1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year December 31, 1998. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________. Commission file number 0-19969 ARKANSAS BEST CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 71-0673405 ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3801 Old Greenwood Road, Fort Smith, Arkansas 72903 - --------------------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 501-785-6000 Securities registered pursuant to Section 12(b) of the Act: None ------------------------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: <TABLE> <CAPTION> Name of each exchange Title of each class on which registered ------------------------------- ------------------------------- <S> <C> Common Stock, $.01 Par Value .................................................... Nasdaq Stock Market/NMS $2.875 Series A Cumulative Convertible exchangeable Preferred Stock, $.01 Par Value .................................... Nasdaq Stock Market/NMS </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 16, 1999, was $127,123,797. The number of shares of Common Stock, $.01 par value, outstanding as of February 16, 1999, was 19,610,213. Documents incorporated by reference into the Form 10-K 1) The following sections of the 1998 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 - Consolidated Financial Statements 2) Proxy Statement for the Annual Stockholder's meeting to be held May 6, 1999.
2 ARKANSAS BEST CORPORATION FORM 10-K TABLE OF CONTENTS <TABLE> <CAPTION> ITEM PAGE NUMBER NUMBER PART I <S> <C> <C> Item 1. Business .................................................................................... 3 Item 2. Properties .................................................................................. 12 Item 3. Legal Proceedings ........................................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders ......................................... 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................... 14 Item 6. Selected Financial Data ..................................................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................................. 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 14 Item 8. Financial Statements and Supplementary Data ................................................. 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................................ 14 PART III Item 10. Directors and Executive Officers of the Registrant .......................................... 15 Item 11. Executive Compensation ...................................................................... 15 Item 12. Security Ownership of Certain Beneficial Owners and Management .............................. 15 Item 13. Certain Relationships and Related Transactions .............................................. 15 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K ............................. 16 </TABLE>
3 PART I Except for historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Arkansas Best Corporation's (the "Company") actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1, "Business." ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS CORPORATE PROFILE Arkansas Best Corporation (the "Company") is a diversified holding company engaged through its subsidiaries primarily in motor carrier transportation operations, intermodal and ocean transportation operations, and truck tire retreading and new tire sales (see Note N of the Consolidated Financial Statements appearing on pages 38 through 40 of the registrant's annual report). Principal subsidiaries are ABF Freight System, Inc. ("ABF"); Treadco, Inc. ("Treadco"); Clipper Exxpress Company and related companies ("Clipper Domestic"); CaroTrans International, Inc. ("Clipper International"); G.I. Trucking Company ("G.I. Trucking"); FleetNet America, Inc.; and, until July 15, 1997, Cardinal Freight Carriers, Inc., Inc. ("Cardinal"). HISTORICAL BACKGROUND The Company was publicly owned from 1969 until 1988, when it was acquired in a leveraged buyout by a corporation organized by Kelso & Company, L.P. ("Kelso"). In 1992, the Company completed an initial public offering of Common Stock par value $.01 (the "Common Stock"). The Company also repurchased substantially all the remaining shares of Common Stock beneficially owned by Kelso, thus ending Kelso's investment in the Company. In 1993, the Company completed a public offering of 1,495,000 shares of preferred stock ("Preferred Stock"). 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 million. Assets acquired had an estimated fair value of approximately $313.0 million and liabilities assumed had a fair value of approximately $252.0 million. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The response to this portion of Item 1 is included in "Note N - Operating Segment Data" appearing on pages 38 through 40 of the registrant's Annual Report to Stockholders for the year ended December 31, 1998, and is incorporated herein by reference under Item 14. 3
