12, 1998, the Company entered into a senior five-year Revolving
Credit Agreement ("Credit Agreement") in the amount of $250.0 million,
which includes a $75.0 million sublimit for the issuance of letters of
credit. The parties to the Credit Agreement are the Company, Wells
Fargo Bank (Texas), N.A. as Administrative Agent, and Bank of America
National Trust and Savings Association and Wells Fargo Bank (Texas),
N.A. as Co-Documentation Agents, as well as six other participating
banks. The Credit Agreement contains covenants limiting, among other
things, indebtedness, distributions and dispositions of assets, and
requires the Company to meet certain quarterly financial ratio tests.
As of December 31, 2001, the Company was in compliance with all
covenants. Interest rates under the agreement are at variable rates as
defined by the Credit Agreement. At December 31, 2001, the effective
average interest rate, after considering the Company's fixed interest
rate swap (see Note N), on Credit Agreement borrowings was 6.4%.
At December 31, 2001, there were $110.0 million of Revolver Advances
and approximately $23.6 million in outstanding letters of credit. At
December 31, 2000, there were $110.0 million of Revolver Advances and
approximately $22.8 million of outstanding letters of credit.
Outstanding revolving credit advances may not exceed a borrowing base
calculated using the Company's equipment, real estate and eligible
receivables. The borrowing base was $325.1 million at December 31,
2001, which would allow
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
borrowings up to the $250.0 million limit specified by the Credit
Agreement. The amount available for borrowing under the Credit
Agreement at December 31, 2001 was $116.4 million. The Company pays a
commitment fee for unborrowed funds. This commitment fee was 0.25% at
December 31, 2001.
(2) The Subordinated Debentures were issued in April 1986 by an acquired
company. The debentures bear interest at 6.25% per annum, payable
semi-annually, on a par value of $5.0 million at December 31, 2001. 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 year through 2010,
$2.5 million of the aggregate principal amount of the debentures
issued. The Company has met its sinking fund obligations through 2010
by making market purchases and deposits of debentures with the Bond
Trustee. Bonds with a par value of $24.9 million were purchased in 2001
for approximately $23.2 million. Bonds with a par value of $5.0 million
were purchased for approximately $4.5 million in 2000. Bonds with a par
value of $5.0 million were purchased in 1999 for approximately $4.3
million. The bond retirements resulted in gains of $0.8 million in
2001, $0.4 million in 2000 and $0.5 million in 1999 (included in other
income).
(3) Capitalized lease obligations include approximately $14.7 million
relative to leases of carrier revenue equipment with an aggregate net
book value of approximately $14.4 million at December 31, 2001. These
leases have a weighted-average interest rate of approximately 7.1%.
Also included is approximately $0.2 million relative to leases of
computer equipment with a weighted-average interest rate of
approximately 4.0%. The net book value of the related assets was
approximately $0.2 million at December 31, 2001.
Annual maturities on long-term debt, excluding capitalized lease obligations, in
2002 through 2006 aggregate approximately $24,000; $110.0 million; $28,000;
$31,000; and $20,000, respectively.
Interest paid, including interest capitalized and payments of IRS interest (see
Note F), was $32.3 million in 2001, $13.8 million in 2000, and $16.5 million in
1999. Interest capitalized totaled $0.3 million in 2001, $0.2 million in 2000,
and $0.2 million in 1999.
In February 1998, the Company entered into an interest rate swap effective April
1, 1998, on a notional amount of $110.0 million. The purpose of the swap was to
limit the Company's exposure to increases in interest rates on $110.0 million of
bank borrowings over the seven-year term of the swap. The fixed interest rate
under the swap is 5.845% plus the Credit Agreement margin (0.575% currently and
0.55% at December 31, 2001) (see Note N).
The Company has guaranteed $0.5 million of payments related to a former
subsidiary. The Company's exposure to the guarantee should be reduced by $60,000
per year.
NOTE H - ACCRUED EXPENSES
<Table>
<Caption>
DECEMBER 31
2001 2000
---------- ----------
($ thousands)
<S> <C> <C>
Accrued salaries, wages and incentive plans ...................... $ 19,719 $ 39,142
Accrued vacation pay ............................................. 31,933 33,293
Accrued interest ................................................. 1,584 11,351
Taxes other than income .......................................... 7,006 6,943
Loss, injury, damage and workers' compensation claims reserves ... 56,804 70,194
Other ............................................................ 4,377 7,702
---------- ----------
$ 121,423 $ 168,625
========== ==========
</Table>
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE I - STOCKHOLDERS' 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 was
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 were
$2.875 and were cumulative. The Preferred Stock was 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 was 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 had no voting rights unless dividends were in
arrears six quarters or more, at which time they had the right to elect two
directors of the Company until all dividends had been paid. Dividends of $2.5
million, $4.1 million and $4.3 million were paid during 2001, 2000 and 1999,
respectively.
On July 10, 2000, the Company purchased 105,000 shares of its Preferred Stock at
$37.375 per share, for a total cost of $3.9 million. All of the shares purchased
were retired. On August 13, 2001, the Company announced the call for redemption
of its $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock
("ABFSP"). As of August 10, 2001, 1,390,000 shares of Preferred Stock were
outstanding. At the end of the extended redemption period on September 14, 2001,
1,382,650 shares of the Preferred Stock were converted to 3,511,439 shares of
Common Stock. A total of 7,350 shares of Preferred Stock were redeemed at the
redemption price of $50.58 per share. The Company paid $0.4 million to the
holders of these shares in redemption of their Preferred Stock.
TREASURY STOCK. At December 31, 2001 and 2000, the Company had 59,782 shares of
treasury stock with a cost basis of $1.0 million. The shares were purchased at
various times throughout the year as employees tendered shares they had held for
six months or more as payments for the exercise price of stock options, as
allowed by the Company's stock option plans.
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 No.
