UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number 1-12149
CONSOLIDATED FREIGHTWAYS CORPORATION
Incorporated in the State of Delaware
I.R.S. Employer Identification No. 77-0425334
16400 S.E. CF Way, Vancouver, WA 98683
Telephone Number (360) 448-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $.01 par value,
outstanding as of March 31, 2002: 22,324,669
CONSOLIDATED FREIGHTWAYS CORPORATION
FORM 10-Q
Quarter Ended March 31, 2002
____________________________________________________________________________
____________________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 3
Statements of Consolidated Operations -
Three Months Ended March 31, 2002 and 2001 5
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,277 $ 28,067
Trade accounts receivable, net of allowances 282,766 292,851
Other receivables 8,178 6,045
Operating supplies, at lower of average
cost or market 6,161 6,670
Prepaid expenses 49,747 35,772
Deferred income taxes 57,228 59,897
Total Current Assets 417,357 429,302
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 86,258 87,024
Buildings and improvements 343,854 353,102
Revenue equipment 510,171 519,546
Other equipment and leasehold improvements 165,095 158,963
1,105,378 1,118,635
Accumulated depreciation and amortization (762,254) (761,044)
343,124 357,591
OTHER ASSETS
Deposits and other assets 97,943 93,687
Deferred income taxes 714 --
98,657 93,687
TOTAL ASSETS $ 859,138 $ 880,580
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
...
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 104,800 $ 85,043
Accrued liabilities 207,702 189,361
Accrued claims costs 82,671 85,593
Federal and other income taxes 1,806 2,264
Current maturities of long-term debt 2,239 --
Short-term borrowings 38,350 83,900
Total Current Liabilities 437,568 446,161
LONG-TERM LIABILITIES
Long-term debt 39,355 15,100
Accrued claims costs 88,817 94,187
Employee benefits 126,117 124,284
Deferred income taxes -- 1,978
Other liabilities 54,434 50,631
Total Liabilities 746,291 732,341
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
5,000,000 shares; issued none -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued 23,133,848 shares 231 231
Additional paid-in capital 73,592 74,020
Accumulated other comprehensive loss (13,162) (13,712)
Retained earnings 59,276 95,814
Treasury stock, at cost (809,179 and 1,298,812
shares, respectively) (7,090) (8,114)
Total Shareholders' Equity 112,847 148,239
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 859,138 $ 880,580
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(Dollars in thousands except per share amounts)
For the Three
Months Ended
March 31,
2002 2001
REVENUES $ 462,991 $ 574,578
COSTS AND EXPENSES
Salaries, wages and benefits 318,201 373,758
Operating expenses 92,611 103,133
Purchased transportation 42,959 52,988
Operating taxes and licenses 14,267 16,383
Claims and insurance 12,657 15,161
Depreciation 13,210 12,925
493,905 574,348
OPERATING INCOME (LOSS) (30,914) 230
OTHER INCOME (EXPENSE)
Investment income 51 224
Interest expense (1,899) (1,856)
Miscellaneous, net (2,673) (649)
(4,521) (2,281)
Loss before income taxes (benefits)
(35,435) (2,051)
Income taxes (benefits) 1,103 (224)
NET LOSS $ (36,538) $ (1,827)
Basic average shares outstanding 22,299,755 21,818,691
Diluted average shares outstanding 22,299,755 21,818,691 (a)
Basic Loss per Share: $ (1.64) $ (0.08)
Diluted Loss per Share: $ (1.64) $ (0.08)
(a) Does not include 305,624 potentially dilutive securities because to
do so would be anti-dilutive.
