2003 annual report - arcb · 2017. 1. 8. · 4 arkansas best corporation 2003 annual report letter...

2003Arkansas Best Corporation

2 0 0 3 A N N U A L R E P O R T

Table of Contents

Financial Highlights 2003 2002

($ thousands, except per share data)

Operations for the YearOperating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,527,473 $ 1,422,297Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,180 68,221Income from continuing operations, before accounting change . . . . . . . . . . . . . . . . . . . 46,110 40,755Cumulative effect of change in accounting principle, net of

tax benefits of $13,580 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (23,935)Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,110 16,820Income from continuing operations, before accounting change

per common share (diluted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.81 1.60Cumulative effect of change in accounting principle per common share (diluted) . . . . – (0.94)Net income per common share (diluted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.81 0.66

Information at Year EndTotal assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 697,225 $ 756,372Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 328Long-term debt (including capital leases and excluding current portion) . . . . . . . . . . . . 1,826 112,151Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,737 355,460Stockholders’ equity per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.01 14.27Long-term debt-to-equity ratio (including current portion) . . . . . . . . . . . . . . . . . . . . . . . . 0.01 0.32Number of common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,036 24,912

Financial Measures12 Months Minimum

Ended Acceptable12/31/03 Level

After-Tax Return on Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . 12.20%Debt-to-Equity Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.01:1After-Tax Return on Capital Employed . . . . . . . . . . . . . . . . . . . . . . . 13.15% 10.00%

(Net income + interest after tax) / (average total debt + average equity)

Company Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Letter From the President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Market and Dividend Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Management’s Discussion and Analysisof Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . 20

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Board of Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Arkansas Best Corporation 2003 Annual Report2

Company Highl ights

FleetNet America, Inc.FleetNet is a third-party vehicle maintenance company that coordinatesscheduled and nonscheduled service to truck fleets, owner operators,original equipment truck manufacturers and after-market equipmentproviders. FleetNet receives nationwide service calls regarding on-the-roadbreakdowns at its 24-hour-a-day, 365-day-a-year call center. FleetNet’s callcoordinators utilize a network of over 60,000 truck repair vendors to assistin providing vehicle repair and emergency road service throughout thecontinental United States and Canada. Through its FleetNet Select program,FleetNet’s customers have nationwide access to preferential towing andrecovery providers at competitive prices.

FleetNet’s Web site: www.fleetnetamerica.comContact FleetNet – [email protected]

FleetNet America, Inc. General Offices300 Commerce Drive • P.O. Box 970 • Cherryville, NC 28021

(800) 438-8961

ClipperClipper is a non-asset, non-labor-intensive provider of nationwidetransportation services. As one of the largest intermodal marketingcompanies, Clipper uses a blend of rail and trucking service options. Clipperalso maintains one of the largest private fleets of rail temperature-controlledtrailers in the United States. Clipper specializes in intermodal and over-the-road truckload, as well as protective services for the produce and non-produce perishable markets.

Clipper’s Web site: www.clippergroup.comContact Clipper – [email protected]

Clipper General Offices15700 West 103rd Street • Lemont, IL 60439

(630) 739-0700

ABF Freight System, Inc.®

ABF Freight System, Inc.®, is one ofNorth America’s largest and mostexperienced motor carriers, withdirect service to all 50 states, nineCanadian provinces and Puerto Rico.In addition to its broad service toMexico, the carrier offers service to250 ports in more than 130countries worldwide. ABF handlesshipments of general commodities inless-than-truckload (“LTL”) quantities.Via its TimeKeeper® service, ABFprovides guaranteed expeditedservice for time-critical and time-definite shipments.

In 2003, ABF was awarded thePresident’s Trophy for safety by theAmerican Trucking Associations (ATA),for an unprecedented fifth time.ABF’s safety, security, and freight-handling performance have been consistently

recognized as best in class. Duringthe past decade, 99% of allshipments handled by ABF havemoved without a loss or damageclaim. In 2001, the ATA selected ABFas the top LTL motor carrier both inclaims/loss prevention and insecurity, the first such dual award of its kind. In 2002, ABF was againselected by the ATA as the top LTLmotor carrier in claims/lossprevention.

The company’s Web site, abf.com,has been ranked among the best 50of all sites by CIO magazine and top10 Web sites by BtoB magazine. In2003, ABF was recognized in theInfoWorld 100, earning two awardsfor innovation and leadership amongorganizations

around the globe. These awards,involving ABF’s Web site and itsNetLink system, follow a series ofhonors received by ABF® over thepast decade in recognition of thecompany’s strategic use oftechnology.

ABF has been in continuous servicesince 1923 and is the largestsubsidiary of Arkansas BestCorporation, representing 90%percent of the corporation’s 2003revenues.

ABF’s Web site: abf.comContact ABF - [email protected]

ABF Freight System, Inc.General Offices

3801 Old Greenwood Road Fort Smith, AR 72903

Phone: (479) 785-8700

Robert A. Young IIIPresident &Chief ExecutiveOfficer

To Our Shareholders...At the end of another successful year forArkansas Best Corporation, I am pleased toreport on our company’s results for 2003.Arkansas Best Corporation and its largestsubsidiary, ABF Freight System, experiencedrevenue growth over 2002 that resulted inimproved profits and consistent aboveaverage returns for our shareholders. Ourcompany is basically debt-free and in one ofthe strongest financial positions of anytrucking company. Once again, ABF had avery good operating ratio and was recognizedin several areas throughout 2003 forexcellence in the trucking industry.

Revenues for Arkansas Best during the yearwere $1.53 billion, an increase of 7.4% over2002. Earnings per diluted common share in2003 were $1.81 compared to $1.60 (beforethe accounting change) in 2002. Withoutcertain items of note (see

the reconciliation provided in Management’s Discussion and Analysis), earnings per dilutedcommon share in 2003 were $1.66 comparedto $1.48 in 2002.

For the year, Arkansas Best’s After-Tax Returnon Capital Employed was 13.2% compared to9.6% during 2002, an increase of 37.4%. I ampleased that our returns once again exceededour minimum acceptable level of 10.0%. Withthe exception of 2002, Arkansas Best hassurpassed this minimum threshold in everyyear since 1998. Return on Capital Employedremains the most important measure offinancial performance used within ourcompany. Our management incentive plancontinues to be based on this financialmeasure, thus ensuring that the interests ofour stockholders and our management arealigned and that our company’s businessdecisions are made based on the mostefficient use of our capital resources.

We ended the year with no outstanding debton our revolving credit facility. Totalstockholders’ equity increased to $400.7million. Our Debt-to-Equity Ratio was 0.01 to1 compared to last year’s figure of 0.32 to 1.

Being totally out of debt was never a goal ofour company, and we never imagined we’d bein that position back in 1995 when we endedthe year with over $400 million of long-termdebt and a Debt-to-Equity Ratio of 2.39 to 1.The elimination of debt is the result of our

consistent profitability and investment ofcash where we can generate adequatereturns. The debt-free financial positionand strong cash flow we enjoy today haveallowed us to reinstate our quarterlydividend and to initiate a sharerepurchase program. On January 23,2003, our Board of Directors declared aquarterly cash dividend of $0.08 pershare that was paid throughout 2003.The quarterly cash dividend wasincreased to $0.12 per share onJanuary 28, 2004. Also on January23, 2003, our Board announced aprogram to repurchase up to amaximum of $25 million ofArkansas Best’s Common Stock. By the end of 2003, we had pur-chased 200,000 shares totaling$4.8 million. On January 29,2004, Arkansas Best purchasedan additional 131,400 sharestotaling $3.9 million. Sharepurchases under this programmay continue from time to time

throughout the remainder of 2004,on an opportunistic basis.

In April 2003, Arkansas Bestcompleted the sale of our 19%ownership interest in Wingfoot to TheGoodyear Tire & Rubber Company.The cash payment of $71.3 millionwas used to reduce the outstanding

debt under our Credit Agreement at thetime. As a result of Arkansas Best no

longer forecasting debt at the level whereinterest payments were hedged under ourinterest rate swap, we took $8.9 million of pre-tax charges for the swap in the first andsecond quarters of 2003. Nevertheless, theswap was good for our company because itallowed us to hedge against higher interestrates during a time when our debt level wassignificant. The interest rate swap isscheduled to mature in April 2005.

In May 2003, Standard & Poor’s upgradedArkansas Best’s corporate credit rating toBBB+ from BBB. This upgrade represented arise to a higher investment grade rating. In itspress release announcing these changes,Standard & Poor’s stated that the ratingupgrade was driven by “the company’s strongoperating results and decreasing debt levels,which support solid credit measures, despitethe continued weak economic environment.”

In September 2003, Arkansas Bestannounced an amendment and restatementof its existing $225 million Credit Agreement.The agreement was extended for two yearsand is now scheduled to mature in May 2007.

At the end of 2003, Arkansas Best’s nonunionpension plan assets were $156.9 million,which exceeded the plan’s projected benefitobligation by $5.8 million and the plan’saccumulated benefit obligation by $34.6million. Our company’s pension plan is inexcellent financial condition. In contrast tomany firms, we do not anticipate making cashcontributions to the plan during 2004, sinceour well-funded status eliminates the taxdeductibility of such contributions.

In January 2004, Forbes magazine recognizedArkansas Best’s superior financialperformance for the fourth year in a row. Onceagain Arkansas Best was named as one ofThe Platinum 400 Best Big Companies inAmerica. According to Forbes, ArkansasBest’s 5-year annualized total return of 39.5%was the #1 return in the “Transportation”industry sector and the 22nd highest return of all “400 Best Big Companies.”

Our largest subsidiary, ABF Freight System,once again had the best operating ratio in thelong-haul, LTL industry. In 2003, ABF’s totalrevenue increased over 7% to $1.37 billioncompared to $1.28 billion in 2002. ABFrepresented 90% of Arkansas Best’s totalcorporate revenues in 2003. ABF’s operatingincome was $77.8 million compared to $68.8million during the previous year, an increase of13.1%. ABF’s operating ratio was 94.3% in2003 versus 94.6% during 2002.

Throughout the first eight months of 2003,year-over-year LTL tonnage changes benefitedfrom the additional business ABF receivedfollowing the early September 2002 closure ofConsolidated Freightways Corporation (“CF”).Beginning in September 2003, LTL tonnagedeclined year-over-year following the one-yearanniversary of CF’s closure. However,because of the benefits of the improving U.S.

Letter From the President

2003 Annual Report Arkansas Best Corporation 3


Letter From the President (cont inued)

economy during the fourth quarter, monthlyLTL tonnage declines were less severe as wemoved toward the end of the year. For the fullyear of 2003, ABF’s total tonnage per day wasapproximately equal to that of 2002. LTLtonnage per day during 2003 increased 0.7%over 2002 levels while truckload tonnage perday decreased 2.6% compared to 2002.

Because of the numerous factors affectingyear-over-year tonnage comparisons during2003, we believe a better measure of ABF’sbusiness changes is reflected in sequential,quarter-to-quarter comparisons. For instance,compared to sequential, historical trendsbetween the fourth quarter and the thirdquarter, ABF’s fourth quarter 2003 LTLtonnage ran approximately 2% better thanexpected. These measures indicate thatABF’s business is benefiting fromimprovement in the economic environment.

For the full year of 2003, ABF’s billed LTLrevenue per hundredweight, excluding fuelsurcharge, increased by 4.9% compared tothe full year of 2002. Approximately half ofthis increase was related to changes thatoccurred throughout the year in ABF’s freightprofile. Following the demise of CF, smallershipments moving longer distances causedABF’s revenue per hundredweight to increase.During the fourth quarter of 2003, theaddition of larger shipments related tochanges in the federal Hours of Service rulescaused some decline in yield.

Despite benefiting from the effects ofconsolidation, the pricing environment of theLTL industry remains competitive. Due to itsemphasis on individual account profitability,ABF continues to price rationally and tomanage effectively during the current periodof economic improvement. In particular, webelieve ABF’s fixed costs provide operatingleverage that should allow us to improveprofitability if significant growth occurs duringthe year.

ABF continues to benefit in numerous waysfrom the cost-effective application oftechnology, especially the use ofmicrobrowsers. These low cost, handheld cell phones have a continuous wirelessconnection to the Internet. They are used tocommunicate vital information on shipmentsas they move throughout ABF’s freight-handling network. At pickup, ABF’s city drivers use the microbrowser to transmit ashipment’s weight, size and destination backto the loading facility to improve outboundload planning. Many of ABF’s docks are“paperless” as freight-handling activities useinformation on the microbrowser instead of ona paper document. At ABF’s distributioncenters and at many of its large facilities, real-time data regarding trailer movements is transmitted using the microbrowser. Thistechnology allows for specific, point-of-deliveryinstruction to individual city drivers, thusenabling ABF to offer personalized services tomeet customer needs. During the year, ABF

identified new operational uses for themicrobrowser. Ultimately, ABF’s customersbenefit from this innovative technology thathelps ABF streamline and customize itsservices while keeping costs low.

On April 1, 2003, ABF’s new labor contractwith the International Brotherhood ofTeamsters took effect. This contract willprovide ABF with labor stability for the nextfour years. Over the five-year life of thecontract, this agreement has defined wageand benefit increases totaling approximately3.2% - 3.4% per year. In this day of uncertainand potentially excessive increases in wage,health care and pension costs for manynonunion carriers, these known increases are manageable.

The U.S. economy is finally showing signs of strength following three years of decline. I have been especially encouraged by ABF’ssuperior performance during this prolongedand challenging economic environment. ABFhas always relied on conservative pricingdiscipline, emphasis on account profitabilityand cost control. However, these principlesare especially important in difficult economictimes. ABF focuses on understanding specificcustomer needs and responds with value-added solutions that result in a more efficientsupply chain. ABF continues to be successfulin establishing long-term customerrelationships that benefit both parties.

Looking forward, one of ABF’s greatestopportunities lies in effectively growing itsbase of business in order to maximize the useof available network capacity. Though systemcapacity is an elusive number that can varygreatly by location, ABF currently hasapproximately 10% available capacity infacilities throughout its system. There aremany opportunities for future growth of ABF’sbusiness. Transit time improvements havebeen significant and are ongoing. During thelast few years, shipment service times havebeen reduced by at least one day in more thantwo-thirds of ABF’s lanes. Theseimprovements have occurred in ABF’scustomary long-haul lanes but have alsoresulted in many new, two-day service lanesfor short-haul shipments traditionally handledby the nonunion, regional carriers. ABF nowhas over 16,000 two-day, LTL lanes. As aresult, ABF is aggressively solicitingdistribution shipments from its customerswho, in the past, have only given ABF theirshipments moving longer distances. Inaddition, the company’s increasingpenetration into retail accounts iscomplementing its traditional strength among manufacturing customers.

During 2003, the long-haul, LTL industryexperienced dramatic change as ABF’s twolargest competitors joined forces. Thoughthese two companies have stated that theywill continue to operate as separate carriersunder one parent company, historicallymergers of large LTL carriers have resulted in

Operating Revenue*In millions

Operating Income*In millions

After-Tax Return onCapital Employed (ROCE)*(Annual)

$1

,72

2

$1

,84

0

$1

,52

6

$1

,42

2

$1

,527

99 00 01 02 03

$1

09

.7

$1

40

.2

$7

5.9

$6

8.2

$7

3.2

99 00 01 02 03

20

.04

%

9.5

7%

99 00 01 02 03

10

.99

%

13

.15

%

14

.90

%

*From continuing operations beforeaccounting change

1999-2000 includes Treadco1999-2001 includes G.I. Trucking

Minimum AcceptableLevel - 10.00%

the availability of freight in the marketplace.In response to this industry development, ABFwill concentrate on specific customer needs in order to take advantage of businessopportunities as they occur.

Beginning in January 2004, new federal Hours of Service regulations wereimplemented. The new rule changes aredesigned to improve highway safety byreducing driver fatigue, thus saving lives andpreventing accidents. Due to its long-standingcommitment to safety, ABF has supportedthese changes, which are generally sensibleand logical. Although fatigue-relatedaccidents in our industry are low anddeclining, this effort at further reduction iswarranted. These new rules will have amodest impact on ABF. However, thetruckload industry anticipates significantlyhigher costs associated with driver pay,customer delays and increased charges forstop-off and detention services. As a result, inDecember 2003, ABF began to handle somelarger shipments that have recently beenmoved by truckload carriers. Combined withthe tightening of truckload capacity resultingfrom improvements in the economy, this hasresulted in a steady increase in the weight ofABF’s average shipment. This profile changecauses a decrease in yield, though theselarger shipments have historically been moreprofitable for ABF.

For several years, there has been a prevalenttheory that the nonunion, regional carriers arerapidly growing by taking away the marketshare of union carriers like ABF. Often theimpressive growth rates of these regionalcarriers are primarily the result of geographicexpansion into new service areas. ABF hasbeen able to offset increased labor costs withhigher levels of efficiency, superior applicationof technology and better yield management.For instance, a comparison of the mostrecently available (2002) U.S. Department ofTransportation figures for direct wages,salaries and purchased transportation as apercent of revenue shows that ABF’s ratio isactually lower than that of a number ofnonunion LTL carriers. ABF’s fringe costs arecurrently higher than those of the nonunioncarriers. However, as I previously mentioned,ABF’s labor contract provides for defined costincreases for the remainder of the currentcontract period. For the next four years of ourlabor contract, wages will increase an averageof 2.1% per year and fringes will increase anaverage of 5.8% per year. During this sametime period, other companies will be undersignificant pressure trying to maintain wage,health care and other benefit cost increasesnear these levels. Throughout its history, ABFhas always adapted to a changingenvironment and effectively contended withall competitors, many of which are no longer inbusiness. Going forward, ABF is well equippedand ready to continue its historical pattern ofinnovation and positive change in acompetitive environment.

Clipper, our U.S. intermodal marketingsubsidiary, had revenues of $126.8 millioncompared to $118.9 million during 2002.Clipper’s full year 2003 operating ratio was100.3% versus 99.1% during 2002. In earlyDecember 2003, Arkansas Best announcedthat Clipper had reached an agreement to sellcertain assets of its LTL freight business. Thesale resulted in a pre-tax gain of $2.5 million.Excluding the $1.2 million of exit costsassociated with the closure of the LTLbusiness unit, Clipper’s full year 2003operating ratio was 99.3%. Clipper’s LTLdivision accounted for approximately 30% oftotal Clipper revenues. In recent years, theprofitability of this portion of Clipper’sbusiness had suffered, primarily from thenegative effects of the U.S. economy. Clipperretains the intermodal and temperature-controlled truckload business moving on therail, as well as its brokerage operation. During2004, Clipper will focus on consistent growthof its remaining business segments withemphasis on individual account profitability.

Superior corporate governance continues tobe a top priority for our company. Last year Imentioned governance practices that werealready in place including an independentBoard of Directors, with me as the onlymanagement member, an independent andactive Audit Committee and a strong InternalAudit function. In addition, because I ownnearly 9% of the company’s outstandingcommon shares, I have a personal stake inthe success of our company. During 2003,Arkansas Best developed a Code of Conductthat includes information on how employeescan report questionable practices. Inaddition, charters and operating proceduresfor the company’s audit, compensation,nominating and qualified legal compliancecommittees were established or updated. As Ihave previously stated, it is my expectationthat the management of Arkansas BestCorporation will always strive for the highestquality of financial reporting practices anddisclosures.

Trends in business levels seen during thefourth quarter of 2003 were very encouragingand suggest that the improving U.S. economyis benefiting the general freight market.These positive trends, combined withopportunities related to ABF’s transit timeimprovements, changes associated with LTLindustry consolidation, the addition of largershipments due to the tightening of truckloadcapacity and the new Hours of Serviceregulations, have the potential for making2004 an outstanding year for our company.Arkansas Best’s strong financial position, lackof debt and superior cash flow put us in agreat position to apply capital wherever it isneeded, as profitable business opportunitiespresent themselves.

Robert A. Young III

Letter From the President (cont inued)


Income Per Common Share(Diluted)*

After-Tax Return on Stockholders’Equity*

Debt-to-Equity Ratio

$2

.14

$3

.17

$1

.66

$1

.60

$1

.81

99 00 01 02 03

25

.52

% 29

.68

%

13

.14

%

11

.76

%

12

.20

%

99 00 01 02 03

0.8

8:1

0.6

1:1

0.3

8:1

0.3

2:1

0.0

1:1

99 00 01 02 03

*From continuing operations beforeaccounting change1999-2000 includes Treadco1999-2001 includes G.I. Trucking


Selected Financial Data

(1) Selected financial data is not comparable to prior years’ information due to the contribution of Treadco, Inc.’s (“Treadco”) assets and liabilities to Wingfoot Commercial Tire Systems, LLC (“Wingfoot”) on October 31, 2000 and the sale of G.I. Trucking Company (“G.I. Trucking”) on August 1, 2001 (see Note S).

(2) Gain on sale of Wingfoot (see Note E) and fair value net gain on the contribution of Treadco’s assets and liabilities to Wingfoot.(3) Gain on the sale of G.I. Trucking on August 1, 2001 (see Note S).(4) Gain on the sale of Clipper LTL vendor and customer lists on December 31, 2003 (see Note D).(5) Internal Revenue Service (“IRS”) interest settlement (see Note H).(6) Fair value changes and payments on the interest rate swap (see Note F).(7) 2001 provision for income taxes includes a nonrecurring tax benefit of approximately $1.9 million ($0.08 per diluted common share)

resulting from the resolution of certain tax contingencies originating in prior years (see Note H).(8) Noncash impairment loss of $23.9 million, net of taxes ($0.94 per diluted common share), due to the write-off of Clipper goodwill

(see Note G).(9) Discontinued operations for 1999 include the operations of CaroTrans International, Inc., which was sold on April 17, 1999.

(10) Net income and earnings per share, as adjusted, excluding goodwill amortization (see Note G). (11) Cash dividends on the Company’s Common Stock were suspended by the Company as of the second quarter of 1996. On January 23,

2003, the Company announced that its Board had declared a quarterly cash dividend of eight cents per share.(12) Capital expenditures, net of proceeds from the sale of property, plant and equipment.