4 ITEM 1. BUSINESS-continued (C) NARRATIVE DESCRIPTION OF BUSINESS GENERAL During the periods being reported on, the Company operated in six defined reportable operating segments: 1) ABF; 2) G.I. Trucking; 3) Cardinal, which was sold in July 1997; 4) Clipper Domestic; 5) Clipper International; and 6) Treadco. Note N to the Consolidated Financial Statements contains additional information regarding the Company's operating segments and appears on pages 38 through 40 of the registrant's Annual Report to Stockholders for the year ended December 31, 1998, and is incorporated herein by reference under Item 14. DISCONTINUED OPERATIONS As of June 30, 1997 and prior periods since 1995, the Company was engaged in providing logistics services, including warehousing and distribution, through two wholly owned subsidiaries, The Complete Logistics Company ("CLC") and Integrated Distribution, Inc. ("IDI"). CLC was sold on August 8, 1997. In September, 1997, the Company completed a formal plan to exit the logistics segment by disposing of IDI. The Company closed the sale of IDI on October 31, 1997. EMPLOYEES At December 31, 1998, the Company and its subsidiaries had a total of 14,829 employees of which approximately 62% are members of a labor union. 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 G.I. Trucking Company ("G.I. Trucking"). LTL carriers offer services to shippers transporting a wide variety of large and small shipments to geographically dispersed destinations. LTL carriers pick up small shipments throughout the vicinity of a local terminal and consolidate them at the terminal. Shipments are consolidated by destination for transportation by intercity units to their destination cities or to distribution centers. Shipments from various locations can be reconsolidated for transportation to distant destinations, other distribution centers or local terminals. Once delivered to a local terminal, a shipment is delivered to the customer by local trucks operating from the terminal. In some cases, when a sufficient number of different shipments at one origin terminal are going to a common destination, they can be combined to make a full trailerload. A trailer is then dispatched to that destination without the freight having to be rehandled. COMPETITION, PRICING AND INDUSTRY FACTORS The trucking industry is highly competitive. The Company's LTL motor carrier subsidiaries actively compete for freight business with other national, regional and local motor carriers and, to a lesser extent, with private carriage, freight forwarders, railroads and airlines. Competition is based primarily on personal relationships, 4
5 ITEM 1. BUSINESS-continued 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, $300,000 of each workers' compensation loss and $200,000 of each general and auto liability loss, plus an aggregate of $750,000 of auto liability losses between $200,000 and $500,000. The Company maintains insurance adequate to cover losses in excess of such amounts. The Company has been able to obtain adequate coverage and is not aware of problems in the foreseeable future which would significantly impair its ability to obtain adequate coverage at comparable rates for its motor carrier operations. ABF FREIGHT SYSTEM, INC. Headquartered in Fort Smith, Arkansas, ABF is the largest subsidiary of the Company. ABF currently accounts for approximately 71% of the Company's consolidated revenues. ABF is the fourth largest national LTL motor carrier in the United States, based on revenues for 1998 as reported to the U.S. Department of Transportation ("D.O.T."). ABF provides direct service to over 98.7% 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 43,000 points through 310 terminals in all 50 states, Canada and Puerto Rico. Through an alliance and relationships with trucking companies in Mexico, ABF provides motor carrier services to customers in that country as well. ABF was incorporated in Delaware in 1982 and is the successor to Arkansas Motor Freight, a business originally organized in 1935. ABF concentrates on long-haul transportation of general commodities freight, involving primarily LTL shipments. General commodities include all freight except hazardous waste, dangerous explosives, commodities of exceptionally high value, commodities in bulk and those requiring special equipment. ABF's general commodities shipments differ from shipments of bulk raw materials which are commonly transported by railroad, pipeline and water carrier. General commodities transported by ABF include, among other things, food, textiles, apparel, furniture, appliances, chemicals, non-bulk petroleum products, rubber, plastics, metal and metal products, wood, glass, automotive parts, machinery and miscellaneous manufactured products. During the year ended December 31, 1998, no single customer accounted for more than 3% of ABF's revenues, and the ten largest customers accounted for less than 8% of ABF's revenues. EMPLOYEES At December 31, 1998, ABF employed 11,767 persons. Employee compensation and related costs are the largest components of ABF's operating expenses. In 1998, such costs amounted to 66.5% of ABF's 5
