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 June 30, 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 July 31, 2002: 22,442,514
CHAPTER 11 BANKRUPTCY FILINGS
On September 3, 2002, Consolidated Freightways Corporation, a
Delaware corporation ("CFC"), Consolidated Freightways Corporation of
Delaware, a Delaware corporation ("CFCD"), CF AirFreight Corporation,
a Delaware corporation ("CF AirFreight"), Redwood Systems, Inc., a
Delaware corporation ("Redwood Systems"), Leland James Service
Corporation, a Delaware corporation ("Leland James") and CF
MovesU.com Incorporated, a Delaware corporation ("CFMU"),
(collectively, the "Debtors"), intend to file petitions for relief
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
in the United States Bankruptcy Court for the Central District of
California. The Debtors required substantial additional sources of
financing in order to satisfy their obligations in a timely manner.
The Debtors had discussions under way with existing lenders,
investors and other sources to obtain the additional financing the
Debtors needed to continue operations. The Debtors have been unable
to secure sufficient additional financing to continue operations. In
particular, the Chapter 11 filing is necessary because one of CFC's
surety bondholders cancelled coverage relating to CFC's self-
administered insurance programs for workers' compensation and
vehicular casualty. This negatively impacted the pending discussions
with all lenders and investors. Ultimately, CFC was unable to secure
financing and to bridge the surety bond gap, at which point the
situation became critical. Moreover, the Debtors anticipated that a
second insurer would also cancel coverage. The Board of Directors
reluctantly concluded that the Debtors could not continue to operate,
pay employees and meet its obligations. The Debtors will ask the
bankruptcy court to allow them to oversee their operations as debtors
in possession, subject to court approval of matters outside the
ordinary course of business. While in Chapter 11, the Debtors will
attempt a management-directed sale of the Debtors' business as a
going concern. In the event such a sale is not possible, the Debtors
will attempt to sell portions of the business in separate
transactions and to liquidate and collect the remainder of the
Debtors' assets. The Debtors have engaged an investment banking firm
to assist in the sale. All such sales will attempt to maximize the
value of the Debtors' assets for the benefit of the Debtors'
creditors. CFC believes that the Debtors will not be able to fully
satisfy the claims of the creditors from the proceeds of such sales
and liquidations. Therefore, CFC believes that CFC's stockholders
will not receive any distributions on account of their stock.
On September 2, 2002, CFC, CFCD, Redwood Systems, Leland James
and CFMU sent notices of termination to approximately 15,500 active
employees and effectively ceased all operations except those limited
operations necessary to protect the Debtors' assets. Canadian
Freightways Ltd. and subsidiaries and Grupo Consolidated Freightways,
S.A. de RL, as well as several non-operating subsidiaries, have not
terminated their employees and are continuing their normal business
operations. These entities will not be included in the bankruptcy
filings. CF AirFreight, although included in the bankruptcy filing,
did not terminate any employees and will continue normal business
operations.
CONSOLIDATED FREIGHTWAYS CORPORATION
FORM 10-Q
Quarter Ended June 30, 2002
_____________________________________________________________________
_____________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 4
Statements of Consolidated Operations -
Three and Six Months Ended June 30, 2002 and 2001 6
Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Stockholder Proposals 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
CERTIFICATIONS 29
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,834 $ 28,067
Trade accounts receivable, net of allowances 286,626 292,851
Other receivables 6,215 6,045
Operating supplies, at lower of average
cost or market 5,863 6,670
Prepaid expenses 44,605 35,772
Deferred income taxes -- 59,897
Total Current Assets 354,143 429,302
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 85,531 87,024
Buildings and improvements 342,210 353,102
Revenue equipment 501,566 519,546
Other equipment and leasehold improvements 164,558 158,963
1,093,865 1,118,635
Accumulated depreciation and amortization (764,443) (761,044)
329,422 357,591
OTHER ASSETS
Deposits and other assets 100,008 93,687
Deferred income taxes -- --
100,008 93,687
TOTAL ASSETS $ 783,573 $ 880,580
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
..