Year Ended December 31 2003 2002 2001(1) 2000(1) 1999


Statement of Operations Data:Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Minority interest income (expense) in

Treadco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other income (expense) – net . . . . . . . . . . . . . . . . . . .Gain on sale/fair value net gain – Wingfoot (2) . . . . .Gain on sale – G.I. Trucking Company (3) . . . . . . . . . .Gain on sale – Clipper LTL (4) . . . . . . . . . . . . . . . . . . . .IRS interest settlement (5) . . . . . . . . . . . . . . . . . . . . . .Fair value changes and payments on swap (6) . . . . . .Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . .Income from continuing operations,

before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .Provision for income taxes (7) . . . . . . . . . . . . . . . . . . . .Income from continuing operations,

before accounting change . . . . . . . . . . . . . . . . . . . . .Cumulative effect of change in accounting

principle net of tax benefits of $13,580 (8) . . . . . . .Loss from discontinued operations, net of tax (9) . . . .Reported net income . . . . . . . . . . . . . . . . . . . . . . . . .Amortization of goodwill, net of tax (10) . . . . . . . . . . . .Adjusted net income (10) . . . . . . . . . . . . . . . . . . . . . . . .Income per common share, diluted from

continuing operations before accounting change . . .Reported net income per common share,

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Goodwill amortization, per common share,

diluted (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Adjusted net income per common share,

diluted (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cash dividends paid per common share (11) . . . . . . .

Balance Sheet Data:Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Current portion of long-term debt . . . . . . . . . . . . . . . .Long-term debt (including capital leases

and excluding current portion) . . . . . . . . . . . . . . . . .

Other Data:Gross capital expenditures . . . . . . . . . . . . . . . . . . . . .Net capital expenditures (12) . . . . . . . . . . . . . . . . . . . . .Depreciation and amortization . . . . . . . . . . . . . . . . . .

$ 1,527,47373,180

–1,291

12,060–

2,535–

(10,257)3,855

74,95428,844

46,110

––

46,110–

46,110

1.81

1.81

–

1.810.32

697,225353

1,826

68,20260,37351,925

$ 1,422,29768,221

–3,286

–––

5,221–

8,097

68,63127,876

40,755

(23,935)–

16,820–

16,820

1.60

0.66

–

0.66–

756,372328

112,151

58,31346,43949,219

$ 1,526,20675,934

–(1,221)

–4,642

–––

12,636

66,71925,315

41,404

––

41,4043,411

44,815

1.66

1.66

0.14

1.80–

723,15314,834

115,003

74,67064,53850,315

$ 1,839,567140,152

–647

5,011––––

16,687

129,12352,968

76,155

––

76,1553,409

79,564

3.17

3.17

0.14

3.31–

797,12423,948

152,997

93,58583,80152,186

$ 1,721,586109,707

245(3,920)

–––––

18,395

87,63736,455

51,182

–(786)

50,3963,509

53,905

2.14

2.11

0.15

2.26–

731,92920,452

173,702

76,20961,25345,242

At February 27, 2004, there were______________ shares of the Company’sCommon Stock outstanding, which wereheld by ______ stockholders of record.

The Company’s Board of Directorssuspended payment of dividends on theCompany’s Common Stock during thesecond quarter of 1996. On January 23,2003, the Company announced that itsBoard of Directors had declared aquarterly cash dividend of eight cents pershare to holders of record of its CommonStock, which totaled $2.0 million perquarter in 2003. On January 28, 2004,the Board increased its quarterly cashdividend to twelve cents per share (seeNote T).

The Company has a program torepurchase, in the open market or inprivately negotiated transactions, up to amaximum of $25.0 million of theCompany’s Common Stock. Therepurchases may be made either from theCompany’s cash reserves or from otheravailable sources. See Note C for stockrepurchased during 2003 and Note T forshares repurchased in early 2004.

The Company’s $225.0 million CreditAgreement (“Credit Agreement”) limits the total amount of “restricted payments”that the Company may make. Restrictedpayments include payments for theprepayment, redemption or purchase ofsubordinated debt, dividends on Common

Stock, and other distributions that arepayments for the purchase, redemption oracquisition of any shares of capital stock.Dividends on the Company’s CommonStock are limited to the greater of 25.0%of net income from the preceding year,excluding extraordinary items, accountingchanges and one-time noncash charges,or $15.0 million in any one calendar year.The Company’s Credit Agreement allowsfor repurchases of Common Stock and thepayment of a one-time dividend, providedthe Company meets certain debt toEBITDA ratio requirements and certainCredit Agreement availabilityrequirements.

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 reportedby Nasdaq and the cash dividends declared:

Market and Div idend Information


CashHigh Low Dividend

2003First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2002First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 28.0029.1830.0434.55

$ 31.1927.3929.9032.04

$ 23.0823.3623.9228.76

$ 23.7023.0018.6425.70

$ 0.080.080.080.08

$ ––––


Arkansas Best Corporation (“theCompany”) is a diversified holdingcompany engaged through its subsidiariesprimarily in motor carrier and intermodaltransportation operations. Principalsubsidiaries are ABF Freight System, Inc.(“ABF”); Clipper Exxpress Company(“Clipper”) (see Note D regarding the saleand exit of Clipper’s less-than-truckload(“LTL”) business); FleetNet America, Inc.(“FleetNet”); and until August 1, 2001, G.I.Trucking Company (“G.I. Trucking”) (seeNote S).

Critical Accounting Estimates

The preparation of financial statements inconformity with accounting principlesgenerally accepted in the United Statesrequires management to make estimatesand assumptions that affect the amountsreported in the financial statements andaccompanying notes. Actual results coulddiffer from those estimates.

The Company’s accounting estimates(many of which are determined by theCompany’s accounting policies – see Note B) that are “critical,” or the mostimportant, to understand the Company’sfinancial condition and results ofoperations and that require managementof the Company to make the most difficultjudgments are described as follows:

Management of the Company utilizes abill-by-bill analysis to establish estimatesof revenue in transit to recognize in eachreporting period under the Company’saccounting policy for revenue recognition.The Company uses a method prescribedby Emerging Issues Task Force Issue No.91-9 (“EITF 91-9”), Revenue and ExpenseRecognition for Freight Services inProcess, where revenue is recognized

based on relative transit times in eachreporting period with expenses beingrecognized as incurred. Because the bill-by-bill methodology utilizes theapproximate location of the shipment inthe delivery process to determine therevenue to recognize, management of the Company believes it to be a reliablemethod.

The Company estimates its allowance fordoubtful accounts based on theCompany’s historical write-offs, as well astrends and factors surrounding the creditrisk of specific customers. In order togather information regarding these trendsand factors, the Company performsongoing credit evaluations of itscustomers. The Company’s allowance forrevenue adjustments is an estimate basedon the Company’s historical revenueadjustments. Actual write-offs oradjustments could differ from theallowance estimates the Company makesas a result of a number of factors. Thesefactors include unanticipated changes inthe overall economic environment orfactors and risks surrounding a particularcustomer. The Company continuallyupdates the history it uses to make theseestimates so as to reflect the most recenttrends, factors and other informationavailable. Actual write-offs andadjustments are charged against theallowances for doubtful accounts andrevenue adjustments. Managementbelieves this methodology to be reliable in estimating the allowance for doubtfulaccounts.

The Company utilizes tractors and trailersprimarily in its motor carrier transportationoperations. Tractors and trailers arecommonly referred to as “revenueequipment” in the transportationbusiness. Under its accounting policy for

property, plant and equipment,management establishes appropriatedepreciable lives and salvage values forthe Company’s revenue equipment(tractors and trailers) based on theirestimated useful lives and estimated fairvalues to be received when the equipmentis sold or traded in. Managementcontinually monitors salvage values anddepreciable lives in order to make timely,appropriate adjustments to them. TheCompany’s gains and losses on revenueequipment have been historicallyimmaterial, which reflects the accuracy ofthe estimates used. Management has apolicy of purchasing its revenue equipmentrather than utilizing off-balance-sheetfinancing.

The Company has a noncontributorydefined benefit pension plan coveringsubstantially all noncontractualemployees. Benefits are generally basedon years of service and employeecompensation. The Company accounts forits nonunion pension plan in accordancewith Statement of Financial AccountingStandards No. 87 (“FAS 87”), Employer’sAccounting for Pensions, and follows thedisclosure requirements of Statement ofFinancial Accounting Standards No. 132(“FAS 132”), Employers’ Disclosures aboutPensions and Other PostretirementBenefits. During the fourth quarter of2003, the Company adopted the reviseddisclosure provisions of FAS 132. TheCompany’s pension expense and relatedasset and liability balances are estimatedbased upon a number of assumptions. Theassumptions with the greatest impact onthe Company’s expense are the assumedcompensation cost increase, the expectedreturn on plan assets and the discountrate used to discount the plan’sobligations.

Management’s Discussion and Analysis of F inancial Condit ion and Results of Operat ions

The following table provides the key assumptions the Company used for 2003 compared to those it is utilizing to estimate 2004 pensionexpense:

Year Ended December 31 2004 2003

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.01%8.25%4.00%

6.90%7.90%4.00%

The assumptions used directly impact the pension expense for a particular year (see Note L for further discussion of theapproach used to establish the expectedreturn on plan assets and for anexplanation of the change in discountrates). If actual results vary from theassumption, an actuarial gain or loss iscreated and amortized into pensionexpense over the average remainingservice period of the plan participantsbeginning in the following year. Theimproved stock market performance in2003 positively impacted the Company’spension plan assets and created anactuarial gain. The Company hasincreased its pension plan return onassets in accordance with its approach to establishing the rate. This approachconsiders the historical returns for theplan’s current investment mix, whichimproved as a result of an improved stockmarket in 2003, and its investmentadvisor’s range of expected returns for theplan’s current investment mix. An increasein expected returns on plan assets, higherassets on which to earn a return andactuarial gains, decrease the Company’spension expense. A 1.0% increase in thepension plan rate of return would reduceannual pension expense (pre-tax) byapproximately $1.6 million. The Companyanticipates its pension expense fornonunion plans to be between $6.0 and$7.0 million for 2004 compared to $11.1million for 2003.

The Company has elected to followAccounting Principles Board Opinion No.25 (“APB 25”), Accounting for Stock Issuedto Employees, and related interpretationsin accounting for stock options becausethe alternative fair value accountingprovided for under the Statement ofFinancial Accounting Standards No. 123 (“FAS 123”), Accounting for Stock-BasedCompensation, requires the use of optionvaluation models that were not developedfor use in valuing employee stock optionsand are theoretical in nature. Under APB25, because the exercise price of theCompany’s employee and director optionsequals the market price of the underlyingstock on the date of grant, nocompensation expense is recognized.

The Company is self-insured up to certainlimits for workers’ compensation and

certain third-party casualty claims. For2003, these limits were $1.0 million perclaim for both workers’ compensationclaims and third-party casualty claims.Workers’ compensation and third-partycasualty claims liabilities recorded in thefinancial statements totaled $53.7 millionand $49.1 million at December 31, 2003and 2002, respectively. The Companydoes not discount its claims liabilities.Under the Company’s accounting policy forclaims, management annually estimatesthe development of the claims based uponthe Company’s historical developmentfactors over a number of years. Thisannual update of the development ofclaims allows management to address any changes or trends identified in theprocess. The Company utilizes a third partyto calculate the development factors andanalyze historical trends. Actual paymentsmay differ from management’s estimatesas a result of a number of factors. Thesefactors include increases in medical costsand the overall economic environment, aswell as many other factors. The actualclaims payments are charged against theCompany’s accrued claims liabilities andhave been reasonable with respect to theestimates of the liabilities made under theCompany’s methodology.

The Company owned a 19.0% interest inWingfoot Commercial Tire Systems, LLC(“Wingfoot”). The transaction whichcreated Wingfoot was accounted for at fairvalue, as prescribed by Emerging IssuesTask Force Issue No. 00-5 (“EITF 00-5”),Determining Whether a NonmonetaryTransaction is an Exchange of SimilarProductive Assets. The Company’sinvestment was accounted for under theequity method, similar to a partnershipinvestment. However, the Company did notshare in the profits or losses of Wingfootduring the term of the Company’s “Put”option, based upon the terms of theoperating agreement. See Note Eregarding the sale of the Company’sinterest in Wingfoot during 2003.

The Company hedged its interest rate riskby entering into a fixed rate interest rateswap on $110.0 million of revolving CreditAgreement borrowings. The Company’saccounting policy for derivative financialinstruments is as prescribed by Statementof Financial Accounting Standards No. 133

(“FAS 133”), Accounting for DerivativeFinancial Instruments and HedgingActivities. The Company’s fixed rateinterest rate swap was an effective hedgeon $110.0 million of revolving CreditAgreement borrowings at December 31,2002, in accordance with its accountingpolicy. As a result, the fair value of theswap, as estimated by Societe Generale,the counterparty, was a liability of $9.9million at December 31, 2002 and wasrecorded on the Company’s balance sheetthrough accumulated othercomprehensive losses, net of tax, ratherthan through the income statement.

As discussed in Note E, on March 19,2003, the Company announced itsintention to sell its 19.0% ownershipinterest in Wingfoot and use the proceedsto pay down Credit Agreement borrowings.As a result, the Company forecasted CreditAgreement borrowings to be below the$110.0 million level and reclassified themajority of the negative fair value of theswap on March 19, 2003 of $8.5 million(pre-tax), or $5.2 million net of taxes, fromaccumulated other comprehensive lossinto earnings on the income statementduring the first quarter of 2003. Thetransaction closed on April 28, 2003, andmanagement used the proceeds receivedfrom The Goodyear Tire & RubberCompany (“Goodyear”) to pay down itsCredit Agreement borrowings below the$110.0 million level. During the secondquarter of 2003, the Company reclassifiedthe remaining negative fair value of theswap of $0.4 million (pre-tax), or $0.2million net of taxes, from accumulatedother comprehensive loss into earnings onthe income statement. Changes in the fairvalue of the interest rate swap sinceMarch 19, 2003 have been accounted forin the Company’s income statement.Future changes in the fair value of theinterest rate swap will be accounted forthrough the income statement until theinterest rate swap matures on April 1,2005, unless the Company terminates the arrangement prior to that date.

The Company has no current plans tochange the methodologies outlined above,which are utilized in determining its criticalaccounting estimates.

Management’s Discussion and Analysis of F inancial Condit ion and Results of Operat ions (cont inued)




Liquidity and Capital Resources

Cash and cash equivalents totaled $5.3million and $39.6 million at December 31,2003 and 2002, respectively. During2003, cash provided from operations of$74.3 million, proceeds from the sale ofWingfoot of $71.3 million (see Note E),proceeds from the sale of Clipper LTL of$2.7 million (see Note D), proceeds fromasset sales of $7.8 million and availablecash were used to purchase revenue

equipment and other property andequipment totaling $68.2 million, paydividends on Common Stock of $8.0million (see Note C), purchase 200,000shares of the Company’s Common Stockfor $4.8 million (see Note C) and reduceoutstanding debt by $110.3 million (seeNote J). Revenue equipment includestractors and trailers used primarily in theCompany’s motor carrier transportationoperations.

During 2002, cash provided by operationsof $88.7 million, proceeds from assetsales of $11.9 million, borrowings of $2.6million and available cash were usedprimarily to purchase revenue equipmentand other property and equipment totaling$58.3 million, retire the remaining $5.0million in face value of the Company’sWorldWay 6¼% Convertible SubordinatedDebentures and reduce outstanding debtobligations.

The following is a table providing the aggregate annual obligations of the Company including debt, capital lease maturities and futureminimum rental commitments:

Payments Due by Period

Contractual Obligations

($ thousands)12/31/03 Less than 1-3 4-5 After

Total 1 Year Years Years 5 Years

Long-term debt obligations . . . . . . . . . . . . . . . . . . . . . . .Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . .Operating lease obligations . . . . . . . . . . . . . . . . . . . . . .Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . .Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,647532

49,615––

$ 51,794

$ 133220

11,261––

$ 11,614

$ 319309

17,856––

$ 18,484

$ 3513

11,730––

$ 12,084

$ 844–

8,768––

$ 9,612

The Company’s primary subsidiary, ABF,maintains ownership of most of its largerterminals or distribution centers. ABFleases certain terminal facilities andClipper leases its office facilities. AtDecember 31, 2003, the Company hadfuture minimum rental commitments, netof noncancellable subleases, totaling$47.7 million for terminal facilities and$1.9 million primarily for revenueequipment.

In 2002 and 2001, the Company’snonunion pension plan assets wereadversely impacted by stock marketdeclines. In addition, nonunion pensionplan obligations have been adverselyimpacted by declining interest rates,which increases the present value of theplan obligations. During 2003, theCompany made $15.0 million in tax-deductible contributions to its nonunionpension plan. The Company’s nonunionpension plan assets were favorablyimpacted by stock market improvementsin 2003. As a result, the Company has norequired minimum contributions to itspension plan for 2004. Based uponcurrent information available from plan

actuaries, the Company anticipates noadditional contributions will be made in2004, due to Internal Revenue Codelimitations on tax-deductiblecontributions.

As discussed in Note L, the Company has an unfunded supplemental pensionbenefit plan for the purpose ofsupplementing benefits under theCompany’s defined benefit plan. Basedupon currently available information,distributions of benefits are anticipated to be approximately $3.0 million in 2004,none in 2005 and between an estimated$8.0 million and $11.0 million in 2006,with no other anticipated distributionsoccurring until the year 2010.Distributions are funded from generalcorporate cash funds.

The Company is party to an interest rateswap on a notional amount of $110.0million. The purpose of the swap was tolimit the Company’s exposure to increasesin interest rates on $110.0 million of bankborrowings over the seven-year term ofthe swap. The interest rate under theswap is fixed at 5.845% plus the Credit

Agreement margin, which was 0.775%and 0.825% at December 31, 2003 and2002, respectively. The fair value of theCompany’s interest rate swap was ($6.3)million at December 31, 2003 and ($9.9)million at December 31, 2002 andrepresents the amount the Companywould have had to pay at those dates ifthe interest rate swap agreement wereterminated. The fair value of the swap isimpacted by changes in rates of similarlytermed Treasury instruments. The liabilityis recognized on the Company’s balancesheet in accordance with FAS 133 atDecember 31, 2003 and 2002 (see Note F).

The Company has guaranteedapproximately $0.4 million that relates toa debt owed by The Complete LogisticsCompany (“CLC”) to the owner of acompany CLC acquired in 1995. CLC wasa wholly owned subsidiary of the Companyuntil 1997 when CLC was sold. TheCompany’s exposure to this guaranteedeclines by approximately $60,000 per year.



The amounts presented in the tableinclude computer equipment purchasesfinanced with a capital lease of $31,000 in 2003. 2002 amounts include landpurchases financed with notes payable of$1.7 million and computer equipmentpurchases financed with capital leases of$0.9 million. No notes payable or capitallease obligations were incurred in 2001.

The Company has two principal sources ofavailable liquidity, which are its operatingcash and the $166.6 million it hasavailable under its revolving CreditAgreement at December 31, 2003. TheCompany has generated betweenapproximately $65.0 million and $90.0million of operating cash annually for theyears 2001 through 2003. Managementof the Company is not aware of any knowntrends or uncertainties that would cause asignificant change in its sources ofliquidity. The Company expects cash fromoperations and its available revolver tocontinue to be principal sources of cash tofinance its annual debt maturities, leasecommitments, letter of creditcommitments, quarterly dividends, stockrepurchases and fund its 2004 capitalexpenditures, which includes commitmentsto purchase approximately $51.0 million ofrevenue equipment which are cancellableby the Company if certain conditions are met.

On September 26, 2003, the Companyamended and restated its existing three-year $225.0 million Credit Agreementdated as of May 15, 2002 with Wells FargoBank Texas, National Association asAdministrative Agent and Lead Arranger,and Fleet National Bank and SunTrustBank as Co-Syndication Agents, andWachovia Bank, National Association asDocumentation Agent. The Amended andRestated Credit Agreement among WellsFargo Bank, National Association asAdministrative Agent and Lead Arranger,

and Fleet National Bank and SunTrustBank as Co-Syndication Agents, andWachovia Bank, National Association andThe Bank of Tokyo-Mitsubishi, Ltd. as Co-Documentation Agents, extended theoriginal maturity date for two years, to May15, 2007. The Credit Agreement providesfor up to $225.0 million of revolving creditloans (including a $125.0 million sublimitfor letters of credit) and allows theCompany to request extensions of thematurity date for a period not to exceedtwo years, subject to participating bankapproval. The Credit Agreement alsoallows the Company to request an increasein the amount of revolving credit loans aslong as the total revolving credit loans donot exceed $275.0 million, subject to theapproval of participating banks.

At December 31, 2003, there were nooutstanding Revolver Advances andapproximately $58.4 million of out-standing letters of credit. At December 31,2002, there were $110.0 million ofRevolver Advances and approximately$66.4 million of outstanding letters ofcredit. As discussed in Note E, theCompany used the proceeds from the saleof its interest in Wingfoot and operatingcash to reduce outstanding debt under itsCredit Agreement during 2003. The CreditAgreement contains various covenants,which limit, among other things,indebtedness, distributions, stockrepurchases and dispositions of assetsand which require the Company to meetcertain quarterly financial ratio tests. As ofDecember 31, 2003, the Company was incompliance with the covenants. Interestrates under the agreement are at variablerates as defined by the Credit Agreement.

The Company’s Credit Agreement containsa pricing grid that determines its LIBORmargin, facility fees and letter of creditfees. The pricing grid is based on theCompany’s senior debt rating agency

ratings. A change in the Company’s seniordebt ratings could potentially impact itsCredit Agreement pricing. In addition, if theCompany’s senior debt ratings fall belowinvestment grade, the Company’s CreditAgreement provides for limits on additionalpermitted indebtedness without lenderapproval, acquisition expenditures andcapital expenditures. On May 28, 2003,Standard & Poor’s upgraded its corporatecredit rating on the Company to BBB+ fromBBB, stating that the upgrade was drivenby “…the company’s strong operatingresults and decreasing debt levels, whichsupport solid credit measures, despite thecontinued weak economic environment.”The Company is currently rated BBB+ byStandard & Poor’s Rating Service andBaa3 by Moody’s Investors Service, Inc.The Company has no downward ratingtriggers that would accelerate the maturityof its debt.

The Company has not historically enteredinto financial instruments for tradingpurposes, nor has the Company historicallyengaged in hedging fuel prices. No suchinstruments were outstanding during2003 or 2002.