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended
March 31,
2002 2001
(Dollars in thousands)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 28,067 $ 46,523
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (36,538) (1,827)
Adjustments to reconcile net
loss to net cash provided (used) by
operating activities:
Depreciation and amortization 17,306 15,633
Increase (decrease) in deferred income taxes (23) 8,881
Gains from property disposals, net (2,320) (19,475)
Issuance of common stock under stock
and benefit plans 596 647
Changes in assets and liabilities:
Receivables 7,952 (11,661)
Prepaid expenses (13,975) (8,806)
Accounts payable 19,757 (3,795)
Accrued liabilities 18,341 18,124
Accrued claims costs (8,292) (1,699)
Income taxes (458) --
Employee benefits 1,833 (83)
Other (649) 410
Net Cash Provided (Used) by Operating Activities 3,530 (3,651)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,059) (34,183)
Software expenditures (116) (585)
Proceeds from sales of property 4,311 2,093
Net Cash Provided (Used) by Investing Activities 3,136 (32,675)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term
borrowings (45,550) 28,000
Net proceeds from long-term borrowings 24,094 --
Net Cash Provided (Used) by Financing Activities (21,456) 28,000
Decrease in Cash and Cash Equivalents (14,790) (8,326)
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,277 $ 38,197
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of
Consolidated Freightways Corporation and subsidiaries (the Company)
have been prepared by the Company, without audit by independent
public accountants, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management,
the consolidated financial statements include all normal recurring
adjustments necessary to present fairly the information required to
be set forth therein. Certain information and note disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have
been condensed or omitted from these statements pursuant to such
rules and regulations and, accordingly, should be read in conjunction
with the consolidated financial statements included in the Company's
2001 Annual Report to Shareholders.
There were no significant changes in the Company's commitments
and contingencies as previously described in the 2001 Annual Report
to Shareholders and related annual report to the Securities and
Exchange Commission on Form 10-K.
2. Liquidity and Management's Plan
The Company incurred a net loss of $104.3 million for the year
ended December 31, 2001 and a net loss of $36.5 million in the
quarter ended March 31, 2002. The Company expects to incur further
operating losses in 2002 due to the continued economic slowdown.
Cash used by operating activities for the year ended December 31,
2001 was $41.1 million. Cash provided by operating activities during
the quarter ended March 31, 2002 was $3.5 million. The Company's
financing requirements to fund operations and capital expenditures
and to support letters of credit in 2002 are expected to be
approximately $45 to $55 million. During the quarter ended March 31,
2002, the Company secured financing sufficient to meet these
requirements.
As discussed more fully in Note 5 "Debt" below, the Company
secured a net $45 million financing agreement secured by real
property. In addition, the Company completed a $4.1 million
financing agreement secured by revenue equipment of a Canadian
subsidiary and a $5.5 million financing agreement secured by real
property of a Canadian subsidiary.
The Company is currently negotiating additional financing
agreements for approximately $20 million, secured by assets of the
Canadian subsidiaries. Of this amount, the Company has credit
committee approval and is in the documentation stages for
approximately $13 million and expects to receive funding during the
second quarter of 2002. Approximately $10 million of the $13 million
will be available for transfer to the U.S. operations. However,
there can be no assurance that the Company will be able to complete
these transactions or that the final terms will be reasonable.
The Company has significant additional unleveraged assets and is
considering other asset backed borrowings and the sale of surplus
real properties. However, there can be no assurance that the Company
will be able to complete these transactions or that the final terms
will be reasonable.
The Company has an existing accounts receivable securitization
agreement and an existing real estate backed credit facility to
provide for working capital and letter of credit needs. The combined
availability of funds under these agreements was $6.5 million as of
March 31, 2002. Consistent with these types of agreements, the
availability ranged from $0 to $15 million during the quarter ended
March 31, 2002. The continued availability of funds under these
agreements requires that the Company comply with certain financial
covenants, the most restrictive of which are to maintain a minimum
EBITDAL (earnings before interest, taxes, depreciation, amortization
and lease expense) and fixed charge coverage ratio. On April 8,
2002, to cure violations of these covenants as of March 31, 2002, the
covenants were amended for 2002.
The amended covenants require the Company to achieve significant
improvements in EBITDAL for the remainder of 2002. To achieve these
improvements, the Company and the Board of Directors have developed
plans that include an immediate and continuing reduction of workforce
in line with lower business levels and expansion of programs aimed at
increasing pick-up and delivery and dock efficiencies, increasing
load factor and reducing claims expense that have proved successful
at selected terminals during 2001. Management is also focused on
improving revenue through better freight mix, emphasizing high margin
services and increasing revenue per shipment. Additionally, starting
in the fourth quarter of 2001, the Company began carefully reviewing
its business activities with its customers in an effort to secure
additional business and to ensure that it is fairly compensated for
the services provided. As part of this plan, the Company began
reviewing contract accounts as they came up for renewal during the
fourth quarter of 2001 and is continuing this review in 2002. The
Company and the Board of Directors believe that the above actions
will be sufficient to allow the Company to meet the amended covenant
requirements for the balance of 2002. If the Company does not
achieve the operating improvements, it may violate the amended
covenants in 2002. Although the Company has previously received
amendments to the covenants, there can be no assurance that the
lender will grant waivers or additional amendments if required. The
inability of the Company to meet its covenants or obtain waivers or
additional amendments, if required, would require the Company to
secure alternative financing to fund operating activities and provide
letters of credit necessary to support its self-insurance program.