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 and director stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
At December 31, 2001, the Company had two stock option plans, which provided
3,900,000 shares of Common Stock for the granting of options to directors and
key employees of the Company. One of the stock option plans, the 1992 Arkansas
Best Corporation Stock Option Plan, expired on December 31, 2001. 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 No. 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 2001, 2000 and 1999, respectively: risk-free interest rates of
5.4%, 5.2% and 6.7%; dividend yields of .01%, .01% and .01%; volatility factors
of
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
the expected market price of the Company's Common Stock of .57, .46 and .45; 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 that 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.
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):
<Table>
<Caption>
DECEMBER 31
2001 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net income - as reported ......................... $ 41,404 $ 76,155 $ 50,396
============ ============ ============
Net income - pro forma ........................... $ 39,573 $ 75,330 $ 49,696
============ ============ ============
Net income per share - as reported (basic) ....... $ 1.79 $ 3.62 $ 2.34
============ ============ ============
Net income per share - as reported (diluted) ..... $ 1.66 $ 3.17 $ 2.11
============ ============ ============
Net income per share - pro forma (basic) ......... $ 1.70 $ 3.58 $ 2.31
============ ============ ============
Net income per share - pro forma (diluted) ....... $ 1.59 $ 3.13 $ 2.08
============ ============ ============
</Table>
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<Table>
<Caption>
2001 2000 1999
------------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year ........ 2,235,731 $ 9.84 2,054,700 $ 8.28 1,839,500 $ 8.11
Granted ................................ 819,201 25.71 691,398 13.62 429,000 8.85
Exercised .............................. (826,718) 9.66 (466,804) 8.91 (142,120) 7.26
Forfeited .............................. (27,000) 17.48 (43,563) 6.50 (71,680) 7.77
--------- ---------- --------- --------- --------- ----------
Outstanding - end of year .............. 2,201,214 $ 15.78 2,235,731 $ 9.84 2,054,700 $ 8.28
========= ========== ========= ========= ========= ==========
Exercisable - end of year .............. 690,856 $ 8.55 1,052,554 $ 8.34 1,154,680 $ 8.87
========= ========== ========= ========= ========= ==========
Estimated weighted-average fair
value per share of options granted
to employees during the year ........ $ 10.31 $ 8.67 $ 5.82
========== ========= ==========
</Table>
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The following table summarizes information concerning currently outstanding and
exercisable options:
<Table>
<Caption>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$4 - $6 171,629 5.2 $ 5.07 124,029 $ 5.07
$6 - $8 433,400 5.6 7.06 293,900 6.80
$8 - $10 57,000 3.6 8.72 49,800 8.77
$10 - $12 57,256 3.7 10.66 42,256 10.70
$12 - $14 668,061 7.7 13.45 176,071 13.16
$14 - $16 24,000 8.3 14.99 4,800 14.99
$24 - $26 485,832 9.0 24.38 -- --
$26 - $28 20,000 9.0 26.81 -- --
$28 - $30 284,036 10.0 28.05 -- --
---------- -------- ------
2,201,214 690,856
========== ========
</Table>
STOCKHOLDERS' 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 an exercise price of $80.00 per right. The rights are not
currently exercisable, but could become exercisable if certain events occur,
including the acquisition of 15% or more of the outstanding Common Stock of the
Company. Under certain conditions, the rights will entitle holders, other than
an acquirer in a non-permitted transaction, to purchase shares of Common Stock
with a market value of two times the exercise price of the right. The rights
will expire in 2011 unless extended.
NOTE J - LEASES AND COMMITMENTS
Rental expense amounted to approximately $13.8 million in 2001, $17.3 million in
2000 and $20.5 million in 1999.
The future minimum rental commitments, net of future minimum rentals to be
received under noncancellable subleases, as of December 31, 2001 for all
noncancellable operating leases are as follows:
<Table>
<Caption>
EQUIPMENT
AND
PERIOD TOTAL TERMINALS OTHER
- ------ ----------- ------------ ---------
($ thousands)
<S> <C> <C> <C>
2002.................................................... $ 11,214 $ 10,001 $ 1,213
2003.................................................... 8,688 8,421 267
2004.................................................... 6,545 6,504 41
2005.................................................... 5,384 5,343 41
2006.................................................... 4,627 4,612 15
Thereafter.............................................. 9,666 9,666 --
----------- ----------- ----------
$ 46,124 $ 44,547 $ 1,577
=========== =========== ==========
</Table>
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 $2.6 million at December 31, 2001.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The future minimum payments under capitalized leases at December 31, 2001
consisted of the following ($ thousands):
<Table>
<S> <C>
2002........................................................................... $ 15,290
2003........................................................................... 81
2004........................................................................... 6
----------
Total minimum lease payments .................................................. 15,377
Amounts representing interest ................................................. 481
----------
Present value of net minimum leases
included in long-term debt (see Note G)...................................... $ 14,896
==========
</Table>
Assets held under capitalized leases are included in property, plant and
equipment as follows:
<Table>
<Caption>
DECEMBER 31
2001 2000
---------- ----------
($ thousands)
<S> <C> <C>
Revenue equipment ................ $ 34,587 $ 76,978
Other equipment .................. 583 742
---------- ----------
35,170 77,720
Less accumulated amortization .... 20,573 39,278
---------- ----------
$ 14,597 $ 38,442
========== ==========
</Table>
The revenue equipment leases have remaining terms of one year 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 $26.1 million were incurred for the year ended
December 31, 1999. No capital lease obligations were incurred in the years ended
December 31, 2001 and 2000.
Commitments to purchase revenue equipment, which are cancellable by the Company
if certain conditions are met, aggregated approximately $25.6 million at
December 31, 2001.
NOTE K - 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 are expected to have a
material adverse effect on the Company's financial condition, cash flows or
results of operations. The Company maintains liability insurance against certain
risks arising out of the normal course of its business, subject to certain
self-insured retention limits.