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 97,216 $ 85,043
Accrued liabilities 207,127 189,248
Accrued claims costs 79,362 85,593
Federal and other income taxes 1,971 2,264
Deferred income taxes 50 --
Current maturities of long-term debt and
capital lease obligations 5,061 113
Short-term borrowings 24,925 83,900
Total Current Liabilities 415,712 446,161
LONG-TERM LIABILITIES
Capital lease obligation 657 697
Long-term debt 90,083 15,100
Accrued claims costs 89,072 94,187
Employee benefits 130,431 124,284
Deferred income taxes 4,801 1,978
Other liabilities 60,803 49,934
Total Liabilities 791,559 732,341
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued 23,133,848 shares 231 231
Additional paid-in capital 73,109 74,020
Accumulated other comprehensive loss (11,350) (13,712)
Retained earnings (deficit) (63,918) 95,814
Treasury stock, at cost (691,423 and 926,102
shares, respectively) (6,058) (8,114)
Total Shareholders' Equity (Deficit) (7,986) 148,239
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)$ 783,573 $880,580
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
For the For the
Three Six
Months Months
Ended Ended
June 30, June 30,
2002 2001 2002 2001
REVENUES $ 482,419 $ 590,415 $ 945,410 $1,164,993
COSTS AND EXPENSES
Salaries, wages and
benefits 341,141 391,857 659,342 765,615
Operating expenses 103,023 123,826 195,634 226,959
Purchased transportation 48,139 60,152 91,098 113,140
Operating taxes and
licenses 14,143 16,448 28,410 32,831
Claims and insurance 5,465 16,002 18,122 31,163
Depreciation 13,398 13,852 26,608 26,777
Write-off of internal
use software
under development (a) 10,986 -- 10,986 --
536,295 622,137 1,030,200 1,196,485
OPERATING LOSS (53,876) (31,722) (84,790) (31,492)
OTHER INCOME (EXPENSE)
Investment income 40 166 91 390
Interest expense (2,728) (2,037) (4,627) (3,893)
Miscellaneous, net (1,822) 336 (4,495) (313)
(4,510) (1,535) (9,031) (3,816)
Loss before income taxes (58,386) (33,257) (93,821) (35,308)
Income taxes (b) 64,808 1,792 65,911 1,568
NET LOSS $ (123,194) $ (35,049) $ (159,732) $ (36,876)
Basic average shares
outstanding 22,425,263 21,920,756 22,362,856 21,870,028
Diluted average shares
outstanding (c) 22,425,263 21,920,756 22,362,856 21,870,028
Basic Loss per Share: $ (5.49) $ (1.60) $ (7.14) $ (1.69)
Diluted Loss per Share: $ (5.49) $ (1.60) $ (7.14) $ (1.69)
<FN>
(a) The three and six months ended June 30, 2002 reflect the write-off of
costs of internal use software under development that the Company no
longer intends to complete.
(b) The three and six months ended June 30, 2002 reflect $81.9 million and
$95.9 million, respectively, of valuation allowance against the net
domestic deferred tax asset. The three and six months ended
June 30, 2001 reflect $14.1 million of valuation allowance against
the net domestic deferred tax asset. See Note 6 for further discussion.
(c) The three and six-months ended June 30, 2001 do not include 428,073
and 336,205 potentially dilutive securities because to do so would
be anti-dilutive. There were no potentially dilutive securities in the
three and six-months ended June 30, 2002.
The accompanying notes are an integral part of these financial statements
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2002 2001
(Dollars in thousands)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 28,067 $ 46,523
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (159,732) (36,876)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 33,935 31,500
Write-off of deferred internal use software costs 10,986 --
Deferred income taxes 62,770 6,181
Gains from property disposals, net (3,565) (19,665)
Issuance of common stock under stock
and benefit plans 1,145 1,232
Changes in assets and liabilities:
Receivables 6,055 (18,180)
Prepaid expenses (8,833) (3,039)
Accounts payable 12,173 (728)
Accrued liabilities 17,879 18,544
Accrued claims costs (11,346) 428
Income taxes (293) 2,508
Employee benefits 6,147 1,879
Other 4,840 2,915
Net Cash Used by Operating Activities (27,839) (13,301)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,916) (64,895)
Software expenditures (1,059) (1,583)
Proceeds from sales of property 7,729 3,122
Net Cash Provided (Used) by Investing Activities 4,754 (63,356)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term
borrowings (58,975) 69,500
Proceeds from long-term borrowings 78,944 --
Repayment of long-term borrowings and
capital lease obligations (657) --
Payments of debt issuance costs (13,460) (1,642)
Proceeds from exercise of stock options -- 135
Net Cash Provided by Financing Activities 5,852 67,993
Decrease in Cash and Cash Equivalents (17,233) (8,664)
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,834 $ 37,859
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Subsequent Events
On September 3, 2002, Consolidated Freightways Corporation, a
Delaware corporation ("CFC"), Consolidated Freightways Corporation of
Delaware, a Delaware corporation ("CFCD"), CF AirFreight Corporation,
a Delaware corporation ("CF AirFreight"), Redwood Systems, Inc., a
Delaware corporation ("Redwood Systems"), Leland James Service
Corporation, a Delaware corporation ("Leland James") and CF
MovesU.com Incorporated, a Delaware corporation ("CFMU"),
(collectively, the "Debtors"), intend to file petitions for relief
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
in the United States Bankruptcy Court for the Central District of
California. The Debtors required substantial additional sources of
financing in order to satisfy their obligations in a timely manner.