Off-Balance-Sheet Arrangements

The Company’s off-balance-sheetarrangements include future minimumrental commitments, net of cancellablesubleases of $49.6 million, which aredisclosed in Note I, and a guarantee of$0.4 million, which is disclosed in Note J.The Company has no investments, loans or any other known contractualarrangements with special-purposeentities, variable interest entities orfinancial partnerships and has nooutstanding loans with officers or directors of the Company.

The following table sets forth the Company’s historical and forecasted capital expenditures, net of proceeds from asset sales, for theperiods indicated below:

Forecasted Actual2004 2003 2002 2001

($ thousands)

CAPITAL EXPENDITURES (NET)ABF Freight System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Clipper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .G.I. Trucking Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total consolidated capital expenditures (net) . . . . . . . . . . . . . . . . .

$ 74,7001,800

–(200)

$ 76,300

$ 47,6114,655

–8,107

$ 60,373

$ 35,796(109)

–10,752

$ 46,439

$ 54,1763,4824,4152,465

$ 64,538


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 ofrevenue for the applicable segment. Note M to the Consolidated Financial Statements contains additional information regarding theCompany’s operating segments:


Year Ended December 31 2003 2002 2001

Operating Expenses and Costs

ABF Freight System, Inc.Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Supplies and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Operating taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Communications and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Rents and purchased transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Clipper (see Note D)Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Selling, administrative and general . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Exit costs – Clipper LTL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss on sale or impairment of equipment and software . . . . . . . . . . . . . .

G.I. Trucking Company (see Note S)Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Supplies and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Operating taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Communications and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Rents and purchased transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(Gain) on sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating Income (Loss)

ABF Freight System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Clipper (see Note D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .G.I. Trucking Company (see Note S) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65.1%13.0

2.91.81.13.27.00.2

94.3%

86.4%12.7

1.00.2

100.3%

––––––––––

5.7%(0.3)

–

66.2%12.3

3.21.91.13.36.40.2

94.6%

85.9%13.2

––

99.1%

––––––––––

5.4%0.9

–

65.6%13.0

3.21.41.23.16.10.2

93.8%

87.3%12.3

––

99.6%

51.8%9.72.42.41.43.4

26.42.5

(0.1)99.9%

6.2%0.40.1

Results of Operations

Executive Overview

Arkansas Best Corporation’s operationsinclude two primary operatingsubsidiaries, ABF and Clipper. For the year ended December 31, 2003, ABFrepresented 90.0% and Clipperrepresented 8.0% of total revenues. TheCompany’s results of operations areprimarily driven by ABF. On an ongoingbasis, ABF’s ability to operate profitably

and generate cash is impacted by itstonnage levels, the pricing environment,and its ability to manage costs effectively,primarily in the area of salaries, wages andbenefits (“labor”).

ABF’s ability to maintain existing tonnagelevels or to grow tonnage levels isimpacted by the state of the U.S. economy,as well as a number of other competitivefactors, which are more fully described inthe General Development of Businesssection of the Company’s Form 10-K.

ABF’s results were negatively impacted in2002 and 2001 by tonnage declinesresulting from declines in the U.S.economy and the September 11 terroristattacks. Two major events will impact thecompetitive landscape for ABF in 2004:the new Hours of Service rules that wentinto effect on January 4, 2004, and thecombining of two of ABF’s primarycompetitors, Yellow Corporation (“Yellow”)and Roadway Corporation (“Roadway”)that occurred on December 11, 2003 (see General Development of Business).



With respect to the Hours of Service rules,the truckload industry anticipatessignificantly higher costs associated withdriver pay, customer delays and increasedcharges for stop-off and detentionservices. As a result, ABF believes thatopportunities exist to handle some largershipments that have recently been movingby truckload carriers. With respect to theYellow-Roadway combination, becauseboth companies are primary competitorsof ABF, the potential exists for ABF to gainadditional business from customersmoving their business away from eitherYellow or Roadway as a result of thecombination, although there can be nocertainty the impact on ABF will befavorable.

As stated above, the pricing environment is a key to ABF’s operating performance. The impact of changes in the pricingenvironment is measured by LTL-billedrevenue per hundredweight, although thismeasure is also affected by profile factorssuch as average shipment size andaverage length of haul. The environment in2003 was positive, with ABF growing LTL-billed revenue per hundredweight, net offuel surcharges, by 4.9%. In the fourth

quarter of 2003, the environment wasmore competitive, but ABF continued toprice rationally and manage effectivelyduring this period. If the pricingenvironment were to deteriorate, theimpact on ABF’s results of operationswould be negative.

For 2003, salaries, wages and benefitsaccounted for 65.1% of ABF’s costs. Laborcosts are impacted by ABF’s contractualobligation under its agreement with theInternational Brotherhood of Teamsters(“IBT”). In addition, ABF’s ability toeffectively manage labor costs has a directimpact on its operating performance.Shipments per dock, street and yard hour(“DSY”) is the measure ABF uses to assessthis effectiveness. ABF is generally veryeffective in managing its labor costs tobusiness levels.

The Company ended 2003 with noborrowings under its revolving CreditAgreement and $400.7 million in equity.ABF is in a position of strength to takeadvantage of any potential growthopportunities as discussed above becauseof the Company’s financial position atDecember 31, 2003.

2003 Compared to 2002

Consolidated revenues and operatingincome for 2003 increased 7.4% and7.3%, respectively, when compared to2002, due primarily to improved revenuesat ABF.

Income before the cumulative effect ofchange in accounting principle for 2003increased 13.1% when compared to 2002.This increase reflects primarily a gain onthe sale of the Company’s 19.0% interestin Wingfoot (see Note E), a gain from thesale of Clipper’s LTL customer and vendorlists (see Note D), an increase in ABF’soperating income and lower interestexpense from lower average debt levels.These increases were offset in part by aone-time charge related to the fair value of the Company’s interest rate swap (seeNote F). Income before the cumulativeeffect of an accounting change for 2002included the positive impact of an InternalRevenue Service (“IRS”) interestsettlement (see Note H). During the firstquarter of 2002, the Company recognizeda noncash impairment loss on its Clippergoodwill as a cumulative effect of achange in accounting principle as requiredby Statement of Financial AccountingStandards No. 142 (“FAS 142”) Goodwilland Other Intangible Assets(see Note G).

Year Ended December 312003 2002

Earnings EarningsNet Per Share Net Per Share

Income (Diluted) Income (Diluted)

($ thousands, except per share data)GAAP income before cumulative effect of change

in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Less gain on Wingfoot (see Note E) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Less gain on sale of Clipper LTL (see Note D) . . . . . . . . . . . . . . . . . . . . . .Less IRS interest settlement (see Note H) . . . . . . . . . . . . . . . . . . . . . . . . .Plus Clipper LTL exit costs (see Note D) . . . . . . . . . . . . . . . . . . . . . . . . . . .Plus interest rate swap charge (see Note F) . . . . . . . . . . . . . . . . . . . . . . .Income before cumulative effect of change

in accounting principle, excluding above items . . . . . . . . . . . . . . . . . .

$ 46,110(8,429)(1,518)

–747

5,364

$ 42,274

$ 1.81(0.33)(0.06)

–0.030.21

$ 1.66

$ 40,755––

(3,101)––

$ 37,654

$ 1.60––

(0.12)––

$ 1.48

The following table provides a reconciliation of GAAP income and diluted earnings per share, before the cumulative effect of change inaccounting principle for 2003 and 2002. Management believes these non-GAAP financial measures are useful to investors inunderstanding the Company’s results of operations, because they provide more comparable measures:



The improvement of 12.2% in dilutedearnings per share, excluding the aboveitems, to $1.66 from $1.48, reflectsimproved operations at ABF and lowerinterest expense in 2003 when comparedto 2002.

On August 1, 2001, the Company sold thestock of G.I. Trucking for $40.5 million incash to a company formed by the seniorexecutives of G.I. Trucking and EstesExpress Lines (“Estes”). The Companyretained ownership of three Californiaterminal facilities and has agreed to leasethem for an aggregate amount of $1.6million per year to G.I. Trucking for a period

of up to four years. G.I. Trucking has anoption at any time during the four-yearlease term to purchase these terminals for $19.5 million. The terminals may bepurchased in aggregate or individually. The facilities have a net book value ofapproximately $5.6 million. If the terminalfacilities are sold to G.I. Trucking, theCompany will recognize a pre-tax gain ofapproximately $13.9 million in the periodthey are sold.

ABF Freight System, Inc.

Effective July 14, 2003 and August 1,2002, ABF implemented general rate

increases to cover known and expectedcost increases. Typically, the increaseswere 5.9% and 5.8%, respectively,although the amounts can vary by laneand shipment characteristic. ABF chargesa fuel surcharge, based on the increase indiesel fuel prices compared to an indexprice. The fuel surcharge in effect during2003 averaged 3.6% of revenue comparedto 2.0% in 2002.

Revenues for 2003 were $1,370.4 millioncompared to $1,277.1 million during2002. ABF generated operating income of$77.8 million for 2003 compared to $68.8million during 2002.

The following table provides a comparison of key operating statistics for ABF:

December 312003 2002 % Change

Billed revenue per hundredweight, excluding fuel surchargesLess than truckload (“LTL”) (shipments less than 10,000 pounds) . . . . .Truckload (“TL”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tonnage (tons)LTL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .TL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shipments per DSY hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 22.99$ 8.40$ 20.15

2,644,786639,643

3,284,429

0.527

$ 21.91$ 7.94$ 19.11

2,626,623656,615

3,283,238

0.535

4.9%5.8%5.4%

0.7%(2.6)%

0.0%

(1.7)%

ABF’s 2003 increase in revenue of 7.3%over 2002 is due primarily to increases inrevenue per hundredweight and fuelsurcharges. LTL tonnage showed a slightincrease, while total tonnage for 2003equaled that of 2002.

Approximately one-half of the increase inLTL-billed revenue per hundredweight wasthe result of changes in the profile offreight handled. For 2003, ABF’s averageLTL length of haul increased, its LTL-ratedcommodity class increased and its LTLweight per shipment declined, comparedto 2002. Increases in length of haul andLTL-rated commodity class and decreasesin LTL weight per shipment all impact LTL-billed revenue per hundredweightpositively.

ABF’s LTL tonnage levels increased duringthe first eight months of 2003 as a resultof the closure of a major competitor,Consolidated Freightways (“CF”), on

September 3, 2002. Since the one-yearanniversary of the CF closure, monthlyyear-over-year tonnages have declined,although declines were less severe duringthe fourth quarter of 2003. September2003’s year-over-year LTL tonnage declineof 5.4% compares to 2.0% in October2003, 3.1% in November 2003 and 1.3%in December 2003. These tonnagecomparisons suggest that the improvingU.S. economy is benefiting the generalfreight market, although there can be nocertainty.

ABF’s improvement in its 2003 operatingratio to 94.3% from 94.6% in 2002reflects revenue increases as a result of increases in revenue yields, fuelsurcharges and LTL tonnage, as well aschanges in certain other operatingexpense categories as follows:

Salaries and wages expense for 2003decreased 1.1%, as a percent of revenue,

compared to 2002, due primarily torevenue yield improvements and the factthat a portion of salaries and wages arefixed in nature and decrease as a percentof revenue with increases in revenuelevels. This decrease was offset in part byproductivity declines and the annualgeneral IBT contractual increases. Asdiscussed in Note A, in March 2003, theIBT announced the ratification of itsNational Master Freight Agreement withthe MFCA by its membership. The five-yearagreement provides for annual contractualwage and benefit increases ofapproximately 3.2% – 3.4% and waseffective April 1, 2003. For 2003, theannual wage increase occurred on April 1,2003 and was 2.5% and the annual healthand welfare cost increase occurred onAugust 1, 2003 and was 6.5%. Theprevious agreement included contractualbase wage and pension cost



increases of 1.8% and 4.9%, respectively,on April 1, 2002 and an August 1, 2002increase of 12.9% for health and welfarecosts. Productivity for 2003 was belowthat of 2002 primarily because ofadditional shipment handling associatedwith ABF’s concentration on transit timeimprovements and premium servicesprovided at pickup and delivery. Inaddition, ABF’s nonunion pensionexpense for 2003 increased by approx-imately $4.8 million over 2002 amounts.

Supplies and expenses for 2003increased 0.7%, as a percent of revenue,compared to 2002, due primarily to anincrease in fuel costs, excluding taxes,which on an average price-per-gallon basisincreased to $0.97 for 2003 from $0.79in 2002.

The 0.6% increase in ABF’s rents andpurchased transportation costs, as apercent of revenue, is due primarily to anincrease in rail utilization to 16.2% of totalmiles for 2003, compared to 14.4%during 2002. Rail miles have increaseddue to tonnage growth in rail lanes.

As previously mentioned, ABF’s generalrate increase on July 14, 2003 was put inplace to cover known and expected costincreases for the next twelve months.ABF’s ability to retain this rate increase isdependent on the competitive pricingenvironment. ABF could be impacted byfluctuating fuel prices in the future. Aspreviously discussed, ABF hasexperienced an increase in fuel prices in2003 as compared to 2002. ABF’s fuelsurcharges on revenue are intended to

offset any fuel cost increases. ABF’s totalinsurance costs are dependent on theinsurance markets, which have beenadversely impacted by the events ofSeptember 11, 2001 and other factors inrecent years. ABF’s workers’compensation and third-party casualtytotal premiums and claims costs for 2003were consistent with 2002. ABF’snonunion pension expense will decreasein 2004 to between $5.0 million and $6.0 million from $9.6 million in 2003,reflecting the improving stock market in2003. As previously discussed, ABF’sresults of operations in 2003 have beenimpacted by the wage and benefitincreases associated with the new laboragreement with the IBT and will continueto be impacted by this agreement duringthe remainder of the contract term.

Because of changes that have occurred inthe LTL industry since the closure of CF,sequential comparisons of business levelsare often more revealing than year-over-year comparisons. An analysis of the1998 through 2002 sequentialrelationship between fourth quarter LTLtonnage levels and subsequent firstquarter LTL tonnage levels reveals aseasonal decline in ABF’s LTL tonnage perday. Applying this historical relationship toactual LTL tonnage-per-day figures for thefourth quarter of 2003 yields a firstquarter 2004 LTL daily tonnage figure thatis generally comparable to the LTL dailytonnage level of the first quarter of 2003.It is not known at this time if this historicallevel of change will, in fact, occur in thefirst quarter of 2004 relative to the firstquarter of 2003. This sequential tonnage

analysis is only a starting point forpredicting upcoming business levels. Theeffects of various economic and industryfactors must also be considered. The first quarter generally has the highestoperating ratio of the year. First quartertonnage levels are normally lower duringJanuary and February, while Marchprovides a disproportionately higheramount of the quarter’s business.Adverse weather conditions in the earlymonths of the first quarter can have anegative impact on productivity and costs.As the weather improves, business levelstend to increase and the operating resultsof March often have a significant impacton the first quarter’s results. Theseobservations are made based on ABF’shistorical operating performance.

Clipper

Effective August 1, 2003 and July 29,2002, Clipper implemented general rateincreases of 5.9% in both years for LTLshipments. Revenues for 2003 increased6.6% when compared to 2002.

As discussed in Note D, on December 31,2003, Clipper closed the sale of allcustomer and vendor lists related to itsLTL freight business, resulting in a pre-taxgain of $2.5 million. This gain is reportedbelow the operating income line. With thissale, Clipper exited the LTL business. Total costs incurred with the exit of thisbusiness unit amounted to $1.2 millionand included severance pay, software andfixed asset abandonment and certainoperating lease costs. Exit costs arereported in operating income.

The following table provides a comparison of key operating statistics for Clipper:


LTLLTL hundredweight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Revenue per hundredweight, excluding fuel surcharges . . . . . . . . . . . . . .

IntermodalShipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Revenue per shipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Temperature-controlled truckloadShipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Revenue per shipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,755,434$ 18.56

31,630$ 1,633.31

9,761$ 3,026.33

1,910,838$ 18.46

24,232$ 1,684.10

10,983$ 2,813.10

(8.1)%0.5%

30.5%(3.0)%

(11.1)%7.6%



Clipper’s LTL division accounted forapproximately 30.0% of total Clipperrevenues. In 2003 and recent years,revenue and operating income of Clipper’sLTL operation had suffered, primarily fromthe negative effects of the U.S. economyand, in the fourth quarter of 2003, fromthe announcement of the sale of itscustomer and vendor lists to HerculesForwarding Inc. Clipper has retained its

intermodal and temperature-controlledtruckload businesses moving on the rail,as well as its brokerage operation.

Clipper’s intermodal division experiencedsignificant growth in shipments as a resultof additional lanes awarded to Clipper by a large-volume customer. Revenue pershipment declined 3.0% as a result of amore competitive pricing environment.

Clipper’s temperature-controlled truckloadbusiness experienced a decline inshipments that resulted primarily from lowdemand for produce on the East Coast;however, revenue per shipment improved,indicating an improving pricingenvironment for produce shipments.

The following table provides a reconciliation of GAAP operating income and operating ratio for 2003 and 2002. Management believesthe non-GAAP operating income and operating ratio is useful to investors in understanding Clipper’s results of operations, because itprovides more comparable measures:

2003 2002

Operating Operating Operating OperatingClipper – Pre-tax Income (Loss) Ratio Income (Loss) Ratio

($ thousands)

Clipper’s GAAP operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .Clipper LTL exit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Clipper’s operating income, excluding exit costs . . . . . . . . . . . . . . . . . . . .

$ (421)1,246

$ 825

100.3%1.0

99.3%

$ 1,123–

$ 1,123

99.1%–

99.1%

Clipper’s operating ratio, excluding exitcosts, increased slightly when 2003 iscompared to 2002. This increase resultsprimarily from a change in the mix ofClipper’s business to more intermodalbusiness and less temperature-controlledproduce business. The produce businesshistorically has better margins than theintermodal business. In addition, allbusiness units have seen a reduction inrail incentives, which increases directcosts as a percent of revenue.

During 2004, Clipper will focus on theconsistent growth of its remainingbusiness units with an emphasis onindividual account profitability. However,Clipper’s 2004 results could be adverselyimpacted by lower rail incentives andhigher trailer repositioning costs as aresult of lower overall volumes because of no longer having LTL freight. However,these adverse effects could be overcomeby growth in the remaining business units,although there can be no assurances inthis regard.

Other Long-Term Assets

Other assets increased $15.3 million fromDecember 31, 2002 to December 31,2003, due primarily to participantdeferrals and related Company depositsinto the Company’s Voluntary Savings Plan or related trusts.

Other Long-Term Liabilities

Other liabilities increased $6.3 millionfrom December 31, 2002 to December 31,2003, due primarily to participantdeferrals and related Company depositsinto the Company’s Voluntary Savings Plan or related trusts, offset in part bydistributions from its supplementalpension benefit plan.

Income Taxes

The difference between the effective taxrate for 2003 and the federal statutoryrate resulted from state income taxes andnondeductible expenses.

In March 1999, the Tenth Circuit Court of Appeals ruled against an appealingtaxpayer regarding the timing of thedeductibility of contributions to multi-employer pension plans. The IRS hadpreviously raised the same issue withrespect to the Company. There werecertain factual differences between thosepresent in the Tenth Circuit case and thoserelating specifically to the Company. TheCompany was involved in theadministrative appeals process with theIRS regarding those factual differencesbeginning in 1997. During 2001, theCompany paid approximately $33.0 millionwhich represented a substantial portion ofthe tax and interest that would be due if

the multiemployer pension issue wasdecided adversely to the Company andwhich was accounted for in prior years as a part of the Company’s net deferred taxliability and accrued expenses. In August2002, the Company reached a settlementwith the IRS of the multiemployer pensionissue and all other outstanding issuesrelating to the Company’s federal incometax returns for the years 1990 through1994. The settlement resulted in a liabilityfor tax and interest which was less thanthe liability the Company had estimated ifthe IRS prevailed on all issues. As a resultof the settlement, the Company reducedits reserves for interest by approximately$5.2 million to reflect the reduction in theCompany’s liability for future cashpayments of interest. The effect of thischange resulted in an increase in theCompany’s 2002 net income per dilutedcommon share of $0.12.

At December 31, 2003, the Company haddeferred tax assets of $45.3 million, net ofa valuation allowance of $1.3 million, anddeferred tax liabilities of $47.4 million. TheCompany believes that the benefits of thedeferred tax assets of $45.3 million will berealized through the reduction of futuretaxable income. Management hasconsidered appropriate factors inassessing the probability of realizing thesedeferred tax assets. These factors includedeferred tax liabilities of $47.4 million andthe presence of significant taxable income

in 2003 and 2002. The valuationallowance has been provided for thebenefit of net operating loss carryovers incertain states with relatively shortcarryover periods and other limitations.

Management intends to evaluate therealizability of net deferred tax assets on a quarterly basis by assessing the need for any additional valuation allowance.

2002 Compared to 2001

Consolidated revenues for 2002decreased 6.8% as compared to 2001. On August 1, 2001, the Company sold thestock of G.I. Trucking (see Note S). TheCompany’s results for 2001 includedseven months of operations for G.I.Trucking. The decline in revenues in 2002resulted from the sale of G.I. Trucking anddecreases in revenues for ABF and Clipperas a result of a decline in the U.S. economybeginning in mid-2000. This economicdecline was further accelerated by theSeptember 11 terrorist attacks on theWorld Trade Center and on the Pentagonand continued to negatively impact theCompany during the first eight months of2002. These decreases were offset in partby an increase in ABF revenue as a resultof CF filing for bankruptcy protection andceasing operations in early September2002. The Company’s revenues increased13.1% to $381.6 million in the fourth

quarter of 2002, from $337.5 million inthe fourth quarter of 2001.

The decrease in operating income for2002 is due primarily to a decline inoperating income for ABF, which relatesprimarily to the decline in the U.S.economy. However, operating income forthe fourth quarter 2002 increased to$26.2 million from $14.8 million in thefourth quarter of 2001, primarily as aresult of additional business gained byABF from the CF closure.

Income before the cumulative effect ofchange in accounting principle decreasedin 2002 due primarily to the decrease in2002 operating income from 2001,discussed above, offset in part by afavorable settlement with the IRS (seeNote H). In addition, 2002 had lowerinterest expense from lower average debtlevels and no goodwill amortization, inaccordance with the Company’s adoptionof FAS 142. During the first quarter of2002, the Company recognized a noncash impairment loss on its Clippergoodwill as the cumulative effect of achange in accounting principle as requiredby FAS 142 (see Note G). The Company’s2001 income before cumulative effect ofchange in accounting principle included again from the sale of G.I. Trucking (seeNote S).