6 ITEM 1. BUSINESS-continued revenues. Approximately 79% 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 during its term of approximately 2.3%, including a lump-sum payment of $750 for the first contract year for all active employees who are IBT members. During 1997 and 1996, employee wages and benefits increased an average of 3.9% and 3.8%, respectively. 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. G.I. TRUCKING COMPANY Headquartered in La Mirada, California, G.I. Trucking is a non-union regional LTL motor carrier. G.I. Trucking offers one to three-day regional service through 75 service centers in 15 western states including Hawaii and Alaska. G.I. Trucking accounted for approximately 8% of the Company's consolidated revenues. During the year ended December 31, 1998, G.I.'s largest customer and its suppliers accounted for more than 22% of G.I. Trucking's revenues. G.I. Trucking expanded its operations during 1998, opening new terminal locations in Oklahoma City, OK; Tulsa, OK; Albuquerque, NM; El Paso, TX; and Kansas City, KS. G.I. Trucking also added a southern California facility to relieve congestion at their La Mirada, CA distribution center. G.I. provides transcontinental service through a partnership with three other regional carriers through six major hub terminals located in the Midwest and the East Coast. Customer service is enhanced through EDI communications between the partners. G.I. Trucking's linehaul structure utilizes company solo drivers, company sleeper teams, contract carriers and one-way carriers, providing flexibility in maintaining customer service and lane balance. G.I. Trucking's family of electronic services include EDI information, customer FAX capabilities, tracing, rating and reporting interface. 6
7 ITEM 1. BUSINESS-continued CARDINAL The Company's truckload motor carrier operations were conducted primarily through Cardinal. On July 15, 1997, the Company closed the sale of Cardinal. INTERMODAL AND OCEAN OPERATIONS GENERAL The Company's intermodal and ocean operations are conducted through Clipper Domestic and Clipper International, headquartered in Lemont, Illinois. Clipper Domestic operates through two business units: Clipper LTL and Clipper Freight Management ("CFM"), and offers domestic intermodal freight services, utilizing a variety of transportation modes including rail, over-the-road and air. Clipper International provides international ocean freight services as a non-vessel operating common carrier. COMPETITION, PRICING AND INDUSTRY FACTORS Clipper Domestic and Clipper International operate 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 Domestic competes with other intermodal operations, freight forwarders, railroads and airlines, as well as with other national and regional LTL and truckload motor carrier operations. Intermodal and ocean operations are akin to motor carrier operations in terms of market conditions, with revenues being weaker in the first quarter and stronger in the months of September and October. Freight shipments, operating costs and earnings are also affected by inclement weather. The reliability of rail services, a critical component of Clipper Domestic's ability to provide service to its customers, was a significant problem during 1998, causing Clipper Domestic to experience lost revenue and higher operating costs. In the fourth quarter of 1998, Clipper Domestic experienced some improvements in the on-time service level of its rail suppliers. However, rail service remained inconsistent and has not returned to acceptable levels across all lanes. Clipper Domestic plans to pursue business lost as a result of rail service issues. However, truckload carriers which benefited from rail problems can be expected to compete aggressively to retain this business. Accordingly, improvements in Clipper Domestic's results can be expected to occur gradually. Exports are the primary source of Clipper International's revenues. Economic problems in Asia, South America, and to a lesser extent, in other regions of the world have adversely impacted U.S. exports to these regions. Imbalance in export-import freight has resulted in reduced costs for ocean transportation of exports as shipping lines compete for the smaller volume of traffic. In addition, lower export volumes have created substantial price competition in Clipper International's business, as all participants attempt to maintain freight volume and revenue. It is not currently expected that the adverse market conditions described will change significantly in the immediate future. Therefore, Clipper International will continue to experience difficult operating conditions in 1999. CLIPPER DOMESTIC Clipper Domestic's revenues accounted for approximately 7% of consolidated revenues for 1998. 7