Failure to secure letters of credit to support the self-insurance
program would require the Company to fund state insurance programs
which would have a material adverse effect on the Company's financial
position.
3. Segment and Geographic Information
The Company primarily provides less-than-truckload
transportation, air freight forwarding and supply chain management
services throughout the United States, Canada and Mexico and
international freight services between the United States and more
than 80 countries. The Company does not present segment disclosures
because the air freight forwarding, supply chain management and
international service offerings do not meet the quantitative
thresholds of Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related
Information." The following information sets forth revenues and
property, plant and equipment by geographic location. Revenues are
attributed to geographic location based upon the location of the
customer. No one customer provides 10% or more of total revenues.
Geographic Information
(Dollars in thousands)
Three Months Ended
March 31,
2002 2001
Revenues
United States $426,171 $536,837
Canada and other 36,820 37,741
Total $462,991 $574,578
As of March 31,
2002 2001
Property, Plant and Equipment
United States $309,026 $330,386
Canada and other 34,098 35,522
Total $343,124 $365,908
4. Comprehensive Loss
Comprehensive loss for the three months ended March 31, 2002 and
2001 was as follows:
(Dollars in thousands)
Three Months Ended
March 31,
2002 2001
Net Loss $(36,538) $(1,827)
Other Comprehensive Loss:
Foreign currency translation
adjustments 550 (2,310)
Comprehensive Loss $(35,988) $(4,137)
5. Debt
In February 2002, the Company secured a net $45 million
financing agreement secured by terminal properties, of which $20
million, after $2.4 million of deferred loan costs, was funded in
February and $25 million, after deferred loan costs of $3.0 million,
was funded in April. Under the agreement, the Company contributed 39
terminal properties with a net book value of approximately $67
million to CFCD 2002 LLC, a wholly owned, consolidated special
purpose company. CFCD 2002 LLC used the properties as collateral for
the borrowings. Borrowings bear interest at LIBOR plus 375 basis
points. Principal and interest payments are due monthly over a 15-
year period. The Company was required to issue $8.2 million of
letters of credit to secure the first year's payment of principal,
interest, property taxes and insurance. Those letters of credit were
issued under the Company's $200 million accounts receivable
securitization agreement, discussed below. The initial $20 million
of proceeds was used to pay down short-term borrowings under the
Company's $200 million accounts receivable securitization agreement.
Subsequent to the paydown, the Company issued a $20 million letter of
credit under the securitization agreement to support its self-
insurance program.
Also in February 2002, the Company completed a three-year, $4.1
million financing agreement secured by revenue equipment of a
Canadian subsidiary. The revenue equipment had a net book value of
approximately $12.3 million as of March 31, 2002. The borrowings
bear interest at 7.2%. Principal and interest are payable monthly.
In April 2002, the Company completed a three-year, $5.5 million
financing agreement secured by a terminal property of a Canadian
subsidiary. The terminal property had a net book value of
approximately $0.4 million as of March 31, 2002. The borrowings bear
interest at 6.25%. Principal and interest are payable monthly using
a 25-year amortization schedule, with a remaining lump sum payment at
the end of the three-year period.
The Company has a $200 million accounts receivable
securitization agreement to provide for working capital and letter of
credit needs. As of March 31, 2002, outstanding borrowings were $3.7
million, bearing interest at LIBOR plus 250 basis points (4.87%).
Letters of credit outstanding were $128.8 million, of which $117.0
million are used to support the Company's self-insurance program.
Availability of the remaining borrowing capacity is dependent on a
daily calculation of eligible accounts receivable which is subject to
business level fluctuations which may further limit availability. To
the extent that eligible accounts receivable are insufficient to
support issued letters of credit, the Company is required to provide
cash collateral to the lender. The Company was required to provide
as much as $10 million of cash collateral in April 2002 due to
fluctuation of the eligible accounts receivable.