The Company's subsidiaries, or lessees, store fuel for use in tractors and
trucks in approximately 76 underground tanks located in 25 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.
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 $340,000 over the last 12 years), or
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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, 2001, the Company has accrued approximately $2.4 million to
provide for environmental-related liabilities. The Company's environmental
accrual is based on management's best estimate of the actual liability. The
Company's estimate is founded on management's experience in dealing with similar
environmental matters and on actual testing performed at some sites. Management
believes that the accrual is adequate to cover environmental liabilities based
on the present environmental regulations. Accruals for environmental liability
are included in the balance sheet as accrued expenses.
NOTE L - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company and its subsidiaries have noncontributory defined benefit pension
plans covering substantially all noncontractual employees. Benefits are
generally 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 trust funds and are primarily
invested in equity and fixed income securities. Additionally, the Company
participates in several multiemployer plans that 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 multiemployer plans' unfunded vested
benefits, the amount of which, if any, has not been determined, but which would
be material.
During 1999, the Company's and certain subsidiaries' defined benefit pension
plans were amended to reduce early retirement incentives and to change the
benefit formula from an annuity formula to a lump-sum formula.
The Company also sponsors other postretirement benefit plans that provide
supplemental medical benefits, life insurance, accident and vision care to
certain full-time officers of the Company and certain subsidiaries. The plans
are noncontributory, with the Company generally paying 80% of covered charges
incurred by plan participants.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The following is a summary of the changes in benefit obligations and plan assets
for the defined benefit plans and other postretirement benefit plans:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
POSTRETIREMENT
PENSION BENEFITS HEALTH BENEFITS
2001 2000 2001 2000
---------- ---------- ---------- ----------
($ thousands)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year .................... $ 158,349 $ 158,401 $ 6,703 $ 5,188
Service cost ............................................... 7,448 7,729 86 56
Interest cost .............................................. 11,217 11,998 622 489
Sale of G.I. Trucking Company (see Note S) ................. (46,214) -- -- --
Actuarial loss and other ................................... 14,013 3,453 2,228 1,532
Benefits and expenses paid ................................. (13,462) (23,232) (623) (562)
---------- ---------- ---------- ----------
Benefit obligation at end of year .......................... 131,351 158,349 9,016 6,703
---------- ---------- ---------- ----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year ............. 192,287 213,986 -- --
Actual return on plan assets and other ..................... (1,476) 427 -- --
Employer contribution ...................................... 225 1,106 623 562
Sale of G.I. Trucking Company (see Note S) ................. (45,158) -- -- --
Benefits and expenses paid ................................. (13,462) (23,232) (623) (562)
---------- ---------- ---------- ----------
Fair value of plan assets at end of year ................... 132,416 192,287 -- --
---------- ---------- ---------- ----------
Funded status .............................................. 1,065 33,938 (9,016) (6,703)
Unrecognized net actuarial (gain) loss ..................... 28,050 (1,425) 3,396 1,377
Unrecognized prior service cost (credit) ................... (7,009) (7,892) 432 563
Sale of G.I. Trucking Company (see Note S) ................. (3,956) -- -- --
Unrecognized net transition obligation (asset) and other ... (34) (43) 1,473 1,623
---------- ---------- ---------- ----------
Prepaid (accrued) benefit cost ............................. $ 18,116 $ 24,578 $ (3,715) $ (3,140)
========== ========== ========== ==========
</Table>
At December 31, 2001, the net pension asset is reflected in the accompanying
financial statements as a noncurrent asset of $18.4 million, included in other
assets, and a current liability of $0.3 million, included in accrued expenses.
At December 31, 2000, the net pension asset is reflected in the accompanying
financial statements as a noncurrent asset of $24.8 million, included in other
assets, and a current liability of $0.2 million, included in accrued expenses.
At December 31, 2001, the Arkansas Best Corporation Retirement Plan had pension
benefit obligations of $23.5 million and plan assets with a fair value of $23.0
million.
At December 31, 2000, the Treadco pension plan had pension benefit obligations
of $5.5 million and plan assets with a fair value of $4.8 million.
At December 31, 2001, the pension plans' assets included 433,374 shares of the
Company's Common Stock, which had a fair market value of $12.5 million. There
were no dividends paid on the Company's Common Stock during 2001 or 2000.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Assumptions used in determining net periodic benefit cost for the defined
benefit plans and other postretirement benefit plans were:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
PENSION BENEFITS POSTRETIREMENT HEALTH BENEFITS
------------------------------------------ -------------------------------------------
2001 2000 1999 2001 2000 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate .................... 7.55% 7.65% 7.90% 7.55% 7.65% 7.90%
Expected return on plan assets ... 9.0% - 10.0% 9.0% - 10.0% 9.0% - 10.0% -- -- --
Rate of compensation increase .... 3.0% - 4.0% 3.0% - 4.0% 3.0% - 4.0% -- -- --
</Table>
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (in health care cost trend) ranges from 5.0% to 6.0% for 2001
and is assumed to decrease gradually to 4.5% in 2007.