8 ITEM 1. BUSINESS-continued CLIPPER LTL Clipper LTL operates primarily through Clipper Exxpress Company ("Clipper Exxpress"). Management believes Clipper Exxpress is one of the ten largest intermodal consolidators and forwarders of LTL shipments in the United States. Clipper LTL accounts for 37% of Clipper Domestic's 1998 revenues. Clipper LTL's collection and distribution network consists of 24 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 30% of Clipper's LTL revenue. A majority all of Clipper's LTL revenue is derived from long-haul, metro area-to-metro area transportation. Although pickup and delivery and terminal handling is performed by agents, Clipper LTL has an operations and customer service staff located at or near many of its principal agents' terminals to monitor service levels and provide an interface between customers and agents. CFM CFM provides services through Agricultural Express of America, Inc. (d/b/a/ Clipper Controlled Logistics), Agile Freight System, Inc. (d/b/a Clipper Highway Services), and partially through Clipper Exxpress Company, accounting for approximately 63% of Clipper Domestic's revenues during 1998. CFM provides an extensive list of transportation services such as intermodal and truck brokerage, warehousing, consolidation, transloading, repacking, and other ancillary services. As an intermodal marketing operation, CFM arranges for loads to be picked up by a drayage company, tenders them to a railroad, and then arranges for a drayage company to deliver the shipment on the other end of the move. CFM's role in this process is to select the most cost-effective means to provide quality service, and to expedite movement of the loads at various interface points to ensure seamless door-to-door transportation. Clipper Controlled Logistics provides high quality, temperature-controlled intermodal service to fruit and produce brokers, growers, shippers and receivers and supermarket chains, primarily from the West to the Midwest, Canada, and the eastern United States. At December 31, 1998, Clipper Controlled Logistics owns or leases 517 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. During 1998, Clipper Controlled Logistics expanded its service offering to include transportation of non-produce loads requiring protective services and leasing trailers during non-peak produce seasons. Clipper Highway Services is a non-asset intensive, premium service, long-haul truckload carrier that primarily utilizes two-person driver teams provided by contractors and provides truck brokering. Clipper Highway Services provides expedited truckload service in tightly focused long-haul lanes that originate or terminate near a Clipper LTL market. Clipper Highway Services moves full truckloads of consolidated LTL shipments for Clipper LTL, as well as for other shippers. CLIPPER INTERNATIONAL Clipper International's revenues accounted for approximately 3% of consolidated revenues for 1998. Clipper International offers services through CaroTrans International, Inc. ("CaroTrans"). 8
9 ITEM 1. BUSINESS-continued CaroTrans is a neutral, non-vessel operating common carrier ("NVOCC"), providing import and export, door-to-door and door-to-port service to more than 140 countries with 250 ports of discharge. Overseas, Clipper International is recognized as a leader in international transportation between North America and many worldwide destinations. In addition to nine offices on the U.S. mainland, Clipper International maintains offices in Rotterdam, Holland; United Kingdom; Singapore and San Juan. These strategically located offices direct the operations and sales activities of the carefully selected agents within its geographic region. TREADCO GENERAL The Company's tire operations are conducted by Treadco, Inc. a 49% owned subsidiary. Treadco is the nation's largest independent tire retreader for the trucking industry and the fourth largest commercial truck tire dealer. Treadco has 56 locations in the U.S. located primarily in the south, southwest, lower midwest and west. Treadco's revenues currently account for approximately 11% of the Company's consolidated revenues. On January 22, 1999, the Company 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 proposal has the support of Shapiro Capital Management Company, Inc., Treadco's largest independent stockholder, which beneficially owns 1,132,775 shares, or approximately 22% of the common stock of Treadco. Treadco's Board has formed a special committee of independent directors to consider the Company's proposal. The proposal to acquire the remaining outstanding shares of Treadco is subject to the approval of Treadco Board's special committee and the negotiation of a definitive agreement, which will include customary conditions to closing. COMPETITION, PRICING AND INDUSTRY FACTORS The trucking industry faces rising costs including government regulations on safety, maintenance and fuel economy. As a result, trucking companies continually seek ways to obtain more mileage from new tires and less expensive ways to replace old tires. Retreading tires is significantly less expensive than buying new tires. The retread tire market is highly competitive. Historically, Treadco was a Bandag Incorporated ("Bandag") franchisee and competed primarily against smaller independent dealers in a highly fragmented market. Following the termination of the Bandag franchise agreements in 1996, Treadco has seen increased competition as Bandag has granted additional franchises in some locations currently being served by Treadco. This new competition has led to increased pricing pressures in the marketplace. Bandag also continues to target Treadco's customers which has caused the loss of a substantial amount of national account business. Treadco's ability to offer excellent service to its niche market customers, competitive pricing, central administration and purchasing for its production facilities appeal to fleet customers and enables Treadco to compete effectively against these dealers. The new truck tire business is also highly competitive and includes various manufacturers, dealers and retailers. Generally, demand for new truck tires is closely related to the strength of regional and, ultimately national economies. 9