Tonnage levels during the first eightmonths of 2002 continued to be impactedby a decline in the U.S. economy, aspreviously discussed. During this timeperiod, ABF’s LTL pounds per day were6.9% below the same eight-month periodin 2001. During the four-month periodfrom September through December 2002,following CF’s closure, ABF’s LTL poundsper day were 6.2% above the same four-month period in 2001. Comparing the firsteight months of 2002 to the last fourmonths of 2002, ABF experienced anincrease in tonnage trends of 13.1%.

ABF Freight System, Inc.

Effective August 1, 2002 and 2001, ABFimplemented general rate increases tocover known and expected cost increases.Typically, the increases were 5.8% and4.9%, respectively, although the amountscan vary by lane and shipmentcharacteristic. The fuel surcharge in effectduring 2002 averaged 2.0% of revenue.The fuel surcharge in effect during 2001averaged 2.7% of revenue.

Revenues for 2002 were $1,277.1 millioncompared to $1,282.3 million during2001. ABF generated operating income of$68.8 million for 2002 compared to $79.4million during 2001.



The following table provides a comparison of key operating statistics for ABF:


Billed revenue per hundredweight, excluding fuel surchargesLess than truckload (“LTL”) (shipments less than 10,000 pounds) . . . . .Truckload (“TL”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tonnage (tons)LTL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .TL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shipments per DSY hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 21.91$ 7.94$ 19.11

2,626,623656,615

3,283,238

0.535

$ 21.00$ 7.72$ 18.19

2,701,195726,144

3,427,339

0.527

4.3%2.9%5.1%

(2.8)%(9.6)%(4.2)%

1.5%



ABF’s decline in revenue for 2002 is dueto a decrease in LTL tonnage and fuelsurcharges. ABF’s performance for 2002was affected by less available freight dueto decreased business levels at customerfacilities, primarily as a result of a declinein the U.S. economy impacting ABFthrough the first eight months of 2002. Aspreviously discussed, ABF’s businesslevels during the last four months of 2002were positively impacted by the CF closure.ABF experienced an increase in tonnagetrends of 13.1% when the last four monthsof 2002 are compared to the first eightmonths of 2002.

The pricing environment remainedrelatively firm during the first eight monthsof 2002, when compared to that inprevious economic downturns. Since theclosure of CF, the pricing environmentbecame more stable as reflected by the2002 fourth quarter LTL-billed revenue perhundredweight, excluding fuel surcharge,increase of 5.9% to $22.56 from $21.30in the fourth quarter of 2001.

ABF’s decrease in its fourth quarter 2002operating ratio to 92.2% reflectedimproved tonnage levels and a morestable pricing environment, both primarilyas a result of CF’s closure.

ABF’s full year operating ratio for 2002increased primarily as a result of tonnagedeclines as discussed above andincreases in insurance costs and changesin certain other operating expensecategories as follows:

Salaries and wages expense for 2002increased 0.6% as a percent of revenuecompared to the same period in 2001. Theincrease results from the annual generalIBT contractual base wage and pensioncost increases of 1.8% and 4.9% on April 1, 2002 and the August 1, 2002increase of 12.9% for health and welfarecosts, as well as the fact that a portion ofsalaries and wages are fixed in nature andincrease as a percent of revenue withdecreases in revenue levels. In addition,workers’ compensation costs increased,as a result of an increase in severe claimsand an increase in the Company’s self-insurance retention level, from $0.3million per claim to $1.0 million per claim,as well as a $0.9 million increase inreserves associated with ABF’s exposureto the liquidation of Reliance InsuranceCompany (see Note R), when 2002 iscompared to 2001. These increases were offset in part by revenue yieldimprovements and productivityimprovements.

Supplies and expenses decreased 0.7% asa percent of revenue for 2002 comparedto 2001, due primarily to a decline in fuelcosts, excluding taxes, which, on anaverage price-per-gallon basis, declined to $0.79 for 2002 from $0.87 for 2001.

Insurance expense increased 0.5% as apercent of revenue for 2002, compared to 2001, due primarily to increasedinsurance premium costs for third-partycasualty claims, in part because of theeffect on the insurance markets of theSeptember 11 terrorist attacks.

Rents and purchased transportationincreased 0.3% as a percent of revenue for2002, compared to 2001, due primarily toan increase in rail utilization to 14.4% oftotal miles for 2002, compared to 13.5%in 2001.

Clipper

Effective July 29, 2002 and August 13,2001, Clipper implemented general rateincreases of 5.9% and 4.9%, respectively,for LTL shipments. Revenues for 2002decreased to $118.9 million from $127.3million during 2001.


LTLLTL hundredweight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Revenue per hundredweight, excluding fuel surcharges . . . . . . . . . . . . . .

IntermodalShipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Revenue per shipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Temperature-controlled truckloadShipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Revenue per shipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,910,838$ 18.46

24,232$ 1,684.10

10,983$ 2,813.10

1,998,230$ 17.81

28,281$ 1,677.24

9,986$ 2,832.22

(4.4)%3.6%

(14.3)%0.4%

10.0%(0.7)%

The following table provides a comparison of key operating statistics for Clipper:



LTL hundredweight declines reflectClipper’s movement away fromunprofitable LTL business and lowerbusiness levels, resulting from the declinein the U.S. economy. The number ofintermodal shipments decreased, primarilydue to lower shipment volumes fromexisting customers. The number ofshipments for Clipper’s temperature-controlled division increased 10.0% dueprimarily to growth in non-producebusiness.

Despite the overall decline in revenue,Clipper’s operating ratio improved slightlyfor 2002. Clipper’s operating ratio waspositively impacted by the elimination ofunprofitable accounts, higher utilization of rail in line-haul movements and cost-efficient handling of customer shipmentsin service lanes between major cities.Clipper’s rail utilization for 2002 was63.6% of total miles, compared to 57.1%for 2001. For Clipper, rail costs per mileare generally less expensive than over-the-road costs per mile.

G.I. Trucking Company

On August 1, 2001, the Company sold thestock of G.I. Trucking for $40.5 million incash to a company formed by the seniorexecutives of G.I. Trucking and EstesExpress Lines (“Estes”) (see Note S). TheCompany recognized a pre-tax gain on thesale of $4.6 million in the third quarter of2001, which was reported below theoperating income line. Revenue andoperating income for the seven months ofoperations for G.I. Trucking for 2001 were$95.5 million and $0.1 million,respectively.

Interest

Interest expense was $8.1 million for2002, compared to $12.6 million for2001. The decline resulted from loweraverage debt levels when 2002 iscompared to 2001.

Income Taxes

The difference between the effective taxrate for 2002 and the federal statutoryrate resulted from state income taxes andnondeductible expenses.

Seasonality

ABF is affected by seasonal fluctuations,which affects its tonnage to betransported. Freight shipments, operatingcosts and earnings are also affectedadversely by inclement weatherconditions. The third calendar quarter ofeach year usually has the highest tonnagelevels while the first quarter has thelowest. Clipper’s operations are similar tooperations at ABF with revenues beingweaker in the first quarter and strongerduring the months of June throughOctober.

Environmental Matters

The Company’s subsidiaries, or lessees,store fuel for use in tractors and trucks inapproximately 75 underground tankslocated in 26 states. Maintenance of suchtanks is regulated at the federal and, insome cases, state levels. The Companybelieves that it is in substantialcompliance with all such regulations. TheCompany’s underground storage tanks arerequired to have leak detection systems.The Company is not aware of any leaksfrom such tanks that could reasonably beexpected to have a material adverse effecton the Company.

The Company has received notices fromthe Environmental Protection Agency(“EPA”) and others that it has beenidentified as a potentially responsibleparty (“PRP”) under the ComprehensiveEnvironmental Response Compensationand Liability Act or other federal or stateenvironmental statutes at severalhazardous waste sites. After investigatingthe Company’s or its subsidiaries’involvement in waste disposal or wastegeneration at such sites, the Company haseither agreed to de minimis settlements(aggregating approximately $130,000 overthe last 10 years primarily at seven sites)or believes its obligations, other than thosespecifically accrued for with respect tosuch sites, would involve immaterialmonetary liability, although there can beno assurances in this regard.

As of December 31, 2003, the Companyhas accrued approximately $2.9 million to provide for environmental-relatedliabilities. The Company’s environmentalaccrual is based on management’s bestestimate of the actual liability. TheCompany’s estimate is founded onmanagement’s experience in dealing withsimilar environmental matters and onactual testing performed at some sites.Management believes that the accrual isadequate to cover environmental liabilitiesbased on the present environmentalregulations. Accruals for environmentalliability are included in the balance sheetas accrued expenses and in otherliabilities.

Forward-Looking Statements

Statements contained in thisManagement’s Discussion and Analysissection that are not based on historicalfacts are “forward-looking statements.”Terms such as “estimate,” “expect,”“predict,” “plan,” “anticipate,” “believe,”“intend,” “should,” “would,” “scheduled,”and similar expressions and the negativesof such terms are intended to identifyforward-looking statements. Suchstatements are by their nature subject touncertainties and risk, including, but notlimited to, union relations; availability andcost of capital; shifts in market demand;weather conditions; the performance andneeds of industries served by ArkansasBest’s subsidiaries; actual future costs ofoperating expenses such as fuel andrelated taxes; self-insurance claims andemployee wages and benefits; actual costsof continuing investments in technology;the timing and amount of capitalexpenditures; competitive initiatives andpricing pressures; general economicconditions; and other financial, operationaland legal risks and uncertainties detailedfrom time to time in the Company’sSecurities and Exchange Commission(“SEC”) public filings.


Quanti tat ive and Qual i tat ive Disclosures About Market Risk

Interest Rate Instruments

The Company has historically been subjectto market risk on all or a part of itsborrowings under bank credit lines, whichhave variable interest rates.

In February 1998, the Company enteredinto an interest rate swap effective April 1,1998. The swap agreement is a contract

to exchange variable interest ratepayments for fixed rate payments over thelife of the instrument. The notional amountis used to measure interest to be paid orreceived and does not represent theexposure to credit loss. The purpose of theswap was to limit the Company’s exposureto increases in interest rates on thenotional amount of bank borrowings overthe term of the swap. The fixed interest

rate under the swap is 5.845% plus theCredit Agreement margin (0.775% atDecember 31, 2003 and 0.825% atDecember 31, 2002). This instrument isrecorded on the balance sheet of theCompany in other liabilities (see Note F).Details regarding the swap, as ofDecember 31, 2003, are as follows:

Notional Amount Maturity Rate Paid Rate Received Fair Value (2) (3)

$110.0 million April 1, 2005 5.845% plus Credit Agreement

margin (0.775%)

LIBOR rate (1)

plus Credit Agreementmargin (0.775%)

($6.3) million

(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, 2003 to terminate

the agreement.(3) The swap value changed from ($9.9) million at December 31, 2002. The fair value is impacted by changes in rates of similarly termed Treasury

instruments.

Fair Value of FinancialInstruments

The following methods and assumptionswere used by the Company in estimatingits fair value disclosures for all financialinstruments, except for the interest rateswap agreement disclosed above andcapitalized leases:

Cash and Cash Equivalents: The carryingamount reported in the balance sheets forcash and cash equivalents approximatesits fair value.

Long- and Short-Term Debt: The carryingamount of the Company’s borrowings

under its Revolving Credit Agreementapproximates its fair value, since theinterest rate under this agreement isvariable. The fair value of the Company’sother long-term debt was estimated usingcurrent market rates.

The carrying amounts and fair value of the Company’s financial instruments at December 31 are as follows:

2003 2002

Carrying Fair Carrying FairAmount Value Amount Value

($ thousands)

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,251$ 133$ 1,514

$ 5,251$ 134$ 1,516

$ 39,644$ 133$ 111,647

$ 39,644$ 127$ 111,610

Borrowings under the Company’s CreditAgreement in excess of $110.0 million aresubject to market risk. During 2003,outstanding debt obligations under theCredit Agreement did not exceed $110.0million. As discussed in Note E, theCompany used the proceeds from the saleof its interest in Wingfoot and operatingcash to reduce outstanding debt under itsCredit Agreement during 2003. TheCompany’s average borrowings during theyear were $41.0 million. A 100-basis-pointchange in interest rates on CreditAgreement borrowings above $110.0million would change annual interest

cost by $100,000 per $10.0 million ofborrowings.

The Company is subject to market risk forincreases in diesel fuel prices; however,this risk is mitigated by fuel surchargeswhich are included in the revenues of ABFand Clipper based on increases in dieselfuel prices compared to relevant indexes.

The Company does not have a formalforeign currency risk management policy.The Company’s foreign operations are notsignificant to the Company’s totalrevenues or assets. Revenue from

non-U.S. operations amounted toapproximately 1.0% of total revenues for 2003. Accordingly, foreign currencyexchange rate fluctuations have never hada significant impact on the Company, andthey are not expected to in the foreseeablefuture.

The Company has not historically enteredinto financial instruments for tradingpurposes, nor has the Company historicallyengaged in hedging fuel prices. No suchinstruments were outstanding during2003 or 2002.


Repor t of Independent Auditors

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Stockholders and Board of DirectorsArkansas Best Corporation

We have audited the accompanying consolidated balance sheets of Arkansas Best Corporation as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2003. 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 weplan 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 alsoincludes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overallfinancial 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 financialposition of Arkansas Best Corporation at December 31, 2003 and 2002, and the consolidated results of their operations and their cashflows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted inthe United States.

As discussed in Note G to the financial statements, in 2002, the Company changed its method of accounting for goodwill.

Little Rock, ArkansasJanuary 21, 2004


Consol idated Financial Statements

December 312003 2002

($ thousands, except share data)

ASSETS

CURRENT ASSETSCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Accounts receivable, less allowances

(2003 – $3,558; 2002 – $2,942) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PROPERTY, PLANT AND EQUIPMENT Land and structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Revenue equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Service, office and other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less allowances for depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INVESTMENT IN WINGFOOT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PREPAID PENSION COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ASSETS HELD FOR SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GOODWILL, less accumulated amortization(2003 and 2002 – $32,037) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,251

132,3208,600

27,0063,400

176,577

215,476370,102107,066

13,048705,692358,564347,128

–

32,887

68,572

8,183

63,878

$ 697,225

$ 39,644

130,7697,787

26,4433,729

208,372

223,107343,100

91,05412,983

670,244330,841339,403

59,341

29,017

53,225

3,203

63,811

$ 756,372

Balance Sheets




($ thousands, except share data)

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIESBank overdraft and drafts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Federal and state income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LONG-TERM DEBT, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FAIR VALUE OF INTEREST RATE SWAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FUTURE MINIMUM RENTAL COMMITMENTS, NET (2003 – $49,615; 2002 – $42,494) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OTHER COMMITMENTS AND CONTINGENCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

STOCKHOLDERS’ EQUITY Common stock, $.01 par value, authorized 70,000,000 shares;

issued 2003: 25,295,984 shares; 2002: 24,972,086 shares . . . . . . . . . . . . . . . . . . . . .Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Treasury stock, at cost, 2003: 259,782 shares; 2002: 59,782 shares . . . . . . . . . . . . . . .Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The accompanying notes are an integral part of the consolidated financial statements.

$ 8,86155,764

2,816125,148

353192,942

1,826

6,330

66,284

29,106

–

–

253217,781192,610

(5,807)(4,100)

400,737

$ 697,225

$ 7,80858,442

5,442123,294

328195,314

112,151

9,853

59,938

23,656

–

–

250211,567154,455

(955)(9,857)

355,460

$ 756,372

Balance Sheets





OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OPERATING EXPENSES AND COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OTHER INCOME (EXPENSE)Net gains on sales of property and other . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of G.I. Trucking Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of Wingfoot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of Clipper LTL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IRS interest settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Fair value changes and payments on interest rate swap . . . . . . . . . . . . .Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FEDERAL AND STATE INCOME TAXESCurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INCOME BEFORE CUMULATIVE EFFECT OFCHANGE IN ACCOUNTING PRINCIPLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTINGPRINCIPLE, NET OF TAX BENEFITS OF $13,580 . . . . . . . . . . . . . . . . . . . .

NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NET INCOME FOR COMMON STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . .

NET INCOME (LOSS) PER COMMON SHAREBasic:

Income before cumulative effect of change in accounting principle . . .Cumulative effect of change in accounting principle, net of tax . . . . . . .

NET INCOME PER SHARE (BASIC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Diluted:

Income before cumulative effect of change in accounting principle . . .Cumulative effect of change in accounting principle, net of tax . . . . . . .

NET INCOME PER SHARE (DILUTED) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH DIVIDENDS PAID PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . . .

$ 1,527,473

1,454,293

73,180

643–

12,0602,535

–(10,257)

(3,855)648

1,774

74,954

26,2752,569

28,844

46,110

–

46,110–

$ 46,110

$ 1.85–

$ 1.85

$ 1.81–

$ 1.81

$ 0.32

$ 1,422,297

1,354,076

68,221

3,524–––

5,221–

(8,097)(238)410

68,631

19,4648,412

27,876

40,755

(23,935)

16,820–

$ 16,820

$ 1.65(0.97)

$ 0.68

$ 1.60(0.94)

$ 0.66

$ –

$ 1,526,206

1,450,272

75,934

9184,642

––––

(12,636)(2,139)(9,215)

66,719

25,367(52)

25,315

41,404

–

41,4042,487

$ 38,917

$ 1.79–

$ 1.79

$ 1.66–

$ 1.66

$ –


Statements of Income



AccumulatedAdditional Other

Preferred Stock Common Stock Paid–In Retained Treasury Comprehensive TotalShares Amount Shares Amount Capital Earnings Stock Loss Equity

(thousands)

Balances at January 1, 2001 . . . . . . . . . . . .Net income . . . . . . . . . . . . . . . . . . . . . . . . . .Fair value of interest rate swap,

net of tax benefits of $2,094 (a) . . . . . . . .Foreign currency translation,

net of tax benefits of $193 (b) . . . . . . . . . .Total comprehensive income . . . . . . . . .

Issuance of common stock . . . . . . . . . . . . .Tax effect of stock options exercised . . . . .Purchase of preferred stock . . . . . . . . . . . .Conversion of preferred stock

to common . . . . . . . . . . . . . . . . . . . . . . . . .Dividends paid on preferred stock . . . . . . .Fair value of G.I. Trucking and Treadco

officer stock options and other . . . . . . . .

Balances at December 31, 2001 . . . . . . . . .Net income . . . . . . . . . . . . . . . . . . . . . . . . . .Change in fair value of interest rate swap,

net of tax benefits of $1,739 (a) . . . . . . . .Change in foreign currency translation,

net of tax benefits of $4 (b) . . . . . . . . . . . .Minimum pension liability,

net of tax benefits of $2,245 (c) . . . . . . . .Total comprehensive income . . . . . . . . .

Issuance of common stock . . . . . . . . . . . . .Tax effect of stock options exercised . . . . .Change in fair value of Treadco

officer stock options . . . . . . . . . . . . . . . . .

Balances at December 31, 2002 . . . . . . . . .Net income . . . . . . . . . . . . . . . . . . . . . . . . . .Interest rate swap,

net of taxes of $3,833 (a) . . . . . . . . . . . . . .Change in foreign currency translation,

net of taxes of $42 (b) . . . . . . . . . . . . . . . .Change in minimum pension liability,

net of tax benefits of $209 (c) . . . . . . . . . .Total comprehensive income . . . . . . . . .

Issuance of common stock . . . . . . . . . . . . .Tax effect of stock options exercised . . . . .Purchase of treasury stock . . . . . . . . . . . . .Dividends paid on common stock . . . . . . .

Balances at December 31, 2003 . . . . . . . . .

1,390

(7)

(1,383)

–

–

–

$ 14–

–

–

–––

(14)–

–

––

–

–

–

––

–

––

–

–

–

––––

$ –

20,219

811

3,512

24,542

430

24,972

324

25,296

$ 202–

–

–

8––

35–

–

245–

–

–

–

5–

–

250–

–

–

–

3–––

$ 253

$194,211–

–

–

7,6381,510

(414)

(21)–

1,539

204,463–

–

4

–

3,9083,224

(32)

211,567–

–

–

–

4,3941,820

––

$217,781

$ 98,71841,404

–

–

–––

–(2,487)

–

137,63516,820

–

–

–

––

–

154,45546,110

–

–

–

–––

(7,955)

$192,610

$ (955)–

–

–

–––

––

–

(955)–

–

–

–

––

–

(955)–

–

–

–

––

(4,852)–

$(5,807)

$ ––

(3,289)

(303)

–––

––

–

(3,592)–

(2,731)

(6)

(3,528)

––

–

(9,857)–

6,020

65

(328)

––––

$ (4,100)

$292,19041,404

(3,289)

(303)37,8127,6461,510

(414)

–(2,487)

1,539

337,79616,820

(2,731)

(2)

(3,528)10,559

3,9133,224

(32)

355,46046,110

6,020

65

(328)51,867

4,3971,820

(4,852)(7,955)

$400,737


(a) The accumulated loss from the fair value of the interest rate swap in accumulated other comprehensive loss was $3.3 million, net of tax benefits of $2.1 million, atDecember 31, 2001 and $6.0 million, net of tax benefits of $3.8 million, at December 31, 2002. As of March 31, 2003, the Company no longer forecasted borrowingsand interest payments on the full notional amount of the swap. During May 2003, interest payments on borrowings hedged with the swap were reduced to zero. As aresult, the Company transferred the entire fair value of the interest rate swap from accumulated other comprehensive loss into earnings during the first and second quarters of 2003. Until the swap terminates on April 1, 2005, changes in the fair value of the interest rate swap are accounted for through the income statement (seeNote F).

(b) The accumulated loss from the foreign currency translation in accumulated other comprehensive loss is $0.3 million, net of tax benefits of $0.2 million, at bothDecember 31, 2001 and 2002 and $0.2 million, net of tax benefits of $0.2 million, at December 31, 2003.

(c) The minimum pension liability included in accumulated other comprehensive loss at December 31, 2002 was $3.5 million, net of tax benefits of $2.2 million, and $3.9million, net of tax benefits of $2.5 million, at December 31, 2003 (see Note L).