The Company also has a revolving credit agreement with the same
lender, secured by real property to provide for short-term working
capital needs and other general corporate purposes. During February
2002, this agreement was amended, extending the term until February
2004 and limiting borrowings to a maximum of $42 million. The
agreement contains mandatory paydown provisions using a portion of
the proceeds of future debt offerings and asset sales, which will
limit future availability. Due to certain asset sales during the
quarter, maximum availability was reduced to $41.2 million as of
March 31, 2002, of which $34.7 million was outstanding, bearing
interest at 10%.
The combined availability of funds under the above financing
agreements was $6.5 million as of March 31, 2002. Consistent with
these types of agreements, the availability ranged from $0 to $15
million during the quarter ended March 31, 2002. The continued
availability of funds under the above agreements requires that the
Company comply with certain financial covenants, the most restrictive
of which are to maintain a minimum EBITDAL (earnings before interest,
taxes, depreciation, amortization and lease expense) and fixed charge
coverage ratio. To cure violations of these covenants as of March
31, 2002, the covenants were amended on April 8, 2002. The following
are the minimum EBITDAL and fixed charge coverage ratio covenant
requirements for 2002. The Company's actual EBITDAL and fixed charge
coverage ratio were $(10,723,000) and (1.17) to 1, respectively, for
the quarter ended March 31, 2002.
Minimum Required Covenant Levels
(Dollars in thousands)
Period Ended Fixed
Charge
Coverage
EBITDAL Ratio
Three months ended March 31, 2002 $(13,300) (1.80)
Six months ended June 30, 2002 (16,400) (1.20)
Nine months ended September 30, 2002 1,400 (0.30)
Year ended December 31, 2002 20,500 0.20
6. Acquisition
In February 2002, the Company entered into an agreement to
acquire 100% ownership of the business operations of its joint
venture in Mexico. The purchase price is approximately $2.1 million
and is payable in installments through April 2003. Interest on
unpaid installments is 7.5% annually. The Company previously
accounted for the joint venture using the equity method and will
fully consolidate the operations going forward. Total sales and
assets of the Mexico operations were not material.
7. Recently Adopted Accounting Principles
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142 (SFAS 142) "Goodwill and Other
Intangibles" and SFAS No. 144 (SFAS 144)"Accounting for the
Impairment or Disposal of Long-Lived Assets" effective January 1,
2002. SFAS 142 requires that goodwill and other intangible assets
that have indefinite lives no longer be amortized, but will be
subject to impairment review annually. Intangible assets with
estimated finite useful lives will continue to be amortized. SFAS 144
provides a single accounting methodology to be applied to all long-
lived assets to be disposed of, including discontinued operations.
Adoption of these standards did not have a material impact on the
Company's financial position or results of operations.
CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The economic slowdown that impacted the Company in 2001
continued throughout the first quarter of 2002. As a result,
revenues decreased 19.4% as tonnage decreased 17.1% compared with the
same period last year. Shipments decreased 14.3% and the average
weight per shipment decreased 3.2% to 969 lbs. The Company was also
impacted by negative perceptions in the marketplace regarding the
Company's liquidity and by the loss of a large customer in the fourth
quarter of 2001, due to aggressive competitive pricing. Revenue per
hundredweight decreased 3.3% to $17.13 due to a continued unfavorable
freight mix as well as a decrease in the fuel surcharge, as fuel
prices continued to decline. Excluding the fuel surcharge, revenue
per hundredweight decreased 1.4%.
Salaries, wages and benefits decreased 14.9% from the prior year
due primarily to lower tonnage levels. Beginning in the third
quarter of 2001, management implemented workforce reductions to
adjust to continued lower tonnage levels. The workforce was
approximately 17% lower in the first quarter of 2002 compared with
the same period last year. Additionally, cost savings from improved
cross-dock and pick-up and delivery efficiencies as a result of
process improvement programs helped mitigate the impact of a 3.4%
contractual wage and benefit increase that was effective April 1,
2001.
Operating expenses decreased 10.2% from the prior year.