10 ITEM 1. BUSINESS-continued Treadco experiences reduced demand for retreads and new truck tires in the winter months due to more difficult driving and tire maintenance conditions resulting from the inclement weather. Treadco's operations are somewhat seasonal, with the third quarter of the calendar year generally having the highest sales. INSURANCE AND SAFETY Generally, claims exposure for Treadco consists of general and auto liability, property damage and bodily injury and workers' compensation. Treadco is effectively self-insured for the first $300,000 of each workers' compensation loss and $200,000 of each general and auto liability loss. Treadco maintains insurance adequate to cover losses in excess of such amounts. Treadco has been able to obtain adequate coverage and is not aware of problems in the foreseeable future which would significantly impair its ability to obtain adequate coverage at comparable rates for its tire operations. BUSINESS OPERATIONS Treadco, Inc. uses the precure process to retread tires at all of its locations. The precure process uses a specific tread design measured from strips of tread rubber, cut and applied to the casing. A flexible rubber envelope then seals each tire which is placed in a bonding chamber. Air pressure in the chamber creates uniform force, applying pressure on all points of the tire. The tread is bonded to the casing by using a combination of heat and air pressure to cure the encased tire in the bonding chamber. The principal raw material in manufacturing retreaded truck tires is synthetic rubber, which is comprised of styrene and butadiene, both petroleum derivatives. Thus, the commodity price of oil directly affects the price of the Company's principal raw materials. However, because retreading uses roughly one-third of the amount of oil that the manufacture of new tires requires, retreads maintain a competitive price advantage in comparison to new tires, particularly when oil prices increase. In October 1995, Treadco reached an agreement with Oliver Rubber Company ("Oliver") to be a supplier of equipment and related materials for Treadco's truck tire precure retreading business. Oliver agreed to supply Treadco with retreading equipment and related materials for all production facilities which ceased being Bandag franchised locations. During the first three quarters of 1996, Treadco converted its production facilities that were under Bandag retread franchises to Oliver licensed facilities. Under the Oliver license agreements, Treadco purchases from Oliver precured tread rubber and bonding cushion gum and PNEUFLEX tread rubber (collectively "Rubber Products"). Treadco's obligation to purchase Rubber Products from Oliver is subject to (i) Oliver's continuing to produce Rubber Products of no less quality and durability than it presently produces, and (ii) Oliver's overall pricing program for Treadco. Treadco's sales and marketing strategy is based on its service strengths, network of production and sales facilities and strong regional reputation. None of Treadco's customers for retreads and new tires, including ABF or other affiliates, represent more than 3% of Treadco's revenues for 1998. ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS The Company is subject to federal, state and local environmental laws and regulations relating to, among other things, contingency planning for spills of petroleum products, and its disposal of waste oil. In addition, the Company is subject to significant regulations dealing with underground fuel storage tanks. The Company's subsidiaries store some fuel for their tractors and trucks in approximately 91 underground 10
11 ITEM 1. BUSINESS-continued tanks located in 26 states. Maintenance of such tanks is regulated at the federal and, in some cases, state levels. The Company believes that it is in substantial compliance with all such regulations. The Company is not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on the Company. Environmental regulations were adopted by the United States Environmental Protection Agency ("EPA") that required the Company to upgrade its underground tank systems by December 1998. The Company successfully completed the upgrades prior to the deadline set by the EPA. The Company has received notices from the EPA and others that it has been identified as a potentially responsible party ("PRP") under the Comprehensive Environmental Response Compensation and Liability Act or other federal or state environmental statutes at several hazardous waste sites. After investigating the Company's or its subsidiaries' involvement in waste disposal or waste generation at such sites, the Company has either agreed