Statements of Stockholders’ Equity




($ thousands)

OPERATING ACTIVITIESNet income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Adjustments to reconcile net income

to net cash provided by operating activities:Change in accounting principle, net of tax . . . . . . . . . . . . . . . . . . . . . .Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . .Provision for losses on accounts receivable . . . . . . . . . . . . . . . . . . . .Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .Fair value of interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sales of assets and other . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of G.I. Trucking Company . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of Wingfoot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of Clipper LTL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Changes in operating assets and liabilities,

net of sales and exchanges: Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Accounts payable, bank drafts payable, taxes payable,

accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . .NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . .

INVESTING ACTIVITIESPurchases of property, plant and equipment,

less capitalized leases and notes payable . . . . . . . . . . . . . . . . . . . . . . .Proceeds from asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from sale of G.I. Trucking Company . . . . . . . . . . . . . . . . . . . . . .Proceeds from sale of Wingfoot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Proceeds from sale of Clipper LTL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Capitalization of internally developed software and other . . . . . . . . . . . .

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES . . . . . . . . . . . . . .

FINANCING ACTIVITIESBorrowings under revolving credit facilities . . . . . . . . . . . . . . . . . . . . . . . .Payments under revolving credit facilities . . . . . . . . . . . . . . . . . . . . . . . . .Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Retirement of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Purchase of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Dividends paid on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net increase (decrease) in bank overdraft . . . . . . . . . . . . . . . . . . . . . . . .Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NET CASH USED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . .

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . .Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . .

CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . .

$ 46,110

–51,925

–332

1,5562,5696,330

(419)–

(12,060)(2,535)

(3,125)(813)

(20,273)

4,73574,332

(68,171)7,829

–71,309

2,678(3,919)9,726

273,700(383,700)

(331)–––

(7,955)(4,852)

8133,874

(118,451)

(34,393)39,644

$ 5,251

$ 16,820

23,93549,219

–275

1,5938,412

–(3,430)

–––

(15,914)(982)

(12,631)

21,37188,668

(55,668)11,874

–––

(4,381)(48,175)

61,200(61,200)(15,191)(4,983)

––––

1,3793,086

(15,709)

24,78414,860

$ 39,644

$ 41,404

–50,315

4,053180

2,966(52)

–(2,322)(4,642)

––

35,236(136)

(10,892)

(51,263)64,847

(74,670)10,13240,455

––

(2,817)(26,900)

92,800(92,800)(23,234)(23,174)

(414)(2,487)

––

(18,165)7,645

(59,829)

(21,882)36,742

$ 14,860

Statements of Cash Flows


Arkansas Best Corporation (“theCompany”) is a diversified holdingcompany engaged through its subsidiariesprimarily in motor carrier and intermodaltransportation operations. Principalsubsidiaries are ABF Freight System, Inc.(“ABF”); Clipper Exxpress Company(“Clipper”) (see Note D regarding the saleand exit of Clipper’s less-than-truckload(“LTL”) business); FleetNet America, Inc.

(“FleetNet”); and until August 1, 2001, G.I.Trucking Company (“G.I. Trucking”) (seeNote S).

On March 28, 2003, the InternationalBrotherhood of Teamsters (“IBT”)announced the ratification of its NationalMaster Freight Agreement with the MotorFreight Carriers Association (“MFCA”) byits membership. The agreement has a

five-year term and was effective April 1,2003. The agreement provides for annualcontractual wage and benefit increases ofapproximately 3.2% – 3.4%. Approximately77.0% of ABF’s employees are covered bythe agreement. Carrier members of theMFCA ratified the agreement on the same date.

Notes to Consol idated Financial Statements


Note A – Organization and Description of Business

Note B – Accounting Policies

Consolidation: The consolidated financialstatements include the accounts of theCompany and its subsidiaries. Allsignificant intercompany accounts andtransactions are eliminated inconsolidation.

Cash and Cash Equivalents: Short-terminvestments that have a maturity of ninetydays or less when purchased areconsidered cash equivalents.

Concentration of Credit Risk: TheCompany’s services are provided primarilyto customers throughout the United Statesand Canada. ABF, the Company’s largestsubsidiary, which representedapproximately 90.0% of the Company’sannual revenues for 2003, had no singlecustomer representing more than 3.0% of its revenues during 2003 and no singlecustomer representing more than 3.0% of its accounts receivable balance during2003. The Company performs ongoingcredit evaluations of its customers andgenerally does not require collateral. TheCompany provides an allowance fordoubtful accounts based upon historicaltrends and factors surrounding the creditrisk of specific customers. Historically,credit losses have been withinmanagement’s expectations.

Allowances: The Company maintainsallowances for doubtful accounts, revenueadjustments and deferred tax assets. TheCompany’s allowance for doubtfulaccounts represents an estimate ofpotential accounts receivable write-offsassociated with recognized revenue based on historical trends and factorssurrounding the credit risk of specificcustomers. The Company writes offaccounts receivable when it has

determined it appropriate to turn themover to a collection agency. Receivableswritten off are charged against theallowance. The Company’s allowance forrevenue adjustments represents anestimate of potential revenue adjustmentsassociated with recognized revenue basedupon historical trends. The Company’svaluation allowance against deferred taxassets is established by evaluatingwhether the benefits of its deferred taxassets will be realized through thereduction of future taxable income.

Impairment Assessment of Long-LivedAssets: The Company follows Statement of Financial Accounting Standards No. 144(“FAS 144”), Accounting for theImpairment and Disposal of Long-LivedAssets. The Company reviews its long-livedassets, including property, plant,equipment and capitalized software, thatare held and used in its operations forimpairment whenever events or changes incircumstances indicate that the carryingamount of the asset may not berecoverable, as required by FAS 144. Ifsuch an event or change in circumstancesis present, the Company will review itsdepreciation policies and, if appropriate,estimate the undiscounted future cashflows, less the future cash outflowsnecessary to obtain those inflows,expected to result from the use of the assetand its eventual disposition. If the sum ofthe undiscounted future cash flows is lessthan the carrying amount of the relatedassets, the Company will recognize animpairment loss. The Company considers a long-lived asset as abandoned when itceases to be used. The Company recordsimpairment losses resulting from suchabandonment in operating income. Assetsto be disposed of are reclassified as assets

held for sale at the lower of their carryingamount or fair value less costs to sell.

Based upon current available marketinformation about ABF revenue equipmenttrade-in values, during 2003 salvage valuereductions were made to certain ABFrevenue equipment assets. These reduc-tions resulted in additional depreciation of$1.8 million in 2003. During 2003, ABFabandoned $0.1 million of capitalizedsoftware, and Clipper abandoned $0.2million of capitalized software.

Assets held for sale represent primarilyABF’s nonoperating freight terminals andolder revenue equipment that are nolonger in service. Assets held for sale arecarried at the lower of their carrying valueor fair value less costs to sell. Write-downsto fair value less costs to sell are reportedbelow the operating income line in gains orlosses on sales of property, in the case ofreal property, or above the operatingincome line as gains or losses on sales ofequipment, in the case of revenue or otherequipment. Assets held for sale areexpected to be disposed of by selling theproperties or assets to a third party withinthe next 12 to 24 months.

Total assets held for sale at December 31,2002 were $3.2 million. During 2003,additional assets of $9.1 million wereidentified and reclassified to assets heldfor sale. Nonoperating terminals andrevenue equipment carried at $3.1 millionwere sold for gains of $2.0 million, ofwhich $1.7 million related to real estateand was reported below the operating lineand $0.3 million was related to equipmentand reported in operating income. During2003, the Company recorded $1.0 millionof losses from write-downs related to real


Notes to Consol idated Financial Statements (cont inued)

estate moved into assets held for sale.These real estate losses were reportedbelow the operating income line.

At December 31, 2003, management wasnot aware of any events or circumstancesindicating the Company’s long-lived assetswould not be recoverable.

Property, Plant and Equipment IncludingRepairs and Maintenance: The Companyutilizes tractors and trailers primarily in itsmotor carrier transportation operations.Tractors and trailers are commonlyreferred to as “revenue equipment” in thetransportation business. Purchases ofproperty, plant and equipment arerecorded at cost. For financial reportingpurposes, such property is depreciatedprincipally by the straight-line method,using the following lives: structures – 15 to 20 years; revenue equipment – 3 to 12years; other equipment – 3 to 10 years;and leasehold improvements – 4 to 20years. For tax reporting purposes,accelerated depreciation or cost recoverymethods are used. Gains and losses onasset sales are reflected in the year ofdisposal. Unless fair value can bedetermined, trade-in allowances in excessof the book value of revenue equipmenttraded are accounted for by adjusting thecost of assets acquired. Tires purchasedwith revenue equipment are capitalized asa part of the cost of such equipment, withreplacement tires being expensed whenplaced in service. Repair and maintenancecosts associated with property, plant andequipment are expensed as incurred if thecosts do not extend the useful life of theasset. If such costs do extend the usefullife of the asset, the costs are capitalizedand depreciated over the appropriateuseful life. The Company has no plannedmajor maintenance activities.

Computer Software Developed orObtained for Internal Use, IncludingWebsite Development Costs: TheCompany accounts for internally developedsoftware in accordance with Statement ofPosition No. 98-1 (“SOP 98-1”),Accounting for Costs of ComputerSoftware Developed for or Obtained forInternal Use. As a result, the Companycapitalizes qualifying computer softwarecosts incurred during the “applicationdevelopment stage.” For financialreporting purposes, capitalized software

costs are amortized by the straight-linemethod over 2 to 5 years. The amount ofcosts capitalized within any period isdependent on the nature of softwaredevelopment activities and projects ineach period. In March 2000, the EmergingIssues Task Force (“EITF”) issued EITFIssue No. 00-2 (“EITF 00-2”), Accountingfor Website Development Costs. EITF 00-2did not change the Company’s practices,described above, with respect to websitedevelopment costs.

Goodwill: For 2003 and 2002, goodwill isaccounted for under Statement ofFinancial Accounting Standards No. 142(“FAS 142”), Goodwill and Other IntangibleAssets. Under the provisions of FAS 142,goodwill is no longer amortized butreviewed annually for impairment, usingthe fair value method to determinerecoverable goodwill. The fair valuemethod uses a combination of valuationmethods, including EBITDA and netincome multiples and the present value of discounted cash flows (see Note Gregarding the Company’s impairmenttesting). During 2001, goodwill wasaccounted for under the provisions ofStatement of Financial AccountingStandards No. 121 (“FAS 121”),Accounting for Impairment of Long-LivedAssets and for Assets to be Disposed ofand Accounting Principle Board OpinionNo. 17, Intangible Assets.

Income Taxes: Deferred income taxes areaccounted for under the liability method.Deferred income taxes relate principally toasset and liability basis differences arisingfrom the 1988 leveraged buyout transac-tion (“LBO”) and from a 1995 acquisition,as well as to the timing of the depreciationand cost recovery deductions previouslydescribed and to temporary differences inthe recognition of certain revenues andexpenses of carrier operations.

Revenue Recognition: Revenue isrecognized based on relative transit timein each reporting period with expensesrecognized as incurred, as prescribed bythe Securities and Exchange Commis-sion’s (“SEC”) Staff Accounting Bulletin No.101 (“SAB 101”), Revenue Recognition inFinancial Statements, and the EmergingIssues Task Force Issue No. 91-9 (“EITF91-9”), Revenue and Expense Recognitionfor Freight Services in Process.

Earnings (Loss) Per Share: The calculationof earnings (loss) per share is based onthe weighted-average number of common(basic earnings per share) or commonequivalent shares outstanding (dilutedearnings per share) during the applicableperiod. The dilutive effect of CommonStock equivalents is excluded from basicearnings per share and included in thecalculation of diluted earnings per share.The calculation of basic earnings per sharereduces income available to commonstockholders by Preferred Stock dividendspaid or accrued during the period (seeNote C).

Stock-Based Compensation: At December 31, 2003, the Company hadthree stock option plans which aredescribed more fully in Note C. TheCompany accounts for stock options underthe “intrinsic value method” and therecognition and measurement principlesof Accounting Principles Board Opinion No.25 (“APB 25”), Accounting for Stock Issuedto Employees, and related interpretations,including Financial Accounting StandardsBoard Interpretation No. 44 (“FIN 44”),Accounting for Certain TransactionsInvolving Stock Compensation. TheCompany also follows the disclosureprovisions of Statement of FinancialAccounting Standards No. 148 (“FAS148”), Accounting for Stock-BasedCompensation – Transition andDisclosure. No stock-based employeecompensation expense is reflected in netincome, as all options granted under theCompany’s plans had an exercise priceequal to the market value of the underlyingCommon Stock on the date of grant.

The Company has elected to use the APB25 intrinsic value method because thealternative fair value accounting providedfor under Statement of FinancialAccounting Standards No. 123 (“FAS123”), Accounting for Stock-BasedCompensation, requires the use oftheoretical option valuation models, suchas the Black-Scholes model, that were notdeveloped for use in valuing employeestock options. The Black-Scholes optionvaluation model was developed for use inestimating the fair value of traded optionsthat have no vesting restrictions and arefully transferable. In addition, optionvaluation models require the input ofhighly subjective assumptions including



the expected stock price volatility. Becausethe Company’s employee stock optionshave characteristics significantly differentfrom those of traded options, and becausechanges in the subjective inputassumptions can materially affect the fairvalue estimate, in management’s opinion,the existing models do not necessarilyprovide a reliable single measure of thefair value of employee stock options.

For companies accounting for their stock-based compensation under the APB 25intrinsic value method, pro forma

information regarding net income andearnings per share is required and isdetermined as if the Company hadaccounted for its employee stock optionsunder the fair value method of FAS 123.The fair value for these options isestimated at the date of grant, using aBlack-Scholes option pricing model.Subsequent to the issuance of the 2002financial statements, the Companydetermined that an inappropriateweighted-average life was used indetermining the fair value of optionsgranted in 2002 and 2001. Additionally,

a computational error was identified. As aresult, the weighted-average life has beenrevised from 9.5 years to 4 years, whichreflects the Company’s historicalexperience. The impact of the revisions onthe Company’s previously reported 2002and 2001 pro forma annual net income isa decrease of $0.02 and an increase of$0.01 per diluted common share,respectively. The pro forma disclosures for 2002 and 2001 have been revised forthese items. The Company’s pro formaassumptions for 2003, 2002 and 2001are as follows:

2003 2002 2001

Risk free rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Weighted-average life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Dividend yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.7%56.2%4 years

1.2%

4.3%61.0%4 years0.01%

4.2% – 4.9%60.5% – 61.5%

4 years0.01%

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognitionunder FAS 123 and FAS 148 to stock-based employee compensation:

December 312003 2002 2001


Net income – as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Less total stock option expense determined under fair

value-based methods for all awards, net of tax . . . . . . . . . . . . . . . . . . . . . .

Net income – pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income per share – as reported (basic) . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income per share – as reported (diluted) . . . . . . . . . . . . . . . . . . . . . . . . .

Net income per share – pro forma (basic) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income per share – pro forma (diluted) . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 46,110

(2,775)

$ 43,335

$ 1.85

$ 1.81

$ 1.74

$ 1.73

$ 16,820

(2,538)

$ 14,282

$ 0.68

$ 0.66

$ 0.58

$ 0.57

$ 41,404

(1,545)

$ 39,859

$ 1.79

$ 1.66

$ 1.71

$ 1.60

Claims Liabilities: The Company is self-insured up to certain limits for workers’compensation, certain third-party casualtyclaims and cargo loss and damage claims.Above these limits, the Company haspurchased insurance coverage, whichmanagement considers to be adequate.The Company records an estimate of itsliability for self-insured workers’compensation and third-party casualtyclaims which includes the incurred claimamount plus an estimate of future claimdevelopment calculated by applying the

Company’s historical claims developmentfactors to its incurred claims amounts. TheCompany’s liability also includes anestimate of incurred, but not reported,claims. Netted against this liability areamounts the Company expects to recoverfrom insurance carriers and insurancepool arrangements. The Company recordsan estimate of its potential self-insuredcargo loss and damage claims byestimating the amount of potential claimsbased on the Company’s historical trendsand certain event-specific information. The

Company’s claims liabilities have not beendiscounted.

Insurance-Related Assessments: TheCompany accounts for insurance-relatedassessments in accordance with State-ment of Position No. 97-3 (“SOP 97-3”),Accounting by Insurance and OtherEnterprises for Insurance-RelatedAssessments. At December 31, 2003 and2002, the Company recorded estimatedliabilities of $0.9 million and $0.6 million,respectively, for state guaranty fund



assessments and other insurance-relatedassessments. Management has estimatedthe amounts incurred, using the bestavailable information about premiums andguaranty assessments by state. Theseamounts are expected to be paid within a period not to exceed one year. Theliabilities recorded have not beendiscounted.

Environmental Matters: The Companyexpenses environmental expendituresrelated to existing conditions resultingfrom past or current operations and fromwhich no current or future benefit isdiscernible. Expenditures which extend thelife of the related property or mitigate orprevent future environmentalcontamination are capitalized. TheCompany determines its liability on a site-by-site basis with actual testing at somesites and records a liability at the timewhen it is probable and can be reasonablyestimated. The estimated liability is notdiscounted or reduced for possiblerecoveries from insurance carriers or other third parties (see Note Q).

Derivative Financial Instruments: TheCompany has, from time to time, enteredinto interest rate swap agreements andinterest rate cap agreements designatedto modify the interest characteristic ofoutstanding debt or limit exposure toincreasing interest rates in accordancewith its interest rate risk managementpolicy (see Notes F and N). The differentialto be paid or received as interest rateschange is accrued and recognized as anadjustment of interest expense related tothe debt (the accrual method ofaccounting). The related amount payableor receivable from counterparties isincluded in other current liabilities orcurrent assets. Under the provisions of Statement of Financial AccountingStandards No. 133 (“FAS 133”),Accounting for Derivative FinancialInstruments and Hedging Activities, theCompany is required to recognize allderivatives on its balance sheet at fairvalue. Derivatives that are not hedges willbe adjusted to fair value through income.If a derivative is a hedge, depending on thenature of the hedge, changes in the fairvalue of the derivative will either be offsetagainst the change in fair value of thehedged asset, liability or firm commitment

through earnings, or recognized in othercomprehensive income until the hedgeditem is recognized in earnings. Hedgeineffectiveness associated with interestrate swap agreements will be reported bythe Company in interest expense.

In April 2003, the Financial AccountingStandards Board issued Statement No.149 (“FAS 149”), Amendment ofStatement 133 on Derivative Instrumentsand Hedging Activities. FAS 149 amendsand clarifies financial accounting andreporting for derivative instruments,including certain derivative instrumentsembedded in other contracts (collectivelyreferred to as derivatives) and for hedgingactivities under FAS 133. This statement iseffective for contracts entered into ormodified after September 30, 2003 anddid not have an impact upon theCompany’s financial statements or related disclosures.

Costs of Start-Up Activities: The Companyexpenses certain costs associated withstart-up activities as they are incurred.

Comprehensive Income: The Companyreports the components of othercomprehensive income by their nature inthe financial statements and displays theaccumulated balance of othercomprehensive income separately fromretained earnings and additional paid-incapital in the consolidated statements ofstockholders’ equity. Other comprehensiveincome refers to revenues, expenses,gains and losses that are included incomprehensive income but excluded fromnet income.

Asset Retirement Obligations: OnJanuary 1, 2003, the Company adoptedStatement of Financial AccountingStandards No. 143 (“FAS 143”),Accounting for Asset RetirementObligations. This Statement applies tolegal obligations associated with theretirement of long-lived assets that resultfrom the acquisition, construction,development and/or the normal operationof a long-lived asset, except for certainobligations of lessees. The adoption of FAS 143 did not have an impact upon theCompany’s financial statements or relateddisclosures.

Exit or Disposal Activities: On January 1,2003, the Company adopted Statement ofFinancial Accounting Standards No. 146(“FAS 146”), Accounting for CostsAssociated with Exit or Disposal Activities.As prescribed by FAS 146, liabilities forcosts associated with the exit or disposalactivity are recognized when the liability isincurred. See Note D regarding the saleand exit of Clipper’s LTL division in 2003.The adoption of FAS 146 did not have amaterial impact upon the Company’sfinancial statements or relateddisclosures.

Variable Interest Entities: In January2003, the Financial Accounting StandardsBoard issued Interpretation No. 46 (“FIN46”). This Interpretation of AccountingResearch Bulletin No. 51, ConsolidatedFinancial Statements, addressesconsolidation by business enterprises ofvariable interest entities. ThisInterpretation applies immediately tovariable interest entities created afterJanuary 31, 2003, and to variable interestentities in which an enterprise obtains aninterest after that date. The Company hasno investments in or known contractualarrangements with variable interestentities, and therefore this Interpretationhas not impacted the Company’s financialstatements or related disclosures.

Segment Information: The Company uses the “management approach” fordetermining appropriate segmentinformation to disclose. The managementapproach is based on the waymanagement organizes the segmentswithin the Company for making operatingdecisions and assessing performance.

Investment in Wingfoot: The Company’sinvestment in Wingfoot represented a19.0% interest in Wingfoot CommercialTire Systems, LLC. The transaction whichcreated Wingfoot was accounted for at fairvalue, as prescribed by Emerging IssuesTask Force Issue No. 00-5 (“EITF 00-5”),Determining Whether a NonmonetaryTransaction is an Exchange of SimilarProductive Assets. The Company’sinvestment was accounted for under theequity method, similar to a partnershipinvestment. However, the Company did notshare in the profits or losses of Wingfootduring the term of the Company’s “Put”option, based upon the terms of the



operating agreement. See Note Eregarding the sale of the Company’sinterest in Wingfoot in 2003.

Use of Estimates: The preparation offinancial statements in conformity withaccounting principles generally acceptedin the United States requires managementto make estimates and assumptions thataffect the amounts reported in thefinancial statements and accompanyingnotes. Actual results could differ fromthose estimates.

Reclassifications: Certain reclassifi-cations have been made to the prior yearfinancial statements to conform to thecurrent year’s presentation.

Other Accounting Pronouncements: InMay 2003, the Financial AccountingStandards Board issued Statement No.150 (“FAS 150”), Accounting for CertainFinancial Instruments with Characteristicsof both Liabilities and Equity. FAS 150establishes standards for how an issuerclassifies and measures certain financial

instruments with characteristics of bothliabilities and equity. It requires that anissuer classify a financial instrument thatis within its scope as a liability (or asset insome circumstances). Many of thoseinstruments were previously classified as equity. This statement is effective forfinancial instruments entered into ormodified after May 31, 2003. FAS 150 didnot have an impact upon the Company’sfinancial statements or relateddisclosures.