Excluding gains on sales of properties of $2.6 million in the first
quarter of 2002 and $19.6 million in the same period last year, operating
expenses decreased 22.4%. Lower tonnage levels combined with an
approximate 30% decrease in the average fuel cost per gallon and
aggressive cost control measures primarily accounted for the
decrease. Additionally, the decrease reflects lower lease expense as
revenue equipment previously under lease was purchased during the
second quarter of 2001.
Purchased transportation decreased 18.9% due to lower tonnage
levels as well as a lower proportion of freight transported via rail.
Rail miles as a percentage of inter-city miles decreased to 24.7%
from 25.7% in the prior year.
Operating taxes and licenses decreased 12.9% due to lower
tonnage levels.
Claims and insurance decreased 16.5% due to lower tonnage levels
and improved vehicular claims experience.
Depreciation increased 2.2% due to increased capital
expenditures in 2001.
The operating loss was $30.9 million for the quarter compared
with operating income of $0.2 million for the same period last year.
The operating ratio deteriorated to 106.7% from 99.9%. The Canadian
operations contributed $2.5 million of operating income for the
quarter compared with $2.8 million for the same period last year.
Excluding gains on sales of operating properties, the operating loss
was $33.5 million for the quarter compared with a $19.3 million
operating loss for the same period last year. The operating ratio was
107.2% compared with 103.4%, excluding the gains.
Other expense, net, increased $2.2 million to $4.5 million. The
increase reflects the write-off of debt costs associated with
financing transactions that the Company decided not to pursue and
higher costs associated with increased letter of credit requirements
to support the Company's self-insurance program.
The Company's effective tax rate for the first quarter of 2002
differed from the statutory federal rate due to foreign taxes and the
recording of deferred tax valuation allowances. As a result of
domestic losses during the quarter, the Company recorded income tax
benefits of $14.0 million and related deferred tax assets of $14.0
million offset by a $14.0 million valuation allowance, discussed
below. As disclosed in the Company's 2001 Form 10-K, due to domestic
cumulative losses over the past three years, current accounting
standards require the Company to assess the realizability of its
domestic net deferred tax asset ($116.6 million as of March 31,
2002). Through the use of tax planning strategies, involving the sale
of appreciated assets, the Company has determined that it is more
likely than not that $62.6 million of its domestic net deferred tax
asset as of March 31, 2002 will be realized. Accordingly, the
Company recorded an additional $14 million deferred tax valuation
allowance in the first quarter of 2002. As of March 31, 2002, the
valuation allowance was $54 million. Until the recent cumulative
loss is eliminated, the Company will continue to record additional
valuation allowance against any tax benefit arising from future
domestic operating losses. The Company will assess the realizability
of its deferred tax assets on an ongoing basis and adjust the
valuation allowance as appropriate.
The Company's effective income tax rate for the first quarter of
2001 differed from the statutory federal rate due primarily to
foreign and state taxes and non-deductible items.
Return to profitability by the latter portion of 2002 will be
dependent on an improvement in the economic environment, improved
operating performance and alignment of costs with lower business
levels. In the interim, management will continue with aggressive
cost control plans to align operating costs with lower business
levels. These plans include an immediate and continuing reduction of
workforce and expansion of programs aimed at increasing pick-up and
delivery and dock efficiencies, increasing load factor and reducing
claims expense that have proved successful at selected terminals
during 2001. Management is also focused on improving revenue through
better freight mix, emphasizing high margin services and increasing
revenue per shipment. Starting in the fourth quarter of 2001, the
Company began carefully reviewing its business activities with its
customers in an effort to secure additional business and to ensure
that it is fairly compensated for the services provided. As part of
this plan, the Company began reviewing contract accounts as they came
up for renewal during the fourth quarter of 2001 and is continuing
this review in 2002. Further deterioration in the economic
environment or failure of the Company to achieve a cost structure in
line with lower business levels would have a material adverse effect
on the Company's financial position and results of operations.
As of March 31, 2002, approximately 80% of the Company's
domestic employees were represented by various labor unions,
primarily the International Brotherhood of Teamsters (IBT). The
Company and the IBT are parties to the National Master Freight
Agreement, which expires on March 31, 2003. Although the Company
believes it will be able to successfully negotiate a new contract
with the IBT, there can be no assurance that it will be able to do
so, or that work stoppages will not occur, or that the terms of any
such contract will not be substantially less favorable than those of
the existing contract, any of which could have a material adverse
effect on the Company's financial position and results of operations.