to de minimis settlements (aggregating approximately $250,000 over the last five years), or believes its obligations with respect to such sites would involve immaterial monetary liability, although there can be no assurances in this regard. Treadco is affected by a number of governmental regulations relating to the development, production and sale of retreaded and new tires, the raw materials used to manufacture such products (including petroleum, styrene and butadiene), and to environmental and safety matters. In addition, the retreading process creates rubber particulate, or "dust," which requires gathering and disposal, and Treadco disposes of used and nonretreadable tire casings, both of which require compliance with environmental and disposal laws. In some situations, Treadco could be liable for disposal problems, even if the situation resulted from previous conduct of Treadco that was lawful at the time or from improper conduct of, or conditions caused by, persons engaged by Treadco to dispose of particulate and discarded casings. Such cleanup costs or costs associated with compliance with environmental laws applicable to the tire retreading process could be substantial and have a material adverse effect on Treadco's financial condition. Treadco believes that it is in substantial compliance with all laws applicable to such operations, however, and is not aware of any situation or condition that could reasonably be expected to have a material adverse effect on Treadco's operations or financial condition. As of December 31, 1998, the Company has accrued approximately $3.6 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 liabilities are included in the balance sheet as accrued expenses. 11
12 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 310 terminal facilities of which it owns 78, leases 52 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 ------------ -------------- <S> <C> <C> Owned: Dayton, Ohio 315 218,000 Ellenwood, Georgia 228 109,845 South Chicago, Illinois 228 109,650 Carlisle, Pennsylvania (two structures) 241 82,960 Dallas, Texas 108 72,500 Leased from affiliate, Transport Realty: North Little Rock, Arkansas 195 82,050 Pico Rivera, California 94 22,500 Leased from non-affiliate: Winston-Salem, North Carolina 150 95,700 </TABLE> G.I. TRUCKING G.I. Trucking currently operates out of 75 terminal facilities of which 32 are company operated and 43 are agent terminals. G.I. Trucking owns 9 facilities, leases 3 facilities from an affiliate and the remainder of the service centers are leased from non-affiliates. CLIPPER DOMESTIC Clipper Domestic operates from 24 service centers, geographically dispersed throughout the United States. Clipper Domestic leases all of its facilities. CLIPPER INTERNATIONAL Clipper International operates from nine domestic and three international locations, all of which are leased facilities. TREADCO Treadco currently operates from 56 locations. Treadco owns 16 production and 8 sales facilities and leases the remainder of its production and sales facilities from non-affiliates. 12
13 ITEM 3. LEGAL PROCEEDINGS Various legal actions, the majority of which arise in the normal course of business, are pending. None of these legal actions is expected to have a material adverse effect on the Company's financial condition or results of operations. The Company maintains liability insurance against most risks arising out of the normal course of its business. On October 30, 1995, Treadco filed a lawsuit in Arkansas State Court, alleging that Bandag Incorporated ("Bandag") and certain of its officers and employees had violated Arkansas statutory and common law in attempting to solicit Treadco's employees to work for Bandag or its competing franchisees and attempting to divert customers from Treadco. At Treadco's request, the Court entered a Temporary Restraining Order barring Bandag, Treadco's former officers J.J. Seiter, Ronald W. Toothaker, and Ronald W. Hawks and Bandag officers Martin G. Carver and William Sweatman from soliciting or hiring Treadco's employees to work for Bandag or any of its franchisees, from diverting or soliciting Treadco's customers to buy from Bandag franchisees other than Treadco, and from disclosing or using any of Treadco's confidential information. On November 8, 1995, Bandag and the other named defendants asked the State Court to stop its proceedings, pending a decision by the United States District Court, Western District of Arkansas, on a Complaint to Compel Arbitration filed by Bandag in the Federal District Court on November 8, 1995. The Federal District Court ruled that under terms of Treadco's franchise agreements with Bandag, all of the issues involved in Treadco's lawsuit against Bandag were to be decided by arbitration. The arbitration hearing began September 21, 1998, and in December 1998, prior to the completion of the arbitration, Treadco entered into a settlement with Bandag, and certain of Bandag's current and former employees. Under the settlement terms, Treadco received a one-time payment of $9,995,000 in settlement of all the Company's claims. The settlement resulted in other income for Treadco of $9,124,000. The settlement payment was used to reduce Treadco's outstanding borrowings under its Revolving Credit Agreement. 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, 1998. 13