Note C – Stockholders’ EquityPreferred Stock: In February 1993, theCompany completed a public offering of1,495,000 shares of Preferred Stock at$50 per share. The Preferred Stock wasconvertible at the option of the holder intoCommon Stock at the rate of 2.5397shares of Common Stock for each share ofPreferred Stock. Annual dividends were$2.875 and were cumulative. ThePreferred Stock was exchangeable, inwhole or in part, at the option of theCompany on any dividend payment datebeginning February 15, 1995 for theCompany’s 5¾% Convertible SubordinatedDebentures due February 15, 2018, at arate of $50 principal amount ofdebentures for each share of PreferredStock. The Preferred Stock wasredeemable at any time, in whole or inpart, at the Company’s option, initially at aredemption price of $52.0125 per shareand thereafter at redemption pricesdeclining to $50 per share on or afterFebruary 15, 2003, plus unpaid dividendsto the redemption date. Holders ofPreferred Stock had no voting rights unlessdividends were in arrears six quarters ormore, at which time they had the right toelect two directors of the Company until alldividends had been paid.

On July 10, 2000, the Company purchased105,000 shares of its Preferred Stock at$37.375 per share, for a total cost of $3.9million. All of the shares purchased wereretired. On August 13, 2001, the Companyannounced the call for redemption of its$2.875 Series A Cumulative ConvertibleExchangeable Preferred Stock (“ABFSP”).As of August 10, 2001, 1,390,000 sharesof Preferred Stock were outstanding. At theend of the extended redemption period onSeptember 14, 2001, 1,382,650 shares

of the Preferred Stock were converted to3,511,439 shares of Common Stock. Atotal of 7,350 shares of Preferred Stockwere redeemed at the redemption price of$50.58 per share. The Company paid $0.4million to the holders of these shares inredemption of their Preferred Stock.Preferred Stock dividends of $2.5 millionwere paid during 2001. There were noPreferred Stock dividends paid during2003 or 2002.

Common Stock: During 2003, theCompany’s Board of Directors declared aquarterly cash dividend of eight cents pershare for its Common Stock, which totaled$8.0 million in 2003.

Stockholders’ Rights Plan: Each issuedand outstanding share of Common Stockhas associated with it one Common Stockright to purchase a share of CommonStock from the Company at an exerciseprice of $80 per right. The rights are notcurrently exercisable, but could becomeexercisable if certain events occur,including the acquisition of 15.0% or moreof the outstanding Common Stock of theCompany. Under certain conditions, therights will entitle holders, other than anacquirer in a nonpermitted transaction, topurchase shares of Common Stock with amarket value of two times the exerciseprice of the right. The rights will expire in2011 unless extended.

Treasury Stock: At December 31, 2002,the Company had 59,782 shares oftreasury stock with a cost basis of $1.0million. These shares were purchased atvarious times throughout 2000, asemployees tendered shares they had heldfor six months or more as payments for the

exercise price of stock options, as allowedby the Company’s stock option plans.

On January 23, 2003, the Board approvedthe Company’s repurchase from time totime, in the open market or in privatelynegotiated transactions, up to a maximumof $25.0 million of the Company’sCommon Stock. The repurchases may bemade either from the Company’s cashreserves or from other available sources.During 2003, the Company purchased200,000 shares for $4.8 million. Thesecommon shares were added to theCompany’s treasury stock. At December 31, 2003, the Company had a total of 259,782 shares of treasury stock with a cost basis of $5.8 million.

Stock Options and Stock AppreciationRights: At December 31, 2003, theCompany maintained three stock optionplans—the 1992 Stock Option Plan, the2000 Non-Qualified Stock Option Plan andthe 2002 Stock Option Plan, whichprovided for the granting of options todirectors and designated employees of theCompany. The 1992 Stock Option Planexpired on December 31, 2001 and,therefore, no new options can be grantedunder this plan. The 2000 Non-QualifiedStock Option Plan, a broad-based plan thatallows options to be granted to designatedemployees, provided 1.0 million shares ofCommon Stock for the granting of options.The 2002 Stock Option Plan allows for thegranting of 1.0 million options, as well astwo types of stock appreciation rights(“SARs”) which are payable in shares orcash. Employer SARs allow the Company to decide, when an option is exercised,whether or not to treat the exercise as aSAR. Employee SARs allow the optionee to



decide, when exercising an option,whether or not to treat it as a SAR. During2003, the Company granted 182,500Employer SARs in conjunction with stockoption grants of 182,500 shares todirectors and key employees of theCompany from the 2002 Stock OptionPlan. As of December 31, 2003, theCompany had not exercised any EmployerSARs. Also during 2003, the Companygranted 143,500 stock options todesignated employees under the 2000

Non-Qualified Stock Option Plan. Alloptions or SARs granted are exercisablestarting on the first anniversary of thegrant date, with 20.0% of the shares orrights covered, thereby becomingexercisable at that time and with anadditional 20.0% of the option shares orSARs becoming exercisable on eachsuccessive anniversary date, with fullvesting occurring on the fifth anniversarydate. The options or SARs are granted for a term of 10 years.

As more fully described in the Company’saccounting policies (see Note B), theCompany has elected to follow APB 25 andrelated interpretations in accounting for itsemployee stock options. Under APB 25, nostock-based employee compensationexpense is reflected in net income, as alloptions granted under the plans had anexercise price equal to the market value ofthe underlying Common Stock on the dateof grant.

The following table is a summary of the Company’s stock option activity and related information for the years ended December 31:

2003 2002 2001

Weighted- Weighted- Weighted-Average Average Average

Options Exercise Price Options Exercise Price Options Exercise Price

Outstanding – beginning of year . . . . . .Granted . . . . . . . . . . . . . . . . . . . . . . . . . . .Exercised . . . . . . . . . . . . . . . . . . . . . . . . .Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . .Outstanding – end of year . . . . . . . . . . .

Exercisable – end of year . . . . . . . . . . . .

Estimated weighted-average fair valueper share of options in excess ofthe exercise price granted toemployees during the year (1) . . . . . . . .

1,768,115326,000

(339,167)(40,301)

1,714,647

713,586

$ 17.4424.5913.3421.81

$ 19.51

$ 15.99

$ 10.39

2,201,2147,500

(430,599)(10,000)

1,768,115

684,411

$ 15.7823.53

9.1314.11

$ 17.44

$ 13.34

$ 11.86

2,235,731819,201

(826,718)(27,000)

2,201,214

690,856

$ 9.8425.719.66

17.48$ 15.78

$ 8.55

$ 13.07

(1) Considers the option exercise price, historical volatility, risk-free interest rate, weighted-average life of the options and dividend yields, under the Black-Scholes method. Subsequent to the issuance of the 2002 financial statements, the Company determined that an inappropriate weighted-average lifewas used in determining the fair value of options granted in 2002 and 2001. Additionally, a computational error was identified. The estimatedweighted-average fair value per share for options granted during 2002 and 2001 has been revised for these matters.

The following table summarizes information concerning currently outstanding and exercisable options:

Weighted-Number Average Weighted- Weighted-

Outstanding Remaining Average Exercisable AverageRange of as of Contractual Exercise as of Exercise

Exercise Prices December 31, 2003 Life Price December 31, 2003 Price

$4 - $6$6 - $8$8 - $10

$10 - $12$12 - $14$14 - $16$22 - $24$24 - $26$26 - $28$28 - $30

48,500174,40027,00033,000

403,35424,000

7,500711,57220,000

265,3211,714,647

3.23.83.44.05.86.38.37.77.07.56.5

$ 5.117.278.24

10.5113.4814.9923.5324.4726.8128.05

$ 19.51

48,500136,000

24,60033,000

194,51814,400

1,500143,172

8,000109,896713,586

$ 5.117.178.23

10.5113.3814.9923.5324.3826.8128.05

$ 15.99



On December 31, 2003, Clipper ExxpressCompany closed the sale of all customerand vendor lists related to Clipper’s LTLfreight business to Hercules ForwardingInc. of Vernon, California for $2.7 million in cash, resulting in a pre-tax gain of $2.5million. This gain is reported below the

operating income line. Total costs incurredwith the exit of this business unitamounted to $1.2 million and includeseverance pay, software and fixed assetabandonment and certain operatingleases. These exit costs are reportedabove the operating income line. No

additional costs relating to the exit of thisbusiness are expected to be incurred. Theimpact of the gain was $1.5 million, net oftaxes, or $0.06 per diluted common shareand the impact of the exit costs was $0.7million, net of taxes, or $0.03 per dilutedcommon share.

Note D – Sale and Exit of Clipper’s LTL Business

Note E – Sale of 19% Interest in WingfootOn March 19, 2003, the Companyannounced that it had notified TheGoodyear Tire & Rubber Company(“Goodyear”) of its intention to sell its19.0% ownership interest in Wingfoot

Commercial Tire Systems, LLC (“Wingfoot”)to Goodyear for a cash price of $71.3million. The transaction closed on April 28,2003 and the Company recorded a pre-taxgain of $12.1 million ($8.4 million after

tax, or $0.33 per diluted common share)during the second quarter of 2003. TheCompany used the proceeds to reduce theoutstanding debt under its CreditAgreement.

Note F – Derivative Financial InstrumentsOn February 23, 1998, the Companyentered into an interest rate swapagreement with an effective date of April 1, 1998 and a termination date ofApril 1, 2005 on a notional amount of$110.0 million. The Company’s interestrate strategy has been to hedge itsvariable 30-day LIBOR-based interest ratefor a fixed interest rate of 5.845% (plus the $225.0 million Credit Agreement(“Credit Agreement”) margin which was0.775% at December 31, 2003 and0.825% at December 31, 2002) on$110.0 million of Credit Agreementborrowings for the term of the interest rate swap to protect the Company frompotential interest rate increases. TheCompany had designated its benchmarkvariable 30-day LIBOR-based interest ratepayments on $110.0 million of borrowingsunder the Company’s Credit Agreement asa hedged item under a cash flow hedge. Asa result, the fair value of the swap, asestimated by Societe Generale, thecounterparty, was a liability of $9.9 millionat December 31, 2002 and was recordedon the Company’s balance sheet throughaccumulated other comprehensive losses,net of tax, rather than through the incomestatement.

As previously discussed, on March 19,2003, the Company announced itsintention to sell its 19.0% ownershipinterest in Wingfoot and use the proceedsto pay down Credit Agreement borrowings.As a result, the Company forecasted CreditAgreement borrowings to be below the$110.0 million level and reclassified themajority of the negative fair value of theswap on March 19, 2003 of $8.5 million(pre-tax), or $5.2 million net of taxes, fromaccumulated other comprehensive lossinto earnings on the income statement,during the first quarter of 2003. Thetransaction closed on April 28, 2003 andmanagement used the proceeds receivedfrom Goodyear to pay down its CreditAgreement borrowings below the $110.0million level. During the second quarter of 2003, the Company reclassified theremaining negative fair value of the swapof $0.4 million (pre-tax), or $0.2 million net of taxes, from accumulated othercomprehensive loss into earnings on theincome statement. Changes in the fairvalue of the interest rate swap sinceMarch 19, 2003 have been accounted for in the Company’s income statement.

Future changes in the fair value of theinterest rate swap will be accounted forthrough the income statement until theinterest rate swap matures on April 1,2005, unless the Company terminates the arrangement prior to that date.

The fair value of the interest rate swap atDecember 31, 2003, is a liability of $6.3million. Included in the income statementfor 2003 is the previously discussed $8.9million (pre-tax) reclassification of negativefair value from accumulated othercomprehensive losses into the incomestatement and $2.5 million in positivechanges in the fair value of the interestrate swap, from March 19, 2003 toDecember 31, 2003.

The Company reported no gain or lossduring 2003, 2002, or 2001 as a result of hedge ineffectiveness.



Note G – Goodwill

On January 1, 2002, the Companyadopted FAS 142. Under the provisions of FAS 142, the Company’s goodwillintangible asset is no longer amortized but reviewed annually for impairment. AtDecember 31, 2001, the Company’sassets included goodwill of $101.3 millionof which $63.8 million was from an LBOtransaction related to ABF and $37.5million related to the 1994 acquisition ofClipper. During the first quarter of 2002,the Company performed the first phase of the required transitional impairmenttesting on its $63.8 million of LBOgoodwill, which was based on ABF’soperations and fair value at January 1,2002. There was no indication ofimpairment with respect to this goodwill.

At the same time, the Company performedboth the first and second phases of thetransitional impairment testing on itsClipper goodwill and found the entire$37.5 million balance to be impaired. As a result, the Company recognized a non-cash impairment loss of $23.9 million,net of tax benefits of $13.6 million, as thecumulative effect of a change inaccounting principle as provided by FAS142. This impairment loss results from the change in method of determiningrecoverable goodwill from usingundiscounted cash flows, as prescribed by FAS 121, to the fair value method, asprescribed by FAS 142, determined byusing a combination of valuation methods,including EBITDA and net income multiples

and the present value of discounted cashflows. The Company performed the annualimpairment testing on its ABF goodwillbased upon operations and fair value atJanuary 1, 2004 and 2003 and foundthere to be no impairment at either ofthese dates.

At December 31, 2003 and 2002, theCompany’s assets included goodwill of$63.9 million and $63.8 million,respectively, from the LBO transactionrelated to ABF. The change in the goodwillasset balance is due to ABF’s foreigncurrency translation adjustments on theportion of the goodwill related to ABFCanadian operations.

A comparison of the Company’s net income and earnings per share for the year ended December 31, 2001 shown on an adjusted basis,excluding goodwill amortization, to the Company’s actual income before the cumulative effect change, net income (loss), and earningsper share for the years ended December 31, 2003 and 2002 is as follows:



NET INCOME (LOSS):Income before cumulative effect of change in accounting principle . . . . . .Cumulative effect of change in accounting principle, net of tax . . . . . . . . . .Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Add back goodwill amortization, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NET INCOME (LOSS) PER COMMON SHARE BASIC:Income before cumulative effect of change in accounting principle . . . . . .Cumulative effect of change in accounting principle, net of tax . . . . . . . . . .Reported net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . .Goodwill amortization, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Adjusted net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NET INCOME (LOSS) PER COMMON SHARE DILUTED:Income before cumulative effect of change in accounting principle . . . . . .Cumulative effect of change in accounting principle, net of tax . . . . . . . . . .Reported net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . .Goodwill amortization, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Adjusted net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 46,110–

46,110–

$ 46,110

$ 1.85–

1.85–

$ 1.85

$ 1.81–

1.81–

$ 1.81

$ 40,755(23,935)16,820

–$ 16,820

$ 1.65(0.97)0.68

–$ 0.68

$ 1.60(0.94)0.66

–$ 0.66

$ 41,404–

41,4043,411

$ 44,815

$ 1.79–

1.790.16

$ 1.95

$ 1.66–

1.660.14

$ 1.80



Note H – Federal and State Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxliabilities and assets are as follows:


($ thousands)

Deferred tax liabilities:Amortization, depreciation and basis differences

for property, plant and equipment and other long-lived assets . . . . . . . . . . . . . . . . . . . .Revenue recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax assets:Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Fair value of interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Postretirement benefits other than pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .State net operating loss carryovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Basis difference in investment in Wingfoot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Valuation allowance for deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 40,8123,9292,638

–47,379

39,7232,4912,5231,273

–613

46,623(1,344)45,279

$ (2,100)

$ 34,4134,2711,8545,934

46,472

38,7873,8971,8892,1961,1304,088

51,987(2,728)

49,259$ 2,787

Significant components of the provision for income taxes are as follows:


($ thousands)

Current:Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred:Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 23,4082,867

26,275

1,5111,0582,569

$ 28,844

$ 17,6751,789

19,464

5,2663,1468,412

$ 27,876

$ 23,2972,070

25,367

(2,274)2,222

(52)$ 25,315




($ thousands)

Income tax at the statutory federal rate of 35% . . . . . . . . . . . . . . . . . . . . . . .Federal income tax effects of:

State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Nondeductible goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Reduction of valuation allowance – Wingfoot sale . . . . . . . . . . . . . . . . . .Other nondeductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Resolution of tax contingencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 26,234

(1,373)–

(1,130)1,322

–(134)

24,9193,925

$ 28,84438.5%

$ 24,021

(1,727)––

1,184–

(537)22,941

4,935$ 27,876

40.6%

$ 23,352

(1,502)841

–1,287

(1,943)(1,012)

21,0234,292

$ 25,31537.9%

A reconciliation between the effective income tax rate, as computed on income before income taxes, and the statutory federal income taxrate is presented in the following table:

The Company’s tax rate of 38.5% in 2003reflects a lower tax rate required on theWingfoot gain, because of a higher taxbasis than book basis. The tax rate for2003 without this benefit would have been40.1%. The lower tax rate in 2001 reflectstax benefits of approximately $1.9 millionresulting from the resolution of certainissues relating to the utilization of netoperating losses and tax credits arising in prior years.

Income taxes of $34.8 million were paid in2003, $18.6 million were paid in 2002,and $39.9 million were paid in 2001. 2001includes $11.9 million in payments to theInternal Revenue Service (“IRS”) related tothe multiemployer pension issues that arediscussed below. Income tax refundsamounted to $10.0 million in 2003, $12.0million in 2002, and $7.6 million in 2001.

The tax benefit associated with stockoptions exercised amounted to $3.2 millionfor 2002 and $1.5 million for 2001. Thebenefit reflected in the 2003 financialstatements is $1.8 million; however, thisamount could increase as additionalinformation becomes available to theCompany regarding stock sales byemployees during 2003. Tax benefits ofstock options are not reflected in netincome; rather, the benefits are credited to additional paid-in capital.

As of December 31, 2003, the Companyhad state net operating loss carryovers ofapproximately $21.7 million. State netoperating loss carryovers expire generally in five to fifteen years.

For financial reporting purposes, theCompany had a valuation allowance ofapproximately $0.9 million for state netoperating loss carryovers and $0.4 millionfor state tax benefits of tax deductiblegoodwill for which realization is uncertain.During 2003, the net change in thevaluation allowance was a $1.4 milliondecrease, which related to a decrease inthe valuation allowance of approximately$1.1 million relating to the excess tax basisin its investment in Wingfoot (see Note E)and a decrease of approximately $0.3million in the valuation allowance for statetax benefits of tax deductible goodwill.

In March 1999, the Tenth Circuit Court of Appeals ruled against an appealingtaxpayer regarding the timing of thedeductibility of contributions tomultiemployer pension plans. The IRS hadpreviously raised the same issue withrespect to the Company. There were certainfactual differences between those presentin the Tenth Circuit case and those relatingspecifically to the Company. The Companywas involved in the administrative appealsprocess with the IRS regarding thosefactual differences beginning in 1997.During 2001, the Company paidapproximately $33.0 million which

represented a substantial portion of the tax and interest that would be due if themultiemployer pension issue was decidedadversely to the Company, and which wasaccounted for in prior years as a part of theCompany’s net deferred tax liability andaccrued expenses. In August 2002, theCompany reached a settlement with the IRSof the multiemployer pension issue and allother outstanding issues relating to theCompany’s federal income tax returns forthe years 1990 through 1994. Thesettlement resulted in a liability for tax andinterest that was less than the liability theCompany had estimated if the IRS prevailedon all issues. As a result of the settlement,the Company reduced its reserves forinterest by approximately $5.2 million toreflect the reduction in the Company’sliability for future cash payments of interest. The effect of this change resultedin an increase in the Company’s 2002 net income per diluted common share of $0.12.

The Company’s federal tax returns for 1995and 1996 and the returns of an acquiredcompany for 1994 and 1995 have beenexamined by the IRS, and the Company isinvolved in the administrative appealsprocess with the IRS. Resolution of theissues before the IRS is not expected toresult in any significant additional liabilitiesto the Company. The Company currently hasno other income tax returns underexamination by the IRS.



Note I – Operating Leases and Commitments

Rental expense amounted to approximately $13.2 million in 2003, $13.0 million in 2002, and $13.8 million in 2001.

The future minimum rental commitments, net of future minimum rentals to be received under noncancellable subleases, as of December 31, 2003 for all noncancellable operating leases are as follows:

EquipmentPeriod Total Terminals and Other

($ thousands)

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 11,2619,4628,3946,9184,8128,768

$ 49,615

$ 10,7448,9457,9066,4884,8128,768

$ 47,663

$ 517517488430

––

$ 1,952

Certain of the leases are renewable for substantially the same rentals for varying periods. Future minimum rentals to be received undernoncancellable subleases totaled approximately $2.1 million at December 31, 2003.

Commitments to purchase revenue equipment, which are cancellable by the Company if certain conditions are met, aggregatedapproximately $51.0 million at December 31, 2003.

Note J – Long-Term Debt and Credit Agreements


($ thousands)

Revolving credit agreement (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Capitalized lease obligations (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ –532

1,6472,179

353$ 1,826

$ 110,000699

1,780112,479

328$ 112,151

(1) On September 26, 2003, the Companyamended and restated its existingthree-year $225.0 million CreditAgreement dated as of May 15, 2002with Wells Fargo Bank Texas, NationalAssociation as Administrative Agentand Lead Arranger, and Fleet NationalBank and SunTrust Bank as Co-Syndication Agents, and WachoviaBank, National Association asDocumentation Agent. The Amendedand Restated Credit Agreement amongWells Fargo Bank, National Associationas Administrative Agent and LeadArranger, and Fleet National Bank andSunTrust Bank as Co-SyndicationAgents, and Wachovia Bank, NationalAssociation and The Bank of Tokyo-Mitsubishi, Ltd. as Co-DocumentationAgents, extended the original maturitydate for two years, to May 15, 2007.The Credit Agreement provides for up

to $225.0 million of revolving creditloans (including a $125.0 millionsublimit for letters of credit) and allowsthe Company to request extensions ofthe maturity date for a period not toexceed two years, subject toparticipating bank approval. The CreditAgreement also allows the Company torequest an increase in the amount ofrevolving credit loans as long as thetotal revolving credit loans do notexceed $275.0 million, subject to theapproval of participating banks.