On April 1, 2002, a 2.0% wage and benefit increase went into
effect for employees covered by the National Master Freight
Agreement. The increase is expected to add approximately $13.5
million of expense in 2002.
As discussed above, the Company experienced lower average fuel
costs per gallon during the first quarter of 2002 compared with the
same period in the prior year. The Company's rules tariff implements
a fuel surcharge when the average cost per gallon of on-highway
diesel fuel exceeds $1.10, as determined from the Energy Information
Administration of the Department of Energy's publication of weekly
retail on-highway diesel prices. This provision of the rules tariff
became effective in July 1999 and remains in effect. However, there
can be no assurance that the Company will be able to maintain this
surcharge or successfully implement such surcharges in response to
increased fuel costs in the future.
LIQUIDITY AND CAPITAL RESOURCES
As previously disclosed, the Company's financing requirements to
fund operations and capital expenditures and to support letters of
credit in 2002 are expected to be approximately $45 to $55 million.
The Company will fund these requirements using the proceeds from
asset backed financing agreements and availability under its existing
credit facilities, each of which is discussed below.
In February 2002, the Company secured a net $45 million
financing agreement secured by terminal properties, of which $20
million, after $2.4 million of deferred loan costs, was funded in
February and $25 million, after deferred loan costs of $3.0 million,
was funded in April. Under the agreement, the Company contributed 39
terminal properties with a net book value of approximately $67
million to CFCD 2002 LLC, a wholly owned, consolidated special
purpose company. CFCD 2002 LLC used the properties as collateral for
the borrowings. Borrowings bear interest at LIBOR plus 375 basis
points. Principal and interest payments are due monthly over a 15-
year period. The Company was required to issue $8.2 million of
letters of credit to secure the first year's payment of principal,
interest, property taxes and insurance. Those letters of credit were
issued under the Company's $200 million accounts receivable
securitization agreement, discussed below. The initial $20 million
of proceeds was used to pay down short-term borrowings under the
Company's $200 million accounts receivable securitization agreement.
Subsequent to the paydown, the Company issued a $20 million letter of
credit under the securitization agreement to support its self-
insurance program.
Also in February 2002, the Company completed a three-year, $4.1
million financing agreement secured by revenue equipment of a
Canadian subsidiary. The revenue equipment had a net book value of
approximately $12.3 million as of March 31, 2002. The borrowings
bear interest at 7.2%. Principal and interest are payable monthly.
In April 2002, the Company completed a three-year, $5.5 million
financing agreement secured by a terminal property of a Canadian
subsidiary. The terminal property had a net book value of
approximately $0.4 million as of March 31, 2002. The borrowings bear
interest at 6.25%. Principal and interest are payable monthly using
a 25-year amortization schedule, with a remaining lump sum payment at
the end of the three-year period.
The Company is currently negotiating additional financing
agreements for approximately $20 million, secured by assets of the
Canadian subsidiaries. Of this amount, the Company has credit
committee approval and is in the documentation stages for
approximately $13 million and expects to receive funding during the
second quarter of 2002. Approximately $10 million of the $13 million
will be available for transfer to the U.S. operations. However,
there can be no assurance that the Company will be able to complete
these transactions or that the final terms will be reasonable.
The Company is focused on improving both short and long-term
liquidity. The Company has significant additional unleveraged assets
and is considering other asset-backed borrowings and the sale of
surplus real properties. However, there can be no assurance that the
Company will be able to complete these transactions or that the final
terms will be reasonable.
If business conditions and the Company's performance do not
improve and the Company is unable to align its cost structure with
lower business levels, cash requirements to fund operations could be
significantly higher than anticipated and would have a material
adverse effect on the Company's financial position and would require
additional financing. The ability of the Company to continue to fund
operations and meet its obligations as they come due will be
dependent on reducing operating losses and maintaining adequate
liquidity.
Existing Credit Facilities
The Company has a $200 million accounts receivable
securitization agreement to provide for working capital and letter of
credit needs. As of March 31, 2002, outstanding borrowings were $3.7
million, bearing interest at LIBOR plus 250 basis points (4.87%).
Letters of credit outstanding were $128.8 million, of which $117.0
million are used to support the Company's self-insurance program.