14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the Caption "Market and Dividend Information" on page 5 of the registrant's Annual Report to Stockholders for the year ended December 31, 1998, is incorporated by reference under Item 14 herein. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Data" on page 4 of the registrant's Annual Report to Stockholders for the year ended December 31, 1998, is incorporated by reference under Item 14 herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 6 through 17 of the registrant's Annual Report to Stockholders for the year ended December 31, 1998, 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 18 of the registrant's Annual Report to Stockholders for the year ended December 31, 1998, 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 19 through 44 of the registrant's Annual Report to Stockholders for the year ended December 31, 1998, are incorporated by reference under Item 14 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 14
15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections entitled "Election of Directors," "Directors of the Company," "Board of Directors and Committees," "Executive Officers of the Company" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission ("Definitive Proxy Statement"), set forth certain information with respect to the directors, nominees for election as directors and executive officers of the Company and are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Executive Compensation," "Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values," "Options/SAR Grants Table," "Executive Compensation and Development Committee Interlocks and Insider Participation," "Retirement and Savings Plan," "Employment Contracts and Termination of Employment and Change in Control Arrangements" and the paragraph concerning directors' compensation in the section entitled "Board of Directors and Committees" in the Company's Definitive Proxy Statement, set forth certain information with respect to compensation of management of the Company and are incorporated herein by reference, provided, however, the information contained in the sections entitled "Report on Executive Compensation by the Executive Compensation and Development Committee and Stock Option Committee" and "Stock Performance Graph" are not incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Principal Stockholders and Management Ownership" in the Company's Definitive Proxy Statement sets forth certain information with respect to the ownership of the Company's voting securities and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Transactions and Relationships" in the Company's Definitive Proxy Statement for the annual meeting of stockholders to be held on May 6, 1999, sets forth certain information with respect to relations of and transactions by management of the Company and is incorporated herein by reference. 15
16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS The following information appearing in the 1998 Annual Report to Stockholders is incorporated by reference in this Form 10-K Annual Report as Exhibit (13): <TABLE> <CAPTION> Page <S> <C> Market for Registrant's Common Equity and Related Stockholder Matters 5 Selected Financial Data 4 Management's Discussion and Analysis of Financial Condition and Results of Operations 6-17 Quantitative and Qualitative Disclosures About Market Risk 18 Consolidated Financial Statements 19-44 Report of Independent Auditors 19 Quarterly Financial Information 43 </TABLE> With the exception of the aforementioned information, the 1998 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 1998 Annual Report to Stockholders. <TABLE> <CAPTION> (a)(2) FINANCIAL STATEMENT SCHEDULES Page <S> <C> For the years ended December 31, 1998, 1997 and 1996: Schedule II - Valuation and Qualifying Accounts 18 </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 None (c) EXHIBITS See Item 14(a)(3) above. (d) FINANCIAL STATEMENTS SCHEDULES The response to this portion of Item 14 is submitted as a separate section of this report. 16
17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARKANSAS BEST CORPORATION BY: /s/ David E. Loeffler ----------------------------------- David E. Loeffler Vice President - Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title Date --------- ----- ---- <S> <C> <C> /s/ William A. Marquard Chairman of the Board, Director 2/23/99 - ------------------------------------- --------------------------- William A. Marquard /s/ Robert A. Young, III Director, Chief Executive Officer 2/23/99 - ------------------------------------- and President (Principal --------------------------- Robert A. Young, III Executive Officer) /s/ David E. Loeffler Vice President - Chief Financial Officer 2/23/99 - ------------------------------------- and Treasurer --------------------------- David E. Loeffler /s/ Frank Edelstein Director 2/23/99 - ------------------------------------- --------------------------- Frank Edelstein /s/ Arthur J. Fritz Director 2/23/99 - ------------------------------------- --------------------------- Arthur J. Fritz /s/ John H. Morris Director 2/23/99 - ------------------------------------- --------------------------- John H. Morris /s/ Alan. J. Zakon Director 2/22/99 - ------------------------------------- --------------------------- Alan J. Zakon </TABLE> 17