At December 31, 2003, there were nooutstanding Revolver Advances andapproximately $58.4 million ofoutstanding letters of credit. AtDecember 31, 2002, there were$110.0 million of Revolver Advancesand approximately $66.4 million ofoutstanding letters of credit. As

previously discussed, the Companyused the proceeds from the sale of itsinterest in Wingfoot and operatingcash to reduce outstanding debt underits Credit Agreement during 2003.Outstanding revolving credit advancesmay not exceed a borrowing basecalculated using the Company’sequipment, real estate and eligiblereceivables. The borrowing base was$352.2 million at December 31, 2003,which would allow borrowings up to the$225.0 million limit specified by theCredit Agreement. The amountavailable for borrowing under theCredit Agreement at December 31,2003 was $166.6 million.

The Credit Agreement contains variouscovenants, which limit, among otherthings, indebtedness, distributions,stock repurchases and dispositions of



assets and which require the Companyto meet certain quarterly financial ratiotests. As of December 31, 2003, theCompany was in compliance with thecovenants. Interest rates under theagreement are at variable rates asdefined by the Credit Agreement.

The Company’s Credit Agreementcontains a pricing grid that determinesits LIBOR margin, facility fees andletter of credit fees. The pricing grid isbased on the Company’s senior debtrating agency ratings. A change in theCompany’s senior debt ratings couldpotentially impact its Credit Agreement

pricing. In addition, if the Company’ssenior debt ratings fall belowinvestment grade, the Company’sCredit Agreement provides for limits on additional permitted indebtednesswithout lender approval, acquisitionexpenditures and capital expenditures.On May 28, 2003, Standard & Poor’supgraded its corporate credit rating on the Company to BBB+ from BBB,stating that the upgrade was driven by “…the company’s strong operatingresults and decreasing debt levels,which support solid credit measures,despite the continued weak economicenvironment.” The Company is

currently rated BBB+ by Standard &Poor’s Rating Service and Baa3 byMoody’s Investors Service, Inc. TheCompany has no downward ratingtriggers that would accelerate thematurity of its debt. The Company’sLIBOR margin and facility fees were0.775% and 0.225%, respectively, atDecember 31, 2003 and 0.825% and0.175% at December 31, 2002.

(2) Capitalized lease obligations are for computer equipment. Theseobligations have a weighted-averageinterest rate of approximately 7.4%.

The future minimum payments under capitalized leases at December 31, 2003 consisted of the following ($ thousands):

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Amounts representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Present value of net minimum leases

included in long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 252252

743

58149

$ 532

Assets held under capitalized leases are included in property, plant and equipment as follows:


($ thousands)

Service, office and other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Less accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,044543

$ 501

$ 1,013334

$ 679

Capital lease obligations of $31,000 and $0.9 million were incurred for the years ended December 31, 2003 and 2002. Capital leaseamortization is included in depreciation expense.

Annual maturities of other long-term debt,excluding capitalized lease obligations, in2004 through 2008 are approximately$0.1 million; $0.2 million; $0.2 million;$0.2 million; and $0.2 million,respectively.

Interest paid, including payments made onthe interest rate swap, was $10.6 millionin 2003, $8.2 million in 2002, and $32.3million in 2001. Amounts include $3.7million and $21.2 million in IRS interestpayments for 2003 and 2001,

respectively. There was no interest paid tothe IRS during 2002. Interest capitalizedtotaled $0.2 million in 2003, $0.4 millionin 2002, and $0.3 million in 2001.

The Company is party to an interest rateswap on a notional amount of $110.0million (see Notes F and N). The purposeof the swap was to limit the Company’sexposure to interest rate increases on$110.0 million of bank borrowings. Theinterest rate under the swap is fixed at5.845% plus the Credit Agreement margin,

which was 0.775% at December 31, 2003and 0.825% at December 31, 2002.

The Company has guaranteedapproximately $0.4 million that relates to a debt owed by The Complete LogisticsCompany (“CLC”) to the owner of acompany CLC acquired in 1995. CLC was a wholly owned subsidiary of the Companyuntil 1997, when CLC was sold. TheCompany’s exposure to this guaranteedeclines by approximately $60,000 per year.



Note K – Accrued Expenses


($ thousands)

Accrued salaries, wages and incentive plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Accrued vacation pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Taxes other than income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss, injury, damage and workers’ compensation claims reserves . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 17,83133,690

5177,123

60,2525,735

$ 125,148

$ 20,79133,149

5897,364

56,5534,848

$ 123,294

The increase in loss, injury, damage and workers’ compensation claims reserves is due primarily to an increase in required reserves forworkers’ compensation and third-party casualty claims for ABF.

Note L – Pension and Other Postretirement Benefit Plans

The Company has a funded non-contributory defined benefit pension plancovering substantially all noncontractualemployees. Benefits are generally basedon years of service and employeecompensation. Contributions are madebased upon at least the minimumamounts required to be funded underprovisions of the Employee RetirementIncome Security Act of 1974, with themaximum contributions not to exceed themaximum amount deductible under theInternal Revenue Code.

The Company also has an unfundedsupplemental pension benefit plan for thepurpose of supplementing benefits underthe Company’s defined benefit plan. Theplan will pay sums in addition to amountspayable under the defined benefit plan toeligible participants. Participation in theplan is limited to employees of theCompany who are participants in theCompany’s defined benefit plan and whoare designated as participants in the planby the Company’s Board of Directors. Theplan provides that upon a participant’stermination, the participant may electeither a lump-sum payment or a deferral of receipt of the benefit. The supplementalpension benefit plan includes a provisionthat benefits accrued under the plan willbe paid in the form of a lump sumfollowing a change-in-control of theCompany.

The Company also sponsors an insuredpostretirement health benefit plan thatprovides supplemental medical benefits,life insurance, accident and vision care tocertain full-time officers of the Company

and certain subsidiaries. The plan isgenerally noncontributory, with theCompany paying the premiums.

The Company accounts for its pension andpostretirement plans in accordance withStatement of Financial AccountingStandards No. 87 (“FAS 87”), Employer’sAccounting for Pensions, Statement ofFinancial Accounting Standards No. 106(“FAS 106”), Employer’s Accounting forPostretirement Benefits Other ThanPensions and Statement of FinancialAccounting Standards No. 132 (“FAS132”), Employers’ Disclosures aboutPensions and Other PostretirementBenefits. During the fourth quarter of2003, the Company adopted the reviseddisclosure provisions of FAS 132.

The Company uses a December 31measurement date for its defined benefitpension plan and its supplementalpension benefit plan. The postretirementhealth benefit plan uses a measurementdate of January 1.

On December 8, 2003, President Bushsigned into law the Medicare PrescriptionDrug, Improvement and Modernization Actof 2003 (“the Act”). The Act expandedMedicare to include, for the first time,coverage for prescription drugs. TheCompany expects that this legislation willeventually reduce the Company’s costs forits postretirement health benefit plan. Atthis point, the Company’s investigation into its response to the legislation ispreliminary, as guidance is awaited fromvarious governmental and regulatoryagencies concerning the requirements

that must be met to obtain these costreductions, as well as the manner in whichsuch savings should be measured. Basedon this preliminary analysis, it appearsthat the Company’s postretirement healthbenefit plan could possibly need to bechanged in order to qualify for beneficialtreatment under the Act. Because ofvarious uncertainties related to theCompany’s response to this legislation andthe appropriate accounting methodologyfor this event, the Company has elected to defer financial recognition of thislegislation until the Financial AccountingStandards Board issues final accountingguidance. When issued, that finalguidance could require the Company tochange previously reported information.This deferral election is permitted underFinancial Staff Position FAS 106-1.

The Company’s union employees andunion retirees are provided pension,health care and other benefits throughdefined benefit multiemployer plansadministered and funded based on theapplicable labor agreement. ABF’s monthlycontributions to the multiemployer plansare based upon the number of hoursworked each week by contractualemployees, as agreed to under the IBTNational Master Freight Agreement. ABF’s aggregate contributions to themultiemployer health and welfare benefitplans totaled approximately $90.4 million,$79.7 million and $78.8 million, for theyears ended December 31, 2003, 2002and 2001, respectively. ABF’s aggregatecontributions to the multiemployer pensionplans totaled $77.1 million, $75.1 millionand $74.1 million for the years ended



December 31, 2003, 2002 and 2001,respectively. The Central States PensionFund (“Central States”), the multiemployerplan to which ABF makes approximately50.0% of its contributions, sufferedsignificant investment losses due to the depressed stock markets andoperating deficits in the years 2000through 2002. Pursuant to a Court Orderfrom the U.S. District Court for theNorthern District of Illinois (EasternDivision), on November 17, 2003 pensionand health and welfare benefits providedto Central States beneficiaries are to bereduced no later than January 1, 2004.The Court Order acknowledged the needfor corrective measures to addresspotential future “Funding Deficiencies” in the Central States plan. There was nochange in ABF’s required contributions toCentral States as a result of the CourtOrder. ABF’s contributions continue to becontractually determined as describedabove. The U.S. District Court, however,stated that in the event a “FundingDeficiency” occurred, the plan’scontributing employers are obligated tocorrect this “Funding Deficiency.” Neitherthe Company nor ABF has receivednotification of a “Funding Deficiency” from

Central States or any other multiemployerplan to which it contributes. If theCompany or ABF were notified of a“Funding Deficiency” in a future period,the amount could be material. InDecember 2003, Central States Trusteesapplied to the IRS for an extension of theamortization period for actuarial losses.Central States Pension Fund reportedearning investment returns of approxi-mately 25.4% in 2003. The Company hasreceived no current financial or fundinginformation from Central States or anyother multiemployer plan for the periodending December 31, 2003. However, theextension of the amortization period, ifgranted, the improved investment returnsin 2003 and the changes in pension andhealth and welfare benefits ordered by the U.S. District Court should positivelyimpact the funded status of the CentralStates plan, as determined under theInternal Revenue Code and regulations,although there can be no assurances inthis regard.

Legislation has passed the U.S. Senate,providing relief to multiemployer plansthrough a two-year hiatus fromamortization of experience losses,

which include investment losses. Thelanguage in the Senate bill allows amultiemployer plan to elect to defer for upto three years the start of the 15-yearamortization of experience losses. Thiselection may be applied to two plan years.If this legislation became law, it wouldprovide near-term funding relief tomultiemployer plans. At this point, the billis expected to go to the Senate-HouseConference Committee, but it is unclearwhether it will become law, or whether therelief provision described will be includedin any law enacted.

In the event of insolvency orreorganization, plan terminations orwithdrawal by the Company from themultiemployer plans, the Company may be liable for a portion of the multiemployerplan’s unfunded vested benefits, theamount of which, if any, has not beendetermined, but which would be material.At December 31, 2003, the Company hasa strong financial position with noborrowings under its Credit Agreement and$400.7 million of Stockholders’ Equity.The Company has no plans to withdrawfrom the multiemployer plans to which ABF contributes.

The following is a summary of the changes in benefit obligations and plan assets:

Year Ended December 31

Supplemental PostretirementPension Benefits Pension Plan Health Benefits

2003 2002 2003 2002 2003 2002

($ thousands)

Change in benefit obligationBenefit obligation at beginning of year . . . . . . . . . .Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Actuarial loss (gain) and other . . . . . . . . . . . . . . . .Benefits and expenses paid . . . . . . . . . . . . . . . . . .Benefit obligation at end of year . . . . . . . . . . . . . . .

Change in plan assetsFair value of plan assets at beginning of year . . . .Actual return on plan assets and other . . . . . . . . .Employer contributions . . . . . . . . . . . . . . . . . . . . . .Benefits and expenses paid . . . . . . . . . . . . . . . . . .Fair value of plan assets at end of year . . . . . . . . .

Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Unrecognized net actuarial loss . . . . . . . . . . . . . . .Unrecognized prior service cost (benefit) . . . . . . . .Unrecognized net transition obligation (asset)

and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net amount recognized . . . . . . . . . . . . . . . . . . . . . .

$ 141,6077,2699,5577,630

(14,939)151,124

127,40729,42915,000

(14,939)156,897

5,77332,738(5,607)

(17)$ 32,887

$ 131,3516,3899,2495,583

(10,965)141,607

132,416(9,791)15,747

(10,965)127,407

(14,200)49,772(6,529)

(26)$ 29,017

$ 28,726690

1,5322,363

(10,440)22,871

––

10,440(10,440)

–

(22,871)9,1859,194

(1,253)$ (5,745)

$ 26,176769

1,6582,740

(2,617)28,726

––

2,617(2,617)

–

(28,726)7,608

10,754

(1,510)$ (11,874)

$ 16,980119

1,004(623)(792)

16,688

––

792(792)

–

(16,688)8,881

168

1,205$ (6,434)

$ 9,016115860

7,759(770)

16,980

––

770(770)

–

(16,980)10,559

300

1,339$ (4,782)



Amounts recognized in the balance sheet consist of the following:



2003 2002 2003 2002 2003 2002

($ thousands)

Prepaid benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .Accrued benefit cost (included in other liabilities) . . .Intangible assets (included in other assets) . . . . . . . .Accumulated other comprehensive loss (pre-tax) . . . .Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . .

$ 32,887–––

$ 32,887

$ 29,017–––

$ 29,017

$ –(21,250)

9,1946,311

$ (5,745)

$ –(28,401)10,754

5,773$ (11,874)

$ –(6,434)

––

$ (6,434)

$ –(4,782)

––

$ (4,782)

Other information regarding the Company’s defined benefit pension plan is as follows:


($ thousands)

Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 151,125122,317156,897

$ 141,607120,587127,407

The following is a summary of the components of net periodic benefit cost:



2003 2002 2001 2003 2002 2001 2003 2002 2001

($ thousands)

Components of net periodic benefit costService cost . . . . . . . . . .Interest cost . . . . . . . . . .Expected return

on plan assets . . . . . . .Transition (asset)

obligation recognition . . . . . . . . . .

Special termination benefit . . . . . . . . . . . . .

Amortization of prior service cost (credit) . . . . . . . . . . . . .

Recognized net actuarial loss and other . . . . . . . . . . .

Net periodic benefit cost . . . . . . . . .

Multiemployer plans . . .

$ 7,2699,557

(10,083)

(8)

–

(922)

5,317

11,13077,110

$ 88,240

$ 6,3899,249

(11,530)

(8)

–

(922)

2,145

5,32375,062

$ 80,385

$ 7,44811,217

(15,232)

(8)

100

(884)

1,150

3,79174,131

$ 77,922

$ 6901,532

–

(256)

–

1,560

962

4,488–

$ 4,488

$ 7691,658

–

(256)

–

1,560

578

4,309–

$ 4,309

$ 7531,595

–

(256)

–

1,600

784

4,476–

$ 4,476

$ 1191,004

–

135

–

131

1,055

2,444–

$ 2,444

$ 115860

–

135

–

131

596

1,837–

$ 1,837

$ 86622

–

135

–

131

209

1,183–

$ 1,183





2003 2002 2001 2003 2002 2001 2003 2002 2001

($ thousands)

Increase in minimum liability included in other comprehensiveloss (pre-tax) . . . . . . . . . . $ – $ – $ – $ 538 $ 5,773 $ – $ – $ – $ –

Additional Information:

Assumptions:

Weighted-average assumptions used to determine benefit obligations were as follows:

December 31


2003 2002 2003 2002 2003 2002

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Rate of compensation increase . . . . . . . . . . . . . . . . . .

6.0%4.0%

6.9%4.0%

6.0%4.0%

6.9%5.0%

6.0%–

6.9%–



2003 2002 2001 2003 2002 2001 2003 2002 2001

Discount rate . . . . . . . . . . . . . . . . . .Expected return on plan assets . . .Rate of compensation increase . . .

6.9%7.9%4.0%

7.55%9.0%4.0%

7.55%9.0 – 10.0%3.0 – 4.0%

6.9%–

4.0%

7.55%–

5.0%

7.55%–

4.0%

6.9%––

7.55%––

7.55%––

Weighted-average assumptions used to determine net periodic benefit cost were as follows:

The Company establishes its pension planexpected long-term rate of return onassets by considering the 10-yearhistorical returns for the current mix ofinvestments in the Company’s pensionplan. In addition, consideration is given to the range of expected returns for thepension plan investment mix provided by the plan’s investment advisors. TheCompany uses the historical information todetermine if there has been a significant

change in the pension plan’s investmentreturn history. If it is determined that therehas been a significant change, the rate isadjusted up or down, as appropriate, by aportion of the change. This approach isintended to establish a long-term,nonvolatile rate that does, however, reflectsignificant changes in the plan’s 10-yearasset return history. The Company hasestablished its long-term expected rate ofreturn utilized in determining its 2004

pension plan expense as 8.25%, whichcompares to 7.9% for 2003.

The Company reduced its discount rate fordetermining benefit obligations from 6.9%at December 31, 2002 to 6.0% forDecember 31, 2003. This reductionreflects lower long-term market interestrates.


Health care cost trend rate assumed for next year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Rate to which the cost trend rate is assumed to

decline (the ultimate trend rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Year that the rate reaches the ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11.5%

5.0%2012

12.0%

4.5%2010

Assumed health care cost trend rates:



The health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-pointchange in assumed health care cost trend rates would have the following effects for the year ended December 31, 2003:


EquityLarge Cap U.S. Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Small Cap Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Small Cap Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fixed IncomeU.S. Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36.2%7.9%8.3%

12.0%

35.5%0.1%

100.0%

35.9%–

4.2%14.2%

37.4%8.3%

100.0%

1% 1%Increase Decrease

($ thousands)

Effect on total of service and interest cost components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Effect on postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1451,987

$ (122)(1,687)

The Company’s defined benefit pension plan weighted-average asset allocation is as follows:

The investment strategy for the Company’s defined benefit pension plan is to maximize the long-term return on plan assets subject to anacceptable level of investment risk, liquidity risk and long-term funding risk. The plan’s long-term asset allocation policy is designed toprovide a reasonable probability of achieving a nominal return of 8.0% to 10.0% per year, protecting or improving the purchasing power ofplan assets and limiting the possibility of experiencing a substantial loss over a one-year period. Target asset allocations are used forinvestments. At December 31, 2003, the target allocations and acceptable ranges were as follows:

Target AcceptableAllocation Range

EquityLarge Cap U.S. Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Small Cap Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Small Cap Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fixed IncomeU.S. Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35.0%7.5%7.5%

10.0%

40.0%

30.0% – 40.0%5.5% – 9.5%5.5% – 9.5%8.0% – 12.0%

35.0% – 45.0%

Investment balances and results are reviewed quarterly. Investment segments which fall outside the acceptable range at the end of anyquarter are rebalanced based on the target allocation of all segments.



For the Large Cap U.S. Equity segment, theInternational Equity segment and the U.S.Fixed Income segment, index funds areused as the investment vehicle. Small CapGrowth and Small Cap Value investmentsare in actively managed funds. Investmentperformance is tracked against recognizedmarket indexes generally using three-to-five year performance. Certain types ofinvestments and transactions areprohibited or restricted by the Company’swritten investment policy, including shortsales; purchase or sale of futures; optionsor derivatives for speculation or leverage;private placements; purchase or sale ofcommodities; or illiquid interests in realestate or mortgages.

The Company has no required minimumcontributions to its pension plan in 2004.Based upon current information availablefrom the plan’s actuaries, the Companyanticipates no additional tax-deductiblecontributions will be made in 2004, due to Internal Revenue code limitations on tax-deductible contributions.

At December 31, 2002, the pension plan’sassets included 205,428 shares of theCompany’s Common Stock, which had afair market value of $5.3 million. Duringthe period October 27 through 29, all ofthe Company’s Common Stock held by thepension plan was sold at an average price of $32.60 per share, for a gain of$3.8 million. In 2003, the Company paidquarterly dividends of eight cents pershare (see Note C). There were nodividends paid on the Company’s Common Stock during 2002 or 2001.

The Company has deferred compensationagreements with certain executives forwhich liabilities aggregating $5.1 million

and $4.5 million as of December 31, 2003 and 2002, respectively, have beenrecorded as other liabilities in theaccompanying consolidated financialstatements. The deferred compensationagreements include a provision thatimmediately vests all benefits and, at theexecutive’s election, provides for a lump-sum payment upon a change-in-control ofthe Company.

An additional benefit plan provides certaindeath and retirement benefits for certainofficers and directors of an acquiredcompany and its former subsidiaries. TheCompany has liabilities of $2.0 million and$2.1 million at December 31, 2003 and2002, respectively, for future costs underthis plan, reflected as other liabilities inthe accompanying consolidated financialstatements.

The Company and its subsidiaries havevarious defined contribution plans thatcover substantially all of its employees.The plans permit participants to defer aportion of their salary up to a maximum of50.0% as provided in Section 401(k) of theInternal Revenue Code. The Companymatches a portion of participantcontributions up to a specifiedcompensation limit ranging from 0% to 6% in 2003. The plans also allow fordiscretionary Company contributionsdetermined annually. The Company’sexpense for the defined contributionretirement plans totaled $3.9 million for2003, $3.6 million for 2002, and $5.0million for 2001.

The Company has a performance awardprogram available to certain of its officers.Units awarded will be initially valued at theclosing price per share of the Company’s

Common Stock on the date awarded. Thevesting provisions and the return-on-equitytarget will be set upon award. No awardshave been granted under this program.

The Company maintains a VoluntarySavings Plan (“VSP”). The VSP is anonqualified deferred compensation planfor certain executives of the Company andcertain subsidiaries. Eligible employeesare allowed to defer receipt of a portion of their regular compensation, incentivecompensation and other bonuses,distributions from the Company’ssupplemental pension benefit plan andcertain deferred compensation plans bymaking an election before thecompensation is payable. In addition, theCompany credits participants’ accountswith applicable matching contributionsand rates of return based on investmentindexes selected by the participants.Salary deferrals, Company match andinvestment earnings are considered partof the general assets of the Company untilpaid. As of December 31, 2003, theCompany has recorded liabilities of $29.1million in other liabilities and assets of$29.1 million in other assets associatedwith the plan. As of December 31, 2002,the Company had recorded liabilities of$16.8 million included in other liabilitiesand assets of $16.8 million in otherassets.

Other assets include $25.6 million and$21.0 million at December 31, 2003 and2002, respectively, in cash surrendervalue of life insurance policies. Thesepolicies are intended to provide funding forlong-term benefit arrangements such asthe Company’s supplemental pensionbenefit plan and certain deferredcompensation plans.



Note M – Operating Segment Data

The Company used the “managementapproach” to determine its reportableoperating segments, as well as todetermine the basis of reporting theoperating segment information. Themanagement approach focuses onfinancial information that the Company’smanagement uses to make decisionsabout operating matters. Managementuses operating revenues, operatingexpense categories, operating ratios,operating income and key operatingstatistics to evaluate performance andallocate resources to the Company’soperating segments.