The Debtors had discussions under way with existing lenders,
investors and other sources to obtain the additional financing the
Debtors needed to continue operations. The Debtors have been unable
to secure sufficient additional financing to continue operations. In
particular, the Chapter 11 filing is necessary because one of CFC's
surety bondholders cancelled coverage relating to CFC's self-
administered insurance programs for workers' compensation and
vehicular casualty. This negatively impacted the pending discussions
with all lenders and investors. Ultimately, CFC was unable to secure
financing and to bridge the surety bond gap, at which point the
situation became critical. Moreover, the Debtors anticipated that a
second insurer would also cancel coverage. The Board of Directors
reluctantly concluded that the Debtors could not continue to operate,
pay employees and meet its obligations. The Debtors will ask the
bankruptcy court to allow them to oversee their operations as debtors
in possession, subject to court approval of matters outside the
ordinary course of business. While in Chapter 11, the Debtors will
attempt a management-directed sale of the Debtors' business as a
going concern. In the event such a sale is not possible, the Debtors
will attempt to sell portions of the business in separate
transactions and to liquidate and collect the remainder of the
Debtors' assets. The Debtors have engaged an investment banking firm
to assist in the sale. All such sales will attempt to maximize the
value of the Debtors' assets for the benefit of the Debtors'
creditors. CFC believes that the Debtors will not be able to fully
satisfy the claims of the creditors from the proceeds of such sales
and liquidations. Therefore, CFC believes that CFC's stockholders
will not receive any distributions on account of their stock.
On September 2, 2002, CFC, CFCD, Redwood Systems, Leland James
and CFMU sent notices of termination to approximately 15,500 active
employees and effectively ceased all operations except those limited
operations necessary to protect the Debtors' assets. Canadian
Freightways Ltd. and subsidiaries and Grupo Consolidated Freightways,
S.A. de RL, as well as several non-operating subsidiaries, have not
terminated their employees and are continuing their normal business
operations. These entities will not be included in the bankruptcy
filings. CF AirFreight, although included in the bankruptcy filing,
did not terminate any employees and will continue normal business
operations.
In July 2002, CFC completed a $6.9 million financing agreement
secured by terminal properties. Under the agreement, CFC contributed
4 terminal properties with a net book value of approximately $14.3
million to CFCD 2002A LLC, a wholly owned, consolidated special
purpose company. CFCD 2002A LLC used the properties as collateral
for the borrowings. Borrowings bear interest at 13%. Interest
payments are due monthly with principal due in 3 years. Loan
proceeds, net of deferred loan costs, of $6.5 million were used to
pay down borrowings under CFC's credit facilities and to fund
operations.
Also in July 2002, CFC entered into a three-year $14.5 million
credit facility to provide for working capital and letter of credit
needs. The agreement is secured by accounts receivable of CFC's
Canadian subsidiaries, a general security interest in all other
Canadian assets as well as a second position on current and future
mortgaged Canadian properties. Borrowings bear interest at the
Canadian prime rate plus 0.875%. Letters of credit are limited to
approximately $12.0 million. The availability of funds under the
agreement would have required the Canadian subsidiaries to maintain a
minimum tangible net worth. Approximately $10.0 million of the
availability was used for letter of credit needs of the Canadian
subsidiaries.