A summary of the components of net periodic benefit cost for the defined benefit
plans and other postretirement plans follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
PENSION BENEFITS POSTRETIREMENT HEALTH BENEFITS
-------------------------------------- --------------------------------
2001 2000 1999 2001 2000 1999
---------- ---------- ---------- --------- -------- --------
($ thousands)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost ....................................... $ 7,448 $ 7,729 $ 6,025 $ 86 $ 56 $ 64
Interest cost ...................................... 11,217 11,998 11,508 622 489 389
Expected return on plan assets ..................... (15,232) (19,217) (17,591) -- -- --
Transition (asset) obligation recognition .......... (8) (6) (4) 135 135 135
Special termination benefit ........................ 100 -- -- -- -- --
Amortization of prior service cost (credit) ........ (884) (895) (895) 131 131 131
Recognized net actuarial loss (gain) and other ..... 1,150 (2,079) 361 209 (23) (2)
---------- ---------- ---------- --------- -------- --------
Net periodic benefit cost .......................... 3,791 (2,470) (596) 1,183 788 717
Multiemployer plans ................................ 74,131 75,821 68,211 -- -- --
---------- ---------- ---------- --------- -------- --------
......................................... $ 77,922 $ 73,351 $ 67,615 $ 1,183 $ 788 $ 717
========== ========== ========== ========= ======== ========
</Table>
The health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for the year ended
December 31, 2001:
<Table>
<Caption>
1% 1%
INCREASE DECREASE
-------- --------
($ thousands)
<S> <C> <C>
Effect on total of service and interest cost components .... 98 (81)
Effect on postretirement benefit obligation ................ 1,145 (959)
</Table>
The Company has deferred compensation agreements with certain executives for
which liabilities aggregating $4.0 million and $3.5 million as of December 31,
2001 and 2000, respectively, have been recorded. The deferred compensation
agreements include a provision that immediately vests all benefits and, at the
executive's election, provides for a lump-sum payment upon a change-in-control
of the Company.
The Company also has a supplemental benefit plan for the purpose of
supplementing benefits under the Company's defined benefit 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 designated as
participants in the plan by the Company's Board of Directors. As of December 31,
2001 and 2000, the Company has liabilities of $10.2
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
million and $5.7 million, respectively, for future costs under this plan
reflected in the accompanying consolidated financial statements in other
liabilities. The supplemental benefit plan includes a provision that benefits
accrued under the plan will be paid in the form of a lump sum following a
change-in-control of the Company.
An additional benefit plan provides certain death and retirement benefits for
certain officers and directors of an acquired company and its former
subsidiaries. The Company has liabilities of $2.3 million and $2.7 million at
December 31, 2001 and 2000, 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, which are
included in other assets, in amounts that are sufficient to fund the benefits
under the plan.
The Company has various defined contribution plans that cover substantially all
of its employees. The plans permit participants to defer a portion of their
salary up to a maximum of 15% as provided in Section 401(k) of the Internal
Revenue Code. The Company matches a portion of participant contributions up to a
specified compensation limit ranging from 0% to 6% in 2001. The plans also allow
for discretionary Company contributions determined annually. The Company's
expense for the defined contribution plans totaled $5.0 million for 2001, $4.0
million for 2000 and $2.7 million for 1999.
In addition, the Company's union employees and union retirees are provided
health care and other benefits through defined benefit multiemployer plans
administered and funded based on the applicable labor agreement. The Company's
obligation is determined based on the applicable labor agreement and does not
extend directly to employees or retirees. 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 $78.8 million, $73.6 million and $69.8 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
The Company has a performance award program available to the officers of ABC.
Units awarded will be initially valued at 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.
The Company maintains a Voluntary Savings Plan ("VSP"). The VSP is a
nonqualified deferred compensation plan for certain executives of the Company.
Eligible employees are allowed to defer receipt of a portion of their regular
compensation, incentive compensation or supplemental retirement payments and
other bonuses by making an election before the compensation is payable. In
addition, the Company credits participants' accounts with matching contributions
and rates of return based on investment indexes selected by the participants.
Salary deferrals, Company match and investment earnings are considered part of
the general assets of the Company until paid. As of December 31, 2001, the
Company has recorded liabilities of $16.5 million in other liabilities and
assets of $16.5 million in other assets associated with the plan. As of December
31, 2000, the Company had recorded liabilities of $12.2 million in other
liabilities and assets of $12.2 million in other assets.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE M - OPERATING SEGMENT DATA
The Company used the "management approach" to determine its reportable operating
segments as well as to determine the basis of reporting the operating segment
information. The management approach focuses on financial information that the
Company's management uses to make decisions about operating matters. Management
uses operating revenues, operating expense categories, operating ratios,
operating income and key operating statistics to evaluate performance and
allocate resources to the Company's operating segments.
During the periods being reported on, the Company operated in four defined
reportable operating segments: (1) ABF; (2) G.I. Trucking (which was sold on
August 1, 2001) (see Note S); (3) Clipper; and (4) Treadco (which was
contributed to Wingfoot on October 31, 2000) (see Note R). A discussion of the
services from which each reportable segment derives its revenues is as follows:
ABF is headquartered in Fort Smith, Arkansas, and is one of North America's
largest national less-than-truckload ("LTL") motor carriers, providing direct
service to over 98.6% of the cities in the United States having a population of
25,000 or more. ABF offers long-haul, intrastate and regional transportation of
general commodities through LTL, assured services and expedited shipments.
Clipper is headquartered in Lemont, Illinois. Clipper offers domestic intermodal
freight services, utilizing transportation movement over the road and on the
rail.
The Company's other business activities and operating segments that are not
reportable include FleetNet America, LLC, a third-party, vehicle maintenance
company; Arkansas Best Corporation, the parent holding company; and Transport
Realty, Inc., a real estate subsidiary of the Company, as well as other
subsidiaries.
The Company eliminates intercompany transactions in consolidation. However, the
information used by the Company's management with respect to its reportable
segments is before intersegment eliminations of revenues and expenses.
Intersegment revenues and expenses are not significant.
Further classifications of operations or revenues by geographic location beyond
the descriptions provided above is impractical and is, therefore, not provided.