18 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 - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Year Ended December 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts receivable $ 7,603 $ 3,957 $ 2,991(A) $ 7,030(B) $ 7,521 =========================================== ======= ======= ======= ======= ======= Year Ended December 31, 1997: Deducted from asset accounts: Allowance for doubtful $ 7,926(B) accounts receivable $ 5,077 $ 7,245 $ 3,270(A) 63(D) $ 7,603 =========================================== ======= ======= ======= ======= ======= Year Ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful 17,755(B) accounts receivable $19,166 $ 8,408 $ 3,932(A) $ 8,674(C) $ 5,077 =========================================== ======= ======= ======= ======= ======= </TABLE> Note A - Recoveries of amounts previously written off. Note B - Uncollectible accounts written off. Note C - Adjustment to WorldWay balance at date of acquisition. Note D - The allowance for doubtful accounts for Cardinal Freight Carriers, Inc. as of the date of sale. NOTE: ALL INFORMATION REFLECTED IN THE ABOVE TABLE HAS BEEN RESTATED TO EXCLUDE VALUATION ALLOWANCES OF DISCONTINUED OPERATIONS. 18
19 FORM 10-K -- ITEM 14(c) EXHIBIT INDEX ARKANSAS BEST CORPORATION The following exhibits are filed with this report or are incorporated by reference to previously filed material. EXHIBIT NO. 3.1* Restated Certificate of Incorporation of the Company (previously filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 3.2* Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 4.1* Form of Indenture, between the Company and Harris Trust and Savings Bank, with respect to $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock (previously filed as Exhibit 4.4 to Amendment No. 2 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on January 26, 1993, Commission File No. 33-56184, and incorporated herein by reference). 4.2* Indenture between Carolina Freight Corporation and First Union National Bank, Trustee with respect to 6 1/4% Convertible Subordinated Debentures Due 2011 (previously filed as Exhibit 4-A to the Carolina Freight Corporation's Registration Statement on Form S-3 filed with the Commission on April 11, 1986, Commission File No. 33-4742, and incorporated herein by reference). 10.1*# Stock Option Plan (previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 10.2*# The Company's Supplemental Benefit Plan (previously filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 under the Securities Act of 1933 filed with the Commission on March 17, 1992, Commission File No. 33-46483, and incorporated herein by reference). 10.3* First Amendment dated as of January 31, 1997 to the $346,971,321 Amended and Restated Credit Agreement dated as of February 21, 1996, among the Company as Borrower, Societe Generale, Southwest Agency as Managing Agent and Administrative Agent, NationsBank of Texas, N.A. as Documentation Agent and the Banks named herein as the Banks (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the Commission on February 27, 1997, Commission File No. 0-19969, and incorporated herein by reference). 19
20 FORM 10-K -- ITEM 14(c) EXHIBIT INDEX ARKANSAS BEST CORPORATION (Continued) EXHIBIT NO. 10.4* First Amendment dated as of January 31, 1997 to the $30,000,000 Credit Agreement dated as of February 21, 1996 among the Company as Borrower, Societe Generale, Southwest Agency as Agent, and the Banks named herein as the Banks (previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K, filed with the Commission on February 27, 1997, Commission File No. 0-19969, and incorporated herein by reference). 10.5*# 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). 10.6 Second Amendment, dated July 15, 1997, to the $346,971,312 Amended and Restated Credit Agreement among the Company as Borrower, Societe Generale, Southwest Agency as Managing Agent and Administrative Agent, NationsBank of Texas, N.A., as Documentation Agent, and the Banks named herein as the Banks (previously filed as Exhibit 10.3 to the Company's current Report on Form 8-K, filed with the Commission on August 1, 1997, Commission File No. 0-19969, and incorporated herein by reference). 10.7* Interest-Rate Swap Agreement effective April 1, 1998 on a notional amount of $110,000,000 with Societe Generale, Southwest Agency (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). 10.8* $250,000,000 Credit Agreement dated as of June 12, 1998 with Societe Generale, Southwest Agency, 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). 13 1998 Annual Report to Stockholders 21 List of Subsidiary Corporations 23 Consent of Ernst & Young LLP, Independent Auditors 27.1 Financial Data Schedule * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. # Designates a compensation plan for Directors or Executive Officers. 20