2.Basis of Presentation
The accompanying consolidated financial statements of CFC and
subsidiaries (collectively, the "Company") have been prepared by the
Company, without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management,
the consolidated financial statements include all adjustments,
consisting of only normal recurring adjustments necessary to present
fairly the information 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. Accordingly, these financial
statements should be read in conjunction with the consolidated
financial statements included in CFC's 2001 Annual Report to
Shareholders.
The accompanying consolidated financial statements have been
prepared on a going concern basis that contemplates the realization
of assets and the settlement of liabilities and commitments in the
normal course of business. In all likelihood, this basis of
accounting will change to either that prescribed by Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" or to the liquidation basis of accounting
in the third quarter of 2002.
Management considers as its most critical accounting policies
those that require the use of estimates and assumptions,
specifically, self-administered insurance reserves, and pension and
post-retirement benefit liabilities. In developing these estimates
and assumptions, the Company takes into consideration historical
experience, current and expected economic conditions and, in certain
cases, actuarial analysis. The Company continually reviews these
factors and makes adjustments as needed. Actual results could differ
from these estimates and could have a material adverse effect on the
Company's financial position and results of operations. Please refer
to the consolidated financial statements included in CFC's 2001
Annual Report to Shareholders for a full discussion of these
accounting policies.
Certain amounts in prior year's financial statements have been
reclassified to conform to the current year presentation.
3. Segment and Geographic Information
The Company primarily provided 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 Six
Months Ended Months Ended
June 30, June 30,
2002 2001 2002 2001
Revenues
United States $441,504 $550,127 $ 867,113 $1,086,071
Canada and other 40,915 40,288 78,297 78,922
Total $482,419 $590,415 $ 945,410 $1,164,993
As of As of
June 30, December 31,
2002 2001
Property, Plant and Equipment
United States $295,209 $322,235
Canada and other 34,213 35,356
Total $329,422 $357,591
4. Comprehensive Loss
Comprehensive loss for the three and six months ended June 30,
2002 and 2001 is as follows:
(Dollars in thousands)
Three Six
Months Ended Months Ended
June 30, June 30,
2002 2001 2002 2001
Net Loss $(123,194) $(35,049) $(159,732) $(36,876)
Other comprehensive income
(loss):
Foreign currency
translation adjustments 1,812 892 2,362 (1,418)
Comprehensive Loss $(121,382) $(34,157) $(157,370) $(38,294)
5. Debt
As discussed in Note 1, on September 3, 2002, the Debtors
intend to file a petition for relief under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the
Central District of California. The Company has arranged for a
debtor in possession credit facility (the "DIP Facility") with
General Electric Capital Corporation ("GECC") in order to provide
liquidity during the bankruptcy proceeding. The DIP Facility will
provide the Company with $225 million in financing for working
capital and letter of credit needs and is secured by accounts
receivable, real estate and rolling stock. Borrowings will bear
interest at the Prime rate as defined in the DIP Facility plus 550
basis points. The DIP Facility matures on the earlier of on or about
September 4, 2003 or the date a plan of liquidation becomes
effective. The DIP Facility may be terminated upon the occurrence of
an event of default under the DIP Facility and contains mandatory
paydown provisions upon the occurrence of certain asset sales. The
DIP Facility contains certain performance covenants that the Company
must maintain and covenants that limit the Company's ability to incur
additional indebtedness or pay dividends, among other things. The
DIP Facility replaces the Company's accounts receivable
securitization agreement and real estate credit facility previously
provided by GECC, both of which are discussed below. Outstanding
borrowings of $34.8 million and outstanding letters of credit of
$130.6 million under these agreements will be transferred to the DIP
Facility on or about September 4, 2002. Deferred costs related to
the accounts receivable securitization agreement and real estate
credit facility were $4.0 million and $0.7 million, respectively, as
of June 30, 2002. Those costs along with costs incurred in entering
into the DIP Facility will be amortized over the life of the DIP
Facility.
Existing Credit Facilities
The Company had a $200.0 million accounts receivable
securitization agreement with GECC to provide for working capital and
letter of credit needs. As of June 30, 2002, outstanding borrowings
were $8.6 million, bearing interest at LIBOR plus 250 basis points
(4.34%). Letters of credit outstanding were $133.6 million, of which
$117.0 million are used to support the Company's self-administered
insurance program. Availability of the remaining borrowing capacity
would have been 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 were insufficient to support issued letters of credit, the
Company was required to provide cash collateral to the lender. The
Company was required to provide as much as $10.0 million of cash
collateral during the six months ended June 30, 2002. As of June 30,
2002, there was no cash collateral required to support issued letters
of credit.