The Company's foreign operations are not significant.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The following tables reflect reportable operating segment information for the
Company, as well as a reconciliation of reportable segment information to the
Company's consolidated operating revenues, operating expenses and operating
income:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
------------ ------------ ------------
($ thousands)
<S> <C> <C> <C>
OPERATING REVENUES
ABF Freight System, Inc. .................. $ 1,282,315 $ 1,379,280 $ 1,277,093
G.I. Trucking Company (see Note S) ........ 95,477 161,897 137,409
Clipper ................................... 127,278 130,242 112,237
Treadco, Inc. (see Note R) ................ -- 158,269 186,602
Other revenues and eliminations ........... 21,136 9,879 8,245
------------ ------------ ------------
Total consolidated operating revenues .. $ 1,526,206 $ 1,839,567 $ 1,721,586
============ ============ ============
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages ........................ $ 841,106 $ 860,447 $ 818,928
Supplies and expenses ..................... 167,072 173,749 140,257
Operating taxes and licenses .............. 40,426 41,004 37,962
Insurance ................................. 17,342 22,515 20,811
Communications and utilities .............. 15,081 14,950 15,808
Depreciation and amortization ............. 39,848 35,947 30,409
Rents and purchased transportation ........ 77,690 93,856 101,849
Other ..................................... 5,036 3,538 4,887
(Gain) on sale of equipment ............... (641) (568) (787)
------------ ------------ ------------
1,202,960 1,245,438 1,170,124
------------ ------------ ------------
G.I. TRUCKING COMPANY (see Note S)
Salaries and wages ........................ 49,496 76,024 64,288
Supplies and expenses ..................... 9,252 15,154 11,061
Operating taxes and licenses .............. 2,255 3,419 3,251
Insurance ................................. 2,312 3,982 3,736
Communications and utilities .............. 1,348 2,091 1,773
Depreciation and amortization ............. 3,275 4,833 3,601
Rents and purchased transportation ........ 25,212 48,627 44,362
Other ..................................... 2,302 3,907 3,419
(Gain) on sale of equipment ............... (48) (55) (117)
------------ ------------ ------------
95,404 157,982 135,374
------------ ------------ ------------
CLIPPER
Cost of services .......................... 111,131 111,302 96,433
Selling, administrative and general ....... 15,651 17,322 14,381
Loss (gain) on sale of equipment .......... 43 (3) (33)
------------ ------------ ------------
126,825 128,621 110,781
------------ ------------ ------------
</Table>
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
------------ ------------ ------------
($ thousands)
<S> <C> <C> <C>
OPERATING EXPENSES AND COSTS (CONTINUED)
TREADCO, INC. (see Note R)
Cost of sales ..................................... $ -- $ 105,379 128,390
Selling, administrative and general ............... -- 48,219 54,622
------------ ------------ ------------
-- 153,598 183,012
------------ ------------ ------------
Other expenses and eliminations ...................... 25,083 13,776 12,588
------------ ------------ ------------
Total consolidated operating expenses and costs ... $ 1,450,272 $ 1,699,415 $ 1,611,879
============ ============ ============
OPERATING INCOME
ABF Freight System, Inc. .......................... $ 79,355 $ 133,842 $ 106,969
G.I. Trucking Company (see Note S) ................ 73 3,915 2,035
Clipper ........................................... 453 1,621 1,456
Treadco, Inc. (see Note R) ........................ -- 4,671 3,590
Other income (loss) and eliminations .............. (3,947) (3,897) (4,343)
------------ ------------ ------------
Total consolidated operating income ............ $ 75,934 $ 140,152 $ 109,707
============ ============ ============
</Table>
The following tables provide asset, capital expenditure and depreciation and
amortization information by reportable operating segment:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
---------- ---------- ----------
($ thousands)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
ABF Freight System, Inc. ...................................... $ 441,644 $ 505,147 $ 469,282
G.I. Trucking Company (see Note S) ............................ -- 57,845 51,049
Clipper ....................................................... 46,618 47,863 41,371
Treadco, Inc. (see Note R) .................................... -- -- 90,472
Investment in Wingfoot (see Note R) ........................... 59,341 59,341 --
Other and eliminations ........................................ 175,550 126,928 79,755
---------- ---------- ----------
Total consolidated identifiable assets ..................... $ 723,153 $ 797,124 $ 731,929
========== ========== ==========
CAPITAL EXPENDITURES (GROSS)
ABF Freight System, Inc. ...................................... $ 62,332 $ 71,337 $ 49,342
G.I. Trucking Company (see Note S) ............................ 4,537 11,693 7,946
Clipper ....................................................... 3,582 4,346 5,309
Treadco, Inc. (see Note R) .................................... -- 3,916 9,801
Other and eliminations ........................................ 4,219 2,293 3,811
---------- ---------- ----------
Total consolidated capital expenditures (gross) ............ $ 74,670 $ 93,585 $ 76,209
========== ========== ==========
DEPRECIATION AND AMORTIZATION EXPENSE
ABF Freight System, Inc. ...................................... $ 41,334 $ 37,746 $ 31,655
G.I. Trucking Company (see Note S) ............................ 3,185 4,781 3,552
Clipper ....................................................... 2,451 1,995 1,473
Treadco, Inc. (see Note R) .................................... -- 5,255 6,522
Other and eliminations ........................................ 7,578 6,677 6,559
---------- ---------- ----------
Total consolidated depreciation and amortization expense ... $ 54,548 $ 56,454 $ 49,761
========== ========== ==========
</Table>
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE N - FINANCIAL INSTRUMENTS
INTEREST RATE INSTRUMENTS
In February 1998, the Company entered into an interest rate swap effective April
1, 1998. The swap agreement is a contract to exchange variable interest rate
payments for fixed rate payments over the life of the instrument. The notional
amount is used to measure interest to be paid or received and does not represent
the exposure to credit loss. The purpose of the swap is to limit the Company's
exposure to increases in interest rates on the notional amount of bank
borrowings over the term of the swap. The fixed interest rate under the swap is
5.845% plus the Credit Agreement margin (currently 0.575%). On January 1, 2001,
this instrument was recorded on the balance sheet of the Company. Details
regarding the swap, as of December 31, 2001, are as follows:
<Table>
<Caption>
NOTIONAL RATE RATE FAIR
AMOUNT MATURITY PAID RECEIVED VALUE (2)(3)
-------- -------- ---- -------- ------------
<S> <C> <C> <C> <C>
$110.0 million April 1, 2005 5.845% Plus Credit Agreement LIBOR rate (1) ($5.4) million
Margin (currently 0.575%) Plus Credit Agreement
Margin (currently 0.575%)
</Table>
(1) LIBOR rate is determined two London Banking Days prior to the first day
of every month and continues up to and including the maturity date.