During the periods being reported on, the Company operated in three reportableoperating segments: (1) ABF; (2) Clipper(see Note D regarding the sale and exit ofClipper’s LTL division); and (3) G.I. Trucking(which was sold on August 1, 2001) (see

Note S). A discussion of the services fromwhich each reportable segment derives itsrevenues is as follows:

ABF is headquartered in Fort Smith,Arkansas, and is one of North America’slargest LTL motor carriers, providing directservice to over 98.6% of the cities in theUnited States having a population of25,000 or more. ABF offers national,interregional and regional transportationof general commodities through standard,expedited and guaranteed LTL services.

Clipper is headquartered in Lemont,Illinois. Clipper offers domestic intermodalfreight services, utilizing transportationmovement over the road and on the rail.

The Company’s other business activitiesand operating segments that are notreportable include FleetNet America, Inc.,

a third-party vehicle maintenancecompany; Arkansas Best Corporation, theparent holding company; and TransportRealty, Inc., a real estate subsidiary of theCompany, as well as other subsidiaries.

The Company eliminates intercompanytransactions in consolidation. However, theinformation used by the Company’smanagement with respect to its reportablesegments is before intersegmenteliminations of revenues and expenses.Intersegment revenues and expenses arenot significant.

Further classifications of operations orrevenues by geographic location beyondthe descriptions provided above isimpractical and is, therefore, not provided.The Company’s foreign operations are notsignificant.

The following tables reflect reportable operating segment information for the Company, as well as a reconciliation of reportable segmentinformation to the Company’s consolidated operating revenues, operating expenses and operating income:


($ thousands)

OPERATING REVENUES

ABF Freight System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Clipper (see Note D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .G.I. Trucking Company (see Note S) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other revenues and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total consolidated operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,370,382126,768

–30,323

$ 1,527,473

$ 1,277,117118,949

–26,231

$ 1,422,297

$ 1,282,315127,278

95,47721,136

$ 1,526,206




($ thousands)

OPERATING EXPENSES AND COSTS

ABF Freight System, Inc.Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Supplies and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Operating taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Communications and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Rents and purchased transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(Gain) on sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Clipper (see Note D)Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Selling, administrative and general . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Exit costs – Clipper LTL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Loss on sale or impairment of equipment and software . . . . . . . . . . . . .

G.I. Trucking Company (see Note S)Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Supplies and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Operating taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Communications and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Rents and purchased transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(Gain) on sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other expenses and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total consolidated operating expenses and costs . . . . . . . . . . . . . . . . . . .

OPERATING INCOME (LOSS)ABF Freight System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Clipper (see Note D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .G.I. Trucking Company (see Note S) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other loss and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total consolidated operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL CONSOLIDATED OTHER INCOME (EXPENSE)Net gains on sales of property and other . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of G.I. Trucking Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of Wingfoot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain on sale of Clipper LTL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IRS interest settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Fair value changes and payments on interest rate swap . . . . . . . . . . . . .Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL CONSOLIDATED INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 891,732178,002

39,66224,39714,46344,38396,468

3,817(311)

1,292,613

109,55416,144

1,246245

127,189

––––––––––

34,491

$ 1,454,293

$ 77,769(421)

–(4,168)

$ 73,180

$ 643–

12,0602,535

–(10,257)

(3,855)648

1,774

$ 74,954

$ 845,562157,058

40,23324,60613,87441,51082,080

3,576(206)

1,208,293

102,15215,620

–54

117,826

––––––––––

27,957

$ 1,354,076

$ 68,8241,123

–(1,726)

$ 68,221

$ 3,524–––

5,221–

(8,097)(238)410

$ 68,631

$ 841,106167,07240,42617,34215,08139,84877,690

5,036(641)

1,202,960

111,13115,651

–43

126,825

49,4969,2522,2552,3121,3483,275

25,2122,302

(48)95,404

25,083

$ 1,450,272

$ 79,355453

73(3,947)

$ 75,934

$ 9184,642

––––

(12,636)(2,139)(9,215)

$ 66,719



The following tables provide asset, capital expenditure and depreciation and amortization information by reportable operating segmentfor the Company, as well as reconciliations of reportable segment information to the Company’s consolidated assets, capital expendituresand depreciation and amortization at December 31, 2003. Subsequent to the recognition of the impairment loss on the Company’sClipper goodwill, the Company reclassified the remainder of the LBO goodwill from the “other” segment to ABF (see Note G).


($ thousands)

IDENTIFIABLE ASSETSABF Freight System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Clipper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Investment in Wingfoot (see Note E) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total consolidated identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . . . .

CAPITAL EXPENDITURES (GROSS)ABF Freight System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Clipper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .G.I. Trucking Company (see Note S) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other equipment and information technology purchases . . . . . . . . . . . . .

Total consolidated capital expenditures (gross) . . . . . . . . . . . . . . . . . . .

DEPRECIATION AND AMORTIZATION EXPENSEABF Freight System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Clipper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .G.I. Trucking Company (see Note S) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total consolidated depreciation and amortization expense . . . . . . . . .

$ 499,31033,685

–164,230

$ 697,225

$ 51,6684,733

–11,801

$ 68,202

$ 44,3832,006

–5,868

$ 52,257

$ 487,75224,81959,341

184,460$ 756,372

$ 46,82394

–11,396

$ 58,313

$ 41,5101,757

–6,227

$ 49,494

$ 441,64446,61859,341

175,550$ 723,153

$ 62,3323,5824,5374,219

$ 74,670

$ 41,3342,4513,1857,578

$ 54,548



Note N – Financial Instruments

Interest Rate Instruments

The Company has historically been subjectto market risk on all or a part of itsborrowings under bank credit lines, whichhave variable interest rates.

In February 1998, the Company enteredinto an interest rate swap effective April 1,1998. The swap agreement is a contract

to exchange variable interest ratepayments for fixed rate payments over thelife of the instrument. The notional amountis used to measure interest to be paid orreceived and does not represent theexposure to credit loss. The purpose of theswap was to limit the Company’s exposureto increases in interest rates on thenotional amount of bank borrowings overthe term of the swap. The fixed interest

rate under the swap is 5.845% plus theCredit Agreement margin (0.775% atDecember 31, 2003 and 0.825% atDecember 31, 2002). This instrument isrecorded on the balance sheet of theCompany in other liabilities (see Note F).Details regarding the swap, as ofDecember 31, 2003, are as follows:

Notional Amount Maturity Rate Paid Rate Received Fair Value (2) (3)

$110.0 million April 1, 2005 5.845% plus Credit Agreement

margin (0.775%)

LIBOR rate (1)

plus Credit Agreementmargin (0.775%)

($6.3) million

(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, 2003 to terminate

the agreement.(3) The swap value changed from ($9.9) million at December 31, 2002. The fair value is impacted by changes in rates of similarly termed Treasury

instruments.

Fair Value of Financial Instruments

The following methods and assumptionswere used by the Company in estimatingits fair value disclosures for all financialinstruments, except for the interest rateswap agreement disclosed above andcapitalized leases:

Cash and Cash Equivalents: The carryingamount reported in the balance sheets forcash and cash equivalents approximatesits fair value.

Long- and Short-Term Debt: The carryingamount of the Company’s borrowings

under its Revolving Credit Agreementapproximates its fair value, since theinterest rate under this agreement isvariable. The fair value of the Company’sother long-term debt was estimated usingcurrent market rates.

The carrying amounts and fair value of the Company’s financial instruments at December 31 are as follows:

2003 2002

Carrying Fair Carrying FairAmount Value Amount Value

($ thousands)

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,251$ 133$ 1,514

$ 5,251$ 134$ 1,516

$ 39,644$ 133$ 111,647

$ 39,644$ 127$ 111,610



Note O – Earnings Per ShareThe following table sets forth the computation of basic and diluted earnings per share:


($ thousands, except share and per share data)

Numerator:Numerator for basic earnings per share –

Income before cumulative effect of changein accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cumulative effect of change in accountingprinciple, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net income available to common stockholders . . . . . . . . . . . . . . . . . . . . .Effect of dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Numerator for diluted earnings per share – Net income available to common stockholders . . . . . . . . . . . . . . . . . . .

Denominator:Denominator for basic earnings per share –

weighted-average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Effect of dilutive securities:Conversion of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Denominator for diluted earnings per share – adjusted weighted-averageshares and assumed conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NET INCOME (LOSS) PER COMMON SHARE Basic:

Income before cumulative effect of changein accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cumulative effect of change in accountingprinciple, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted:Income before cumulative effect of change

in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cumulative effect of change in accounting

principle, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH DIVIDENDS PAID PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . . .

$ 46,110

––

46,110–

$ 46,110

24,914,345

–498,270

25,412,615

$ 1.85

–$ 1.85

$ 1.81

–$ 1.81

$ 0.32

$ 40,755

(23,935)–

16,820–

$ 16,820

24,746,051

–604,632

25,350,683

$ 1.65

(0.97)$ 0.68

$ 1.60

(0.94)$ 0.66

$ –

$ 41,404

–(2,487)38,917

2,487

$ 41,404

21,802,258

2,354,157805,464

24,961,879

$ 1.79

–$ 1.79

$ 1.66

–$ 1.66

$ –



Note P – Quarterly Results of Operations (Unaudited)The tables below present unaudited quarterly financial information for 2003 and 2002:

2003Three Months Ended

March 31 June 30 September 30 December 31


Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Operating expenses and costs . . . . . . . . . . . . . . . . . . . . . . . .Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other income (expense) – net . . . . . . . . . . . . . . . . . . . . . . . .Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . .Income (loss) before cumulative effect of change

in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cumulative effect of change in accounting principle . . . . . .Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income (loss) per common share, basic: Income (loss) before cumulative effect

of change in accounting principle . . . . . . . . . . . . . . . . . .Cumulative effect of change in accounting

principle, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . .Average shares outstanding (basic) . . . . . . . . . . . . . . . . . . . .

Net income (loss) per common share, diluted: Income (loss) before cumulative effect of

change in accounting principle . . . . . . . . . . . . . . . . . . . .Cumulative effect of change in accounting

principle, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . .Average shares outstanding (diluted) . . . . . . . . . . . . . . . . . .

$ 359,577349,723

9,854(11,088)

(500)

(734)–

$ (734)

$ (0.03)

–$ (0.03)

24,892,430

$ (0.03)

–$ (0.03)

24,892,430

$ 377,875364,335

13,54010,063

8,413

15,190–

$ 15,190

$ 0.61

–$ 0.61

24,796,726

$ 0.60

–$ 0.60

25,262,013

$ 402,878374,23328,645

(89)11,580

16,976–

$ 16,976

$ 0.68

–$ 0.68

24,787,831

$ 0.67

–$ 0.67

25,287,271

$ 387,143366,001

21,1422,8889,352

14,678–

$ 14,678

$ 0.59

–$ 0.59

24,955,488

$ 0.58

–$ 0.58

25,517,061



Note Q – Legal Proceedings and Environmental Matters and Other EventsVarious legal actions, the majority of whicharise in the normal course of business, arepending. The Company maintains liabilityinsurance against certain risks arising outof the normal course of its business,subject to certain self-insured retentionlimits. The Company has accruals forcertain legal and environmentalexposures. None of these legal actions isexpected to have a material adverse effecton the Company’s financial condition, cashflows or results of operations.

The Company’s subsidiaries, or lessees,store fuel for use in tractors and trucks inapproximately 75 underground tankslocated in 26 states. Maintenance of suchtanks is regulated at the federal and, insome cases, state levels. The Companybelieves that it is in substantialcompliance with all such regulations. TheCompany’s underground storage tanks are

required to have leak detection systems.The Company is not aware of any leaksfrom such tanks that could reasonably beexpected to have a material adverse effecton the Company.

The Company has received notices fromthe Environmental Protection Agency(“EPA”) and others that it has beenidentified as a potentially responsibleparty (“PRP”) under the ComprehensiveEnvironmental Response Compensationand Liability Act or other federal or stateenvironmental statutes at severalhazardous waste sites. After investigatingthe Company’s or its subsidiaries’involvement in waste disposal or wastegeneration at such sites, the Company haseither agreed to de minimis settlements(aggregating approximately $130,000 overthe last 10 years primarily at seven sites)or believes its obligations, other than those

specifically accrued for with respect tosuch sites, would involve immaterialmonetary liability, although there can beno assurances in this regard.

As of December 31, 2003, the Companyhas accrued approximately $2.9 million toprovide for environmental-relatedliabilities. The Company’s environmentalaccrual is based on management’s bestestimate of the actual liability. TheCompany’s estimate is founded onmanagement’s experience in dealing withsimilar environmental matters and onactual testing performed at some sites.Management believes that the accrual isadequate to cover environmental liabilitiesbased on the present environmentalregulations. Accruals for environmentalliability are included in the balance sheetas accrued expenses and in otherliabilities.

2002Three Months Ended

March 31 June 30 September 30 December 31


Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Operating expenses and costs . . . . . . . . . . . . . . . . . . . . . . . .Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other income (expense) – net . . . . . . . . . . . . . . . . . . . . . . . .Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Income before cumulative effect of change

in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cumulative effect of change in accounting

principle, net of tax benefits of $13,580 . . . . . . . . . . . . . .Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income (loss) per common share, basic: Income before cumulative effect

of change in accounting principle . . . . . . . . . . . . . . . . . .Cumulative effect of change in accounting

principle, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . .Average shares outstanding (basic) . . . . . . . . . . . . . . . . . . . .

Net income (loss) per common share, diluted: Income before cumulative effect of

change in accounting principle . . . . . . . . . . . . . . . . . . . .Cumulative effect of change in accounting

principle, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . .Average shares outstanding (diluted) . . . . . . . . . . . . . . . . . .

$ 320,198315,380

4,818(2,352)1,016

1,450

(23,935)$ (22,485)

$ 0.06

(0.97)$ (0.91)

24,584,022

$ 0.06

(0.95)$ (0.89)

25,334,995

$ 345,137331,880

13,257(2,213)4,550

6,494

–$ 6,494

$ 0.26

–$ 0.26

24,760,978

$ 0.26

–$ 0.26

25,311,665

$ 375,397351,450

23,9477,221

12,821

18,347

–$ 18,347

$ 0.74

–$ 0.74

24,783,674

$ 0.73

–$ 0.73

25,296,694

$ 381,565355,366

26,199(2,245)9,489

14,465

–$ 14,465

$ 0.58

–$ 0.58

24,850,147

$ 0.57

–$ 0.57

25,462,838



Note R – Excess Insurance Carriers

Reliance Insurance Company (“Reliance”)insures the Company’s workers’compensation claims in excess of$300,000 (“excess claims”) for the periodfrom 1993 through 1999. According to anOfficial Statement by the PennsylvaniaInsurance Department on October 3,2001, Reliance was determined to beinsolvent, with total admitted assets of$8.8 billion and liabilities of $9.9 billion, ora negative surplus position of $1.1 billion,as of March 31, 2001. As of December 31,2003, the Company estimates its workers’compensation claims insured by Relianceto be approximately $7.4 million. TheCompany has been in contact with and has received either written or verbalconfirmation from a number of stateguaranty funds that they will accept excess claims, representing a total ofapproximately $5.2 million of the $7.4million, which leaves the Company with anet exposure amount of $2.2 million. AtDecember 31, 2003, the Company had

$1.6 million of liability recorded in itsfinancial statements for its estimatedexposure to Reliance. As of December 31,2002, the Company estimated its workers’compensation claims insured by Relianceto be approximately $5.5 million and theamounts accepted by state guaranty fundsto be $3.7 million, for a net exposureamount of $1.8 million, of which $1.4million was recorded as a liability in itsfinancial statements. The Companyanticipates receiving, from guaranty fundsor through orderly liquidation, partialreimbursement for future claimspayments; however, the process could take several years.

Kemper Insurance Companies (“Kemper”)insure the Company’s workers’compensation excess claims for the periodfrom 2000 through 2001. In March 2003,Kemper announced that it wasdiscontinuing its business of providingfuture insurance coverage. Lumbermen’s

Mutual Casualty Company, the Kempercompany which insures the Company’sexcess claims, received a going-concernopinion on its 2002 statutory financialstatements. The Company has notreceived any communications fromKemper regarding any changes in thehandling of the Company’s existing excessinsurance coverage with Kemper. TheCompany is uncertain as to the futureimpact this will have on insurancecoverage provided by Kemper to theCompany during 2000 and 2001. TheCompany estimates its workers’compensation claims insured by Kemperto be approximately $1.0 million. AtDecember 31, 2003, the Company had$0.1 million of liability recorded in itsfinancial statements for its potentialexposure to Kemper, based uponKemper’s financial information available to the Company.

On August 1, 2001, the Company sold thestock of G.I. Trucking for $40.5 million incash to a company formed by the seniorexecutives of G.I. Trucking and EstesExpress Lines (“Estes”). G.I. Trucking andEstes have been partners in ExpressLINK®,a North American transportationpartnership since 1996. The Companyrecognized a pre-tax gain on the sale of$4.6 million in the third quarter of 2001.Cash proceeds from the sale of G.I.

Trucking, net of costs and income taxes, ofapproximately $33.0 million were used topay down the Company’s outstandingdebt.

The Company retained ownership of threeCalifornia terminal facilities and hasagreed to lease them for an aggregateamount 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 topurchase these terminals for $19.5million. The terminals may be purchased in aggregate or individually. The facilitieshave a net book value of approximately$5.6 million. If the terminal facilities aresold to G.I. Trucking, the Company willrecognize a pre-tax gain of approximately$13.9 million in the period they are sold.

Note S – Sale of G.I. Trucking Company

Note T – Subsequent Events (Unaudited)On January 28, 2004, the Companyannounced that its Board had increasedits quarterly cash dividend from eightcents to twelve cents per share. In

addition, on January 29, 2004, theCompany purchased 131,400 shares ofthe Company’s Common Stock for a totalcost of $3.9 million. These common

shares were added to the Company’streasury stock.

Arkansas Best Corporation

Arkansas Best Corporation,headquartered in Fort Smith, Arkansas,is a diversified transportation holdingcompany consisting of three primarysubsidiaries. ABF Freight System, Inc.provides national and regionaltransportation of less-than-truckload(“LTL”) general commodities throughoutNorth America. Clipper providesdomestic intermodal freight servicesutilizing rail and over-the-roadtransportation. FleetNet America, Inc. is a third-party vehicle maintenancecompany offering road rescue service formatching commercial fleet repair needswith appropriate repair vendors.

Company Employees

The company employs over 11,500 people.

Annual Meeting ofStockholders

The annual meeting of stockholders will be held at 9:00 a.m. (CDT) onTuesday, April 27, 2004 at the corporate offices of Arkansas BestCorporation, 3801 Old GreenwoodRoad, Fort Smith, Arkansas. A form ofproxy will be mailed on or about March19, 2004 to each stockholder of recordon February 27, 2004.

Corporate Governance

Information on corporate governancematters can be found at the Company’sWeb site, www.arkbest.com, under the“Corporate Governance” tab.

Transfer Agent and Registrar

LaSalle Bank N.A. is the stock transferagent and registrar for the Company’sstock. LaSalle Bank will respond toquestions on lost stock certificates,change of ownership and change ofaddress. Direct inquiries to:

LaSalle Bank National AssociationCorporate Trust Shareholder

Services135 South LaSalle StreetChicago, IL 60603800-246-5761 / Option 2Internet: www.lasallebank.com

Form 10-K Availability

The 2003 Form 10-K, filed with theSecurities and Exchange Commission, isavailable to any stockholder by makinga written request to:

David HumphreyDirector of Investor Relations Arkansas Best Corporation Post Office Box 10048Fort Smith, AR 72917-0048

Form 10-K, as well as other financialinformation, can be obtained on-line atArkansas Best’s Web site located atwww.arkbest.com or through the SECWeb site located at www.sec.gov. E-mail requests for financial information should be directed [email protected]. All requested financial information will be providedwithout charge.

Investor Inquiries

Securities analysts, portfolio managersand others needing information on theCompany should contact DavidHumphrey, Director of InvestorRelations, at the corporate head-quarters or call 479-785-6000.

Communications Directory

Corporate Headquarters:Arkansas Best Corporation3801 Old Greenwood RoadFort Smith, AR 72903

Mailing Address:Post Office Box 10048Fort Smith, AR 72917-0048

Telephone: 479-785-6000Facsimile: 479-785-6004Internet: www.arkbest.comE-mail: [email protected]

Stock Listing

The Nasdaq Stock Market/NasdaqNational Market

Nasdaq Symbol:ABFS

Independent Auditors

Ernst & Young LLP1701 Centerview Drive, Suite 301Little Rock, AR 72211

Robert A. Young III’s photograph courtesy of Jon D. Kennedy.

Stockholder Information



Board of Directors and Execut ive Of f icers

Board of Directors(Board Committees noted)

William A. Marquard 2, 3

Chairman of the Board

Robert A. Young IIIPresident & Chief Executive Officer

Frank Edelstein 1, 3

Vice President, StoneCreek Capital

William M. Legg 2

Managing Director, Springhill Ventures

John H. Morris 1, 2

Advisor to StoneCreek Capital

Alan J. Zakon, Ph.D. 1, 2

Private Investor

Fred A. Allardyce 1

Chairman & CEO, Advanced Breath Diagnostics

1 Member, Audit Committee2 Member, Compensation Committee3 Member, Nominating Committee

Executive Officers

Arkansas Best CorporationRobert A. Young IIIPresident & Chief Executive Officer

David E. LoefflerSenior Vice President - Chief Financial Officer and Treasurer

Richard F. CooperSenior Vice President - Administration, General Counsel and Secretary

Judy R. McReynoldsVice President - Controller

J. Lavon MortonVice President - Tax and Chief Internal Auditor

John R. MeyersVice President

ABF Freight System, Inc.Robert A. DavidsonPresident & Chief Executive Officer

ClipperWalter D. WhittPresident & Chief Executive Officer

FleetNet America, Inc.C. Oren SummerPresident

Data-Tronics Corp.David W. HardtPresident

3801 Old Greenwood RoadFort Smith, Arkansas 72903

www.arkbest.com

2003 annual report - arcb · 2017. 1. 8. · 4 arkansas best corporation 2003 annual report letter...

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