The Company also had a revolving credit agreement with GECC
secured by real property to provide for short-term working capital
needs and other general corporate purposes. In February 2002, this
agreement was amended, extending the term until February 2004 and
limiting borrowings to a maximum of $42.0 million. The agreement
contained mandatory paydown provisions using a portion of the
proceeds of additional financing agreements and asset sales. Due to
additional financing agreements discussed below and surplus terminal
property sales, maximum availability was reduced to $25.0 million as
of June 30, 2002, of which $16.3 million was outstanding, bearing
interest at 10%.
The combined availability of funds under the above two financing
agreements was $8.2 million as of June 30, 2002. Consistent with
these types of agreements, the availability ranged from $0 to $20.5
million during the six months ended June 30, 2002. The availability
of funds under these agreements would have required that the Company
comply with certain financial covenants, the most restrictive of
which were to maintain a minimum EBITDAL (earnings before interest,
taxes, depreciation, amortization and lease expense) and fixed charge
coverage ratio. The Company was in violation of these convenants as
of June 30, 2002 and did not receive waivers or amendments to either
agreement. Both agreements were replaced by the DIP Facility
discussed above.
There can be no assurances as to the impact of the Debtors'
Chapter 11 filing on the debt instruments listed below. Since some
of these facilities are in bankruptcy-remote entities, such entities
will not have the benefit of the automatic stay which arises with
respect to the Debtors.
In February 2002, the Company secured a $50.4 million financing
agreement secured by terminal properties. Loan proceeds, net of
deferred loan costs, of $17.9 million were funded in February and
loan proceeds, net of deferred loan costs, of $23.5 million were
funded in April. Under the agreement, the Company contributed 39
terminal properties to CFCD 2002 LLC, a wholly owned, consolidated
special purpose company. The properties had a net book value of
approximately $65.0 million as of June 30, 2002. CFCD 2002 LLC used
the properties as collateral for the borrowings. Borrowings bear
interest at the six month LIBOR plus 375 basis points (5.85% as of
June 30, 2002). 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 $200.0 million accounts receivable
securitization agreement. The initial $17.9 million of proceeds was
used to pay down short-term borrowings under the Company's $200.0
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-administered
insurance program. The $23.5 million of proceeds was used to pay
down borrowings under the Company's real estate credit facility and
to fund operations.
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 $12.0 million as of June 30, 2002. The borrowings bear
interest at 7.2%. Principal and interest are payable monthly. Loan
proceeds, net of deferred loan costs, of $3.9 million, were used to
pay down borrowings under the Company's credit facilities and to fund
operations.
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 June 30, 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. Loan proceeds, net of deferred loan
costs, of $5.4 million were used to pay down borrowings under the
Company's credit facilities and to fund operations.
In June 2002, the Company completed an $18.9 million financing
agreement secured by terminal properties. Under the agreement, the
Company contributed 3 terminal properties with a net book value of
approximately $22.1 million to CFCD 2002A LLC, a wholly owned,
consolidated special purpose company. CFCD 2002A LLC used the
properties as collateral for the borrowings. Borrowings bear interest
at 13%. Interest payments are due monthly with principal due in 3
years. Loan proceeds, net of deferred loan costs, of $17.4 million
were used to pay down borrowings under the Company's credit
facilities and to fund operations.
6. Income Taxes
Deferred tax assets and liabilities in the Consolidated Balance
Sheets are classified based on the related asset or liability
creating the deferred tax. Deferred taxes not related to a specific
asset or liability are classified based on the estimated period of
reversal. As disclosed in CFC's 2001 Annual Report to Shareholders,
due to domestic cumulative losses over the past three years, current
accounting standards required the Company to assess the realizability
of its domestic net deferred tax asset as of June 30, 2001. A review
of all available positive and negative evidence needed to be
considered, including the Company's performance, the market
environment in which the Company operates and available tax planning
strategies. Through the use of tax planning strategies, involving
the sale of appreciated assets, the Company determined that it was
more likely than not that $62.6 million of its domestic net deferred
tax asset as of June 30, 2001 would be realized. Accordingly, the
Company recorded a valuation allowance of $14.1 million in the
quarter ended June 30, 2001. The Company subsequently reviewed the
realizability of its net deferred tax asset and recorded valuation
allowances as necessary. As of December 31, 2001, the Company had
recorded $40.0 million of valuation allowances resulting in a net
deferred tax asset of $62.6 million. The Company recorded $14.0
million and $19.3 million of additional valuation allowance in the
quarters ended March 31, 2002 and June 30, 2002, respectively, to
offset the tax benefit related to the operating loss from ongoing
operations. However, due to the Chapter 11 filing, the Company
concluded that it was necessary to establish a full valuation
allowance against its net deferred tax asset. Accordingly, the
Company recorded an additional $62.6 valuation allowance in the
quarter ended June 30, 2002.