(2) The fair value is an amount estimated by Societe Generale ("process
agent") that the Company would have paid at December 31, 2001 to
terminate the agreement.
(3) The swap value declined from ($0.1) million at December 31, 2000. The
fair value is impacted by changes in rates of similarly termed Treasury
instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for all financial instruments, except for the
interest-rate swap agreement disclosed above and capitalized leases:
CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance sheets
for cash and cash equivalents approximates its fair value.
LONG- AND SHORT-TERM DEBT. The carrying amounts of the Company's borrowings
under its Revolving Credit Agreements approximate their fair values, since the
interest rate under these agreements is variable. Also, the carrying amount of
long-term debt was estimated to approximate their fair values, with the
exception of the Subordinated Debentures, which are estimated using current
market rates.
The carrying amounts and fair value of the Company's financial instruments at
December 31 are as follows:
<Table>
<Caption>
2001 2000
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
($ thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents .... $ 14,860 $ 14,860 $ 36,742 $ 36,742
Short-term debt .............. $ 24 $ 24 $ 21 $ 21
Long-term debt ............... $ 114,917 $ 114,498 $ 138,814 $ 137,831
</Table>
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE O - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2001 2000 1999
-------------- -------------- --------------
($ thousands, except per share data)
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic earnings per share -
Net income ................................. $ 41,404 $ 76,155 $ 50,396
Preferred stock dividends .................. (2,487) (4,122) (4,298)
-------------- -------------- --------------
Numerator for basic earnings per share -
Net income available to
common stockholders ........................ 38,917 72,033 46,098
Effect of dilutive securities ................. 2,487 4,122 4,298
-------------- -------------- --------------
Numerator for diluted earnings per share -
Net income available to
common stockholders ........................ $ 41,404 $ 76,155 $ 50,396
============== ============== ==============
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares ..................... 21,802,258 19,881,875 19,671,130
Effect of dilutive securities:
Preferred stock ............................. 2,354,157 3,530,183 3,796,852
Employee stock options ...................... 805,464 625,162 464,839
-------------- -------------- --------------
Denominator for diluted earnings per share -
adjusted weighted-average
shares and assumed conversions .............. 24,961,879 24,037,220 23,932,821
============== ============== ==============
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Continuing operations ......................... $ 1.79 $ 3.62 $ 2.38
Discontinued operations ....................... -- -- (0.04)
-------------- -------------- --------------
NET INCOME PER SHARE ............................. $ 1.79 $ 3.62 $ 2.34
============== ============== ==============
AVERAGE COMMON SHARES
OUTSTANDING (BASIC) ........................... 21,802,258 19,881,875 19,671,130
============== ============== ==============
DILUTED:
Continuing operations ......................... $ 1.66 $ 3.17 $ 2.14
Discontinued operations ....................... -- -- (0.03)
-------------- -------------- --------------
NET INCOME PER SHARE ............................. $ 1.66 $ 3.17 $ 2.11
============== ============== ==============
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED) ......................... 24,961,879 24,037,220 23,932,821
============== ============== ==============
CASH DIVIDENDS PAID PER COMMON SHARE ............. $ -- $ -- $ --
============== ============== ==============
</Table>
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below present unaudited quarterly financial information for 2001 and
2000:
<Table>
<Caption>
2001
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- -------------- -------------- --------------
($ thousands, except per share data)
<S> <C> <C> <C> <C>
Operating revenues ........................... $ 400,576 $ 406,577 $ 381,554 $ 337,499
Operating expenses and costs ................. 380,512 386,680 360,347 322,733
-------------- -------------- -------------- --------------
Operating income ............................. 20,064 19,897 21,207 14,766
Other income (expense) - net ................. (4,564) (3,125) 812 (2,338)
Income taxes ................................. 6,421 6,939 8,999 2,956
-------------- -------------- -------------- --------------
Income from continuing operations ............ 9,079 9,833 13,020 9,472
Loss from discontinued operations ............ -- -- -- --
-------------- -------------- -------------- --------------
Net income ................................... $ 9,079 $ 9,833 $ 13,020 $ 9,472
============== ============== ============== ==============
Net income per common share, basic: (1)
Continuing operations ..................... $ 0.40 $ 0.43 $ 0.57 $ 0.39
Discontinued operations ................... -- -- -- --
-------------- -------------- -------------- --------------
Net income per share (basic) ................. $ 0.40 $ 0.43 $ 0.57 $ 0.39
-------------- -------------- -------------- --------------
Average shares outstanding ................... 20,349,674 20,454,699 21,947,611 24,457,048
============== ============== ============== ==============
Net income per common share, diluted: (2)
Continuing operations ..................... $ 0.37 $ 0.40 $ 0.52 $ 0.38
Discontinued operations ................... -- -- -- --
-------------- -------------- -------------- --------------
Net income per share (diluted) ............... $ 0.37 $ 0.40 $ 0.52 $ 0.38
-------------- -------------- -------------- --------------
Average shares outstanding ................... 24,693,788 24,834,232 25,141,502 25,178,175
============== ============== ============== ==============
</Table>
<Table>
<Caption>
2000
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- -------------- -------------- --------------
($ thousands, except per share data)
<S> <C> <C> <C> <C>
Operating revenues ........................... $ 443,015 $ 471,987 $ 488,468 $ 436,097
Operating expenses and costs ................. 416,734 436,896 444,073 401,712
-------------- -------------- -------------- --------------
Operating income ............................. 26,281 35,091 44,395 34,385
Other expense - net .......................... (3,726) (4,699) (4,928) 2,324
Income taxes ................................. 9,383 12,643 16,142 14,800
-------------- -------------- -------------- --------------
Income from continuing operations ............ 13,172 17,749 23,325 21,909
Loss from discontinued operations ............ -- -- -- --
-------------- -------------- -------------- --------------
Net income ................................... $ 13,172 $ 17,749 $ 23,325 $ 21,909
============== ============== ============== ==============
Net income per common share, basic: (1)
Continuing operations ..................... $ 0.61 $ 0.84 $ 1.12 $ 1.04
Discontinued operations ................... -- -- -- --
-------------- -------------- -------------- --------------
Net income per share (basic) ................. $ 0.61 $ 0.84 $ 1.12 $ 1.04
-------------- -------------- -------------- --------------
Average shares outstanding ................... 19,763,133 19,785,000 19,882,056 20,097,309
============== ============== ============== ==============
Net income per common share, diluted: (2)
Continuing operations ..................... $ 0.55 $ 0.74 $ 0.97 $ 0.90
Discontinued operations ................... -- -- -- --
-------------- -------------- -------------- --------------
Net income per share (diluted) ............... $ 0.55 $ 0.74 $ 0.97 $ 0.90
-------------- -------------- -------------- --------------
Average shares outstanding ................... 24,088,802 24,081,375 24,081,674 24,445,404
============== ============== ============== ==============
</Table>
(1) Gives consideration to Preferred Stock dividends of $1.0 million per
quarter for the first and second quarters of 2001, $0.5 million for the
third quarter of 2001, $1.1 million per quarter for the first and
second quarters of 2000 and $1.0 million per quarter for the third and
fourth quarters of 2000.