Availability of the remaining borrowing capacity is dependent on a
daily calculation of eligible accounts receivable which is subject to
business level fluctuations which may further limit availability. To
the extent that eligible accounts receivable are insufficient to
support issued letters of credit, the Company is required to provide
cash collateral to the lender. The Company was required to provide
as much as $10 million of cash collateral in April 2002 due to
fluctuation of the eligible accounts receivable.
The Company also has a revolving credit agreement with the same
lender, secured by real property to provide for short-term working
capital needs and other general corporate purposes. During February
2002, this agreement was amended, extending the term until February
2004 and limiting borrowings to a maximum of $42 million. The
agreement contains mandatory paydown provisions using a portion of
the proceeds of future debt offerings and asset sales, which will
limit future availability. Due to certain asset sales during the
quarter, maximum availability was reduced to $41.2 million as of
March 31, 2002, of which $34.7 million was outstanding, bearing
interest at 10%.
The combined availability of funds under the above financing
agreements was $6.5 million as of March 31, 2002. Consistent with
these types of agreements, the availability ranged from $0 to $15
million during the quarter ended March 31, 2002. The continued
availability of funds under the above agreements requires that the
Company comply with certain financial covenants, the most restrictive
of which are to maintain a minimum EBITDAL (earnings before interest,
taxes, depreciation, amortization and lease expense) and fixed charge
coverage ratio. To cure violations of these covenants as of March
31, 2002, the covenants were amended on April 8, 2002. The following
are the minimum EBITDAL and fixed charge coverage ratio covenant
requirements for 2002. The Company's actual EBITDAL and fixed charge
coverage ratio were $(10,723,000) and (1.17) to 1, respectively, for
the quarter ended March 31, 2002.
Minimum Required Covenant Levels
(Dollars in thousands)
Period Ended Fixed
Charge
Coverage
EBITDAL Ratio
Three months ended March 31, 2002 $(13,300) (1.80)
Six months ended June 30, 2002 (16,400) (1.20)
Nine months ended September 30, 2002 1,400 (0.30)
Year ended December 31, 2002 20,500 0.20
If the Company does not improve operating performance through
improved business levels and additional cost reduction efforts, it
may violate the amended covenants in 2002. There can be no assurance
that the lender will grant waivers or additional amendments if
required. The inability of the Company to meet its covenants or
obtain waivers or additional amendments, if required, would require
the Company to secure alternative financing to fund operating
activities and provide letters of credit necessary to support its
self-insurance program in 2002. Failure to secure letters of credit
to support the self-insurance program would require the Company to
fund state insurance programs which would have a material adverse
effect on the Company's financial position.
Cash Flows for the Quarter Ended March 31, 2002 and 2001
Cash and cash equivalents were $13.3 million as of March 31,
2002. Drafts outstanding, which are included in Accounts Payable on
the Consolidated Balance Sheet, were $22.2 million. Cash flow
provided by operations for the first quarter of 2002 was $3.5 million
compared with $3.7 million used by operations in the same period of
2001. Cash flow provided from operations was primarily due to
collections of accounts receivable and aggressive cash management
during the quarter.
Cash flows provided by investing activities of $3.1 million
compares with cash flows used by investing activities of $32.7
million in the same period last year. The reduction in capital and
software expenditures from $34.8 million in the prior year period to
$1.2 million in the current year reflects management's efforts to
improve the Company's liquidity by deferring all non-essential
expenditures. The Company expects capital expenditures to be
approximately $6 million for the remainder of 2002, primarily for the
purchase of revenue and miscellaneous equipment, but has the ability
to defer these expenditures into future years.
Cash flows used by financing activities was $21.5 million
compared with $28.0 million provided in the prior year. As discussed
above, the Company completed a net $45 million financing agreement in
February 2002, of which $20 million, net of deferred loan costs of
$2.4 million, was funded in February. The $20 million of proceeds
was used to pay down borrowings under the Company's $200 million
credit facility in order to issue letters of credit to support the
Company's self-insurance program. Also in February, the Company
completed a $4.1 million financing agreement secured by Canadian
assets. The Company repaid an additional $25.6 million of borrowings
under its credit facilities during the quarter.