7. Employee Benefit Plans
The Company received approval from the Internal Revenue Service
to change the funding methodology of its pension plan. The pension
plan covers employees in the United States who are not subject to
collective bargaining agreements. Under the Company's previous
funding methodology, the actuarial value of the pension plan assets
was market value and would have required an approximately $7.0
million cash contribution in 2002. Under the new methodology, the
Company is able to use a 5-year smoothing period of gains/losses on
market value, with the gains/losses that occurred prior to January 1,
2000 being disregarded, eliminating any required contribution in
2002. As a result of the Chapter 11 filing, funding of the plan will
cease. The Company is unable to determine the impact of the Chapter
11 filing on its pension liability. The pension plan assets are held
in a separate trust and are outside the scope of the Chapter 11
filing.
8. Recent Accounting Pronouncements
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.
In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143 "Accounting for Asset Retirement Obligations."
SFAS 143 will require that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of the fair value can be made. The
associated asset retirement costs will be capitalized as part of the
carrying amount of the asset. This statement is effective for fiscal
years beginning after June 15, 2002. The Company is in the process of
evaluating the financial statement impact of adopting SFAS 143.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" (SFAS 145). SFAS 145 requires that gains and
losses from extinguishment of debt be classified as extraordinary
items only if they meet the criteria in Accounting Principles Board
Opinion No. 30 (APB 30). Applying the provisions of APB 30 will
distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent and meet the
criteria for classification as an extraordinary item. SFAS 145 is
effective January 1, 2003. The Company is in the process of
evaluating the financial statement impact of adopting SFAS 145.
In July 2002, the FASB issued SFAS No. 146 "Accounting for
Restructuring Costs" (SFAS 146). Under SFAS 146, a company will
record a liability for costs associated with an exit or disposal
activity when that liability is incurred and can be measured at fair
value. SFAS 146 will supercede EITF Issue No. 94-3, under which a
company generally could record a liability once management approved
an exit or disposal plan, which is generally before an actual
liability has been incurred. Accordingly, SFAS 146 may affect the
timing of recognition of future restructuring costs as well as the
amounts recognized. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002. The Company is in the
process of evaluating the financial statement impact of adopting SFAS
146.
9. Acquisitions
In February 2002, the Company entered into an agreement to
acquire 100% ownership of the business operations of its joint
venture in Mexico, subject to terms and conditions yet to be met.
The purchase price is approximately $2.1 million payable in
installments through April 2003. Interest on unpaid installments is
7.5% annually. As of June 30, 2002, unpaid installments totaled $1.3
million.
As discussed in CFC's 2001 Annual Report to Shareholders, the
purchase agreement related to First Air, Inc. provides for a
contingent payment to the former owner if revenues exceed certain
targeted levels before May 31, 2003. The payment shall not exceed
$2.5 million. Based upon revenues earned as of June 30, 2002, the
Company recorded a $2.5 million liability and related adjustment to
goodwill. Payment is not due until May 2004.
10. Contingencies
Except as otherwise may be determined by the bankruptcy court,
the stay protection afforded by the Chapter 11 case prevents any
action from being taken against the estate of the Debtors. The
Company plans on rejecting multiple executory contracts and leases as
a result of its bankruptcy filing, which will likely result in
significant pre-petition claims. In most cases, pre-existing
litigation and claims will have the status of general unsecured
claims in the Chapter 11 case.
Approximately 80% of the Company's domestic employees were
covered by union-sponsored, collectively bargained, multi-employer
pension plans. Company contributions were made in accordance with
negotiated labor contracts and generally were based on time worked.