(2) For the first and second quarters of 2001, and all quarters in 2000,
conversion of Preferred Stock into Common is assumed. For the third
quarter of 2001, conversion of Preferred Stock into Common is assumed
for the period prior to the September 14 Preferred Stock redemption
date.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE Q - ACQUISITION OF MINORITY INTEREST IN TREADCO, INC.
On January 22, 1999, the Company announced that it had submitted a formal
proposal to Treadco's Board of Directors under which the outstanding shares of
Treadco's common stock not owned by the Company would be acquired for $9.00 per
share in cash. The announcement stated that the proposal had the support of
Shapiro Capital Management Company, Inc., Treadco's largest independent
stockholder, which beneficially owned 1,132,775 shares (or approximately 22%) of
the common stock of Treadco. On March 15, 1999, the Company and Treadco signed a
definitive merger agreement for the acquisition of all shares of Treadco's stock
not owned by the Company for $9.00 per share in cash via a tender offer. The
tender offer commenced on March 23, 1999 and closed on April 20, 1999. A total
of approximately 2,457,000 shares were tendered to the Company. Including the
tendered shares, the Company owned approximately 98% of Treadco at the closing
of the tender. At a June 10, 1999 special meeting, the stockholders of Treadco,
Inc. approved the merger of Treadco Acquisition Corporation, a wholly owned
subsidiary of the Company, into Treadco, Inc. This transaction resulted in
Treadco, Inc. becoming a wholly owned subsidiary of the Company. Subject to the
terms of the merger agreement, shares of common stock not tendered were
converted into the right to receive $9.00 per share. As a result of the merger,
the Company voluntarily delisted Treadco, Inc.'s common stock from trading on
The Nasdaq National Market on June 10, 1999. The cost of the Treadco shares and
related expenses of $23.7 million was funded with the Company's Revolving Credit
Facility. The acquisition of the Treadco stock was accounted for as a purchase.
The application of purchase accounting to the acquired assets and liabilities of
Treadco resulted in the elimination of Treadco's goodwill of approximately $12.0
million and a reduction of Treadco's fixed assets of approximately $4.0 million.
Pro forma information (as if the acquisition and related transactions were
completed at the beginning of their respective periods) for the year ended
December 31, 1999 is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
1999
----------------------
($ thousands, except per share data)
<S> <C>
Operating revenues ........................ $ 1,721,586
Net income ................................ $ 50,217
Net income per share (diluted) ............ $ 2.10
</Table>
NOTE R - CONTRIBUTION OF TREADCO'S ASSETS AND LIABILITIES TO WINGFOOT
On September 13, 2000, Treadco entered into an agreement with Goodyear to form a
new limited liability company called Wingfoot Commercial Tire Systems, LLC. The
transaction closed on October 31, 2000. Effective October 31, 2000, Treadco
contributed substantially all of its assets and liabilities to Wingfoot in a
non-taxable transaction in exchange for a 19% ownership in Wingfoot. Goodyear
contributed substantially all of the assets and liabilities of its Commercial
Tire and Service Centers and Brad Ragan Tire Centers to Wingfoot in exchange for
an 81% interest in Wingfoot. The final ownership percentages for Treadco and
Goodyear were based upon the terms of the agreement. The assets and liabilities
contributed by Treadco to Wingfoot were $86.8 million and $37.9 million,
respectively.
The Company has the right, at any time after April 30, 2003 and before April 30,
2004, to sell its interest in Wingfoot to Goodyear for a cash "Put Price" equal
to approximately $73.4 million. Goodyear has the right, at any time after April
30, 2003 until October 31, 2004, to purchase the Company's entire interest, for
cash, at a "Call Price" equal to the "Put Price" plus $5.0 million. The Company
accounts for its investment in Wingfoot under the equity method and the
provisions of the Wingfoot Operating Agreement. As provided in the agreement,
during the term of the "Put," the Company does not share in the profits or
losses of Wingfoot. In the event the Company does not elect to sell its interest
in Wingfoot to Goodyear nor Goodyear elects to purchase
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
the Company's interest, then the parties' respective rights and obligations
relating to Wingfoot will continue to be governed by the Wingfoot Operating
Agreement, including accounting for Wingfoot profit and loss allocations at the
respective 19% and 81% ownership percentages beginning May 1, 2004.