Contractual Cash Obligations
As of March 31, 2002
(Dollars in thousands)
Payments Due In
Less than 1 to 3 4 to 5 After
1 Year Years Years 5 Years Total
Operating Leases $29,107 $51,263 $21,853 $15,485 $117,708
Long-Term Debt (a) 3,326 27,923 5,222 38,596 75,067
Interest on Long-
Term Debt (b) 4,033 7,246 5,030 13,141 29,450
Total $36,466 $86,432 $32,105 $67,222 $222,225
(a) Includes agreements funded subsequent to March 31, 2002 as discussed above.
(b) Assumes no change in LIBOR.
OTHER
Certain statements included or incorporated by reference herein
constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to a
number of risks and uncertainties. Any such forward-looking
statements included or incorporated by reference herein should not be
relied upon as predictions of future events. Certain such forward-
looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should,"
"seeks," "approximately," "intends," "plans," "pro forma,"
"estimates," or "anticipates" or the negative thereof or other
variations thereof or comparable terminology, or by discussions of
strategy, plans or intentions. Such forward-looking statements are
necessarily dependent on assumptions, data or methods that may be
incorrect or imprecise and they may be incapable of being realized.
In that regard, the following factors, among others, and in addition
to matters discussed elsewhere herein and in documents incorporated
by reference herein, could cause actual results and other matters to
differ materially from those in such forward-looking statements:
general economic conditions; general business conditions of customers
served and other shifts in market demand; increases in domestic and
international competition; pricing pressures, rate levels and
capacity in the motor-freight industry; future operating costs such
as employee wages and benefits, fuel prices and workers compensation
and self-insurance claims; weather; environmental and tax matters;
changes in governmental regulation; technology costs; legal claims;
timing and amount of capital expenditures; and failure to execute
operating plans, freight mix adjustment plans, yield improvements
efforts, process and operations improvements, cost reduction efforts,
customer service initiatives; pension funding requirements; and
financing needs and availability. As a result of the foregoing, no
assurance can be given as to future results of operations or
financial condition.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risks related to changes in
interest rates and foreign currency exchange rates, primarily the
Canadian dollar and Mexican peso. Management believes that the
impact on the Company's financial position, results of operations and
cash flows from fluctuations in interest rates and foreign currency
exchange rates would not be material. Consequently, management does
not currently use derivative instruments to manage these risks;
however, it may do so in the future.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously disclosed, the Company has received notices from
the Environmental Protection Agency (EPA) and others that it has been
identified as a potentially responsible party (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act
(CERCLA) or other Federal and state environmental statutes at various
Superfund sites. Under CERCLA, PRP's are jointly and severally liable
for all site remediation and expenses. Based upon the advice of local
environmental attorneys and cost studies performed by environmental
engineers hired by the EPA (or other Federal or State agencies), the
Company believes its obligations with respect to such sites would not
have a material adverse effect on its financial position or results
of operations.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.01 Fifth Amendment, dated January 18, 2002, to the Credit
Agreement among Consolidated Freightways Corporation, as
Borrower and General Electric Capital Corporation, as
Lender, dated October 24, 2001.
10.02 Sixth Amendment, dated February 19, 2002, to the Credit
Agreement among Consolidated Freightways Corporation, as
Borrower and General Electric Capital Corporation, as
Lender, dated October 24, 2001.
10.03 Seventh Amendment, dated February 22, 2002, to the
Credit Agreement among Consolidated Freightways Corporation,
as Borrower and General Electric Capital Corporation,
as Lender, dated October 24, 2001.
10.04 Seventh Amendment, dated January 18, 2002, to the Letter
of Credit Agreement between Consolidated Freightways
Corporation and General Electric Capital Corporation
dated April 27, 2001.
10.05 Eighth Amendment, dated February 19, 2002, to the Letter
of Credit Agreement between Consolidated Freightways
Corporation and General Electric Capital Corporation
dated April 27, 2001.
10.06 Seventh Amendment, dated February 19, 2002, to the
Securitization Agreement between Consolidated Freightways
Corporation and General Electric Capital Corporation dated
April 27, 2001.
(b) No reports on Form 8-K were filed in the quarter ended
March 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company (Registrant) has duly caused this Form 10-Q
Quarterly Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Consolidated Freightways Corporation
(Registrant)
April 30, 2002 /s/Robert E. Wrightson
Robert E. Wrightson
Executive Vice President and
Chief Financial Officer
April 30, 2002 /s/James R. Tener
James R. Tener
Vice President and Controller