Under existing legislation regarding multi-employer pension plans, a
total or partial withdrawal from an under-funded plan would result in
the Company having to fund a proportionate share of the unfunded
vested liability. The Company is unable to estimate the amount of
the unfunded vested liability, but expects it to be substantial.
The Company, through its captive insurance subsidiary,
participates in a reinsurance pool to reinsure the majority of its
workers' compensation liability. As a participant, the Company
transfers its liability into the pool and reinsures an equivalent
amount of risk from the pool. Under the provisions of SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts," the Company records a reinsurance receivable
associated with liabilities transferred into the pool and a
corresponding liability for the reinsured risk. As of June 30,
2002, the reinsurance receivable associated with liabilities
transferred into the pool was $50.4 million and was included in
Deposits and Other Assets in the Consolidated Balance Sheet. The
corresponding reinsured risk of $50.4 million was included in Other
Liabilities in the Consolidated Balance Sheet. Reinsurance does not
relieve the Company of ultimate responsibility for its own
transferred liabilities. As a result of the Chapter 11 filing, the
Company will withdraw from the reinsurance pool, which could result
in a liability payable to the reinsurance pool of approximately $4
million.
CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
On September 3, 2002, Consolidated Freightways Corporation, a
Delaware corporation ("CFC"), Consolidated Freightways Corporation of
Delaware, a Delaware corporation ("CFCD"), CF AirFreight Corporation,
a Delaware corporation ("CF AirFreight"), Redwood Systems, Inc., a
Delaware corporation ("Redwood Systems"), Leland James Service
Corporation, a Delaware corporation ("Leland James") and CF
MovesU.com Incorporated, a Delaware corporation ("CFMU"),
(collectively, the "Debtors"), intend to file petitions for relief
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
in the United States Bankruptcy Court for the Central District of
California. The Debtors required substantial additional sources of
financing in order to satisfy their obligations in a timely manner.
The Debtors had discussions under way with existing lenders,
investors and other sources to obtain the additional financing the
Debtors needed to continue operations. The Debtors have been unable
to secure sufficient additional financing to continue operations. In
particular, the Chapter 11 filing is necessary because one of CFC's
surety bondholders cancelled coverage relating to CFC's self-
administered insurance programs for workers' compensation and
vehicular casualty. This negatively impacted the pending discussions
with all lenders and investors. Ultimately, CFC was unable to secure
financing and to bridge the surety bond gap, at which point the
situation became critical. Moreover, the Debtors anticipated that a
second insurer would also cancel coverage. The Board of Directors
reluctantly concluded that the Debtors could not continue to operate,
pay employees and meet its obligations. The Debtors will ask the
bankruptcy court to allow them to oversee their operations as debtors
in possession, subject to court approval of matters outside the
ordinary course of business. While in Chapter 11, the Debtors will
attempt a management-directed sale of the Debtors' business as a
going concern. In the event such a sale is not possible, the Debtors
will attempt to sell portions of the business in separate
transactions and to liquidate and collect the remainder of the
Debtors' assets. The Debtors have engaged an investment banking firm
to assist in the sale. All such sales will attempt to maximize the
value of the Debtors' assets for the benefit of the Debtors'
creditors. CFC believes that the Debtors will not be able to fully
satisfy the claims of the creditors from the proceeds of such sales
and liquidations. Therefore, CFC believes that CFC's stockholders
will not receive any distributions on account of their stock.
On September 2, 2002, CFC, CFCD, Redwood Systems, Leland James
and CFMU sent notices of termination to approximately 15,500 active
employees and effectively ceased all operations except those limited
operations necessary to protect the Debtors' assets. Canadian
Freightways Ltd. and subsidiaries and Grupo Consolidated Freightways,
S.A. de RL, as well as several non-operating subsidiaries, have not
terminated their employees and are continuing their normal business
operations. These entities will not be included in the bankruptcy
filings. CF AirFreight, although included in the bankruptcy filing,
did not terminate any employees and will continue normal business
operations.
The effects of the economic slowdown that began in 2001
continued to impact CFC and its subsidiaries ("the Company")
throughout the first six months of 2002. Revenues for the three
months ended June 30, 2002 decreased 18.3% on a 16.0% tonnage
decrease compared with the same period last year. Shipments
decreased 16.4% and the average weight per shipment increased 0.5% to
996 lbs. The Company continued to be impacted by negative
perceptions in the