The transaction was accounted for using fair value accounting, as prescribed by
the EITF Issue 00-5, which resulted in 81% of the fair value gain being
recognized in the fourth quarter of 2000. The fair value of 19% of Wingfoot is
$62.0 million determined by using the discounted "Put Price," which represents
the fair value of Treadco's net assets at the October 31, 2000 closing date. The
Company's carrying value of Treadco's net assets at the closing date was $49.0
million. The gain on the transaction was $13.0 million of which 81% was
recognized in the fourth quarter of 2000, or $10.5 million. This gain was
reduced by costs of the transaction of $5.5 million, which included investment
banking fees, legal and accounting fees, transaction bonuses and the
acceleration of certain benefits for the former Treadco officers, for a fair
value net gain recognized of $5.0 million. The Company's investment in Wingfoot
at December 31, 2001 and 2000 was $59.3 million.
NOTE S - SALE OF G.I. TRUCKING COMPANY
On August 1, 2001, the Company sold the stock of G.I. Trucking for $40.5 million
in cash to a company formed by the senior executives of G.I. Trucking and Estes
Express Lines ("Estes"). G.I. Trucking and Estes have been partners in
ExpressLINK(R), a North American transportation partnership since 1996. The
Company recognized a pre-tax gain on the sale of $4.6 million in the third
quarter of 2001.
The Company retained ownership of three California terminal facilities and has
agreed to lease them for an aggregate amount of $1.6 million per year to G.I.
Trucking for a period of up to four years. G.I. Trucking has an option at any
time during the four-year lease term to purchase these terminals for $19.5
million. The facilities have a net book value of approximately $6.0 million. If
the terminal facilities are sold to G.I. Trucking, the Company will recognize a
pre-tax gain of approximately $14.0 million in the period they are sold.
Cash proceeds from the sale of G.I. Trucking, net of costs and income taxes, of
approximately $33.0 million were used to pay down the Company's outstanding
debt.
<PAGE>
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE T - RELIANCE INSURANCE COMPANY INSOLVENCY
Reliance Insurance Company ("Reliance") insured the Company's workers'
compensation claims in excess of $300,000 ("excess claims") for the period from
1993 through 1999. According to an Official Statement by the Pennsylvania
Insurance Department on October 3, 2001, Reliance was determined to be
insolvent, with total admitted assets of $8.8 billion and liabilities of $9.9
billion, or a negative surplus position of $1.1 billion, as of March 31, 2001.
As of December 31, 2001, the Company estimates its workers' compensation claims
insured by Reliance to be approximately $5.8 million. The Company has been in
contact with and has received either written or verbal confirmation from a
number of state guaranty funds that they will accept excess claims, representing
a total of approximately $2.5 million of the $5.8 million. Based upon the
limited available Reliance financial information, the Company estimates its
current exposure to Reliance to be $0.5 million, for which it established
reserves during the third quarter of 2001. In evaluating that same financial
information, the Company anticipates receiving, from guaranty funds or through
orderly liquidation, partial reimbursement for future claims payments, a process
that could take several years.
NOTE U - SUBSEQUENT EVENT
On January 24, 2002, the Company called for redemption, the remaining $5.0
million of WorldWay Corporation 6 1/4% Convertible Subordinated Debentures. The
redemption date of the debentures was February 25, 2002 and the redemption price
was the par value of each debenture plus accrued and unpaid interest to, but not
including, the redemption date. The redemption resulted in a loss to the Company
of $0.2 million.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>5
<FILENAME>d94808ex21.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARY CORPORATIONS
ARKANSAS BEST CORPORATION
The Registrant owns and controls the following subsidiary corporations:
<Table>
<Caption>
JURISDICTION OF % OF VOTING
NAME INCORPORATION SECURITIES OWNED
- --------------------------------------------------------------- --------------- ----------------
<S> <C> <C>
SUBSIDIARIES OF ARKANSAS BEST CORPORATION:
ABF Freight System, Inc. Delaware 100
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
Agricultural Express of America, Inc. Delaware 100
Clipper Exxpress Company Delaware 100
Motor Carrier Insurance, Ltd. Bermuda 100
Tread-Ark Corporation Delaware 100
Best Service Corp. Arkansas 100
Clipper Global Air, Inc. Arkansas 100
Clipper Freight Management, Inc. Arkansas 100
CaroTrans Canada, Ltd. Canada 100
CaroTrans de Mexico, S.A. DE C.V. Mexico 100
Advertising Counselors, Inc. Arkansas 100
Arkansas Underwriters Corporation Arkansas 100
Subsidiary of Tread-Ark Corporation (formerly Treadco, Inc.):
FleetNet America, LLC Delaware 100
Subsidiary of ABF Freight System, Inc.:
ABF Freight System (B.C.), Ltd. British Columbia 100
FreightValue, Inc. Arkansas 100
</Table>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>d94808ex23.txt
<DESCRIPTION>CONSENT OF ERNST & YOUNG LLP
<TEXT>
<PAGE>
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 18, 2002, except for
Notes D and U, as to which the date is February 25, 2002, included in the 2001
Annual Report to Stockholders of Arkansas Best Corporation.
Our audits 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. 333-52970) pertaining to the Arkansas Best Corporation
Nonqualified Stock Option Plan, the Registration Statement (Form S-8 No.
333-93381) pertaining to the Arkansas Best Corporation Supplemental Benefit
Plan, the Registration Statement (Form S-8 No. 333-69953) pertaining to the
Arkansas Best Corporation Voluntary Savings Plan, the Registration Statement
(Form S-8 No. 333-61793) pertaining to the Arkansas Best Corporation Stock
Option Plan, 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 401(k) Savings Plan, of our
report dated January 18, 2002, except for Notes D and U, as to which the date is
February 25, 2002, 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.
Ernst & Young LLP
Little Rock, Arkansas
March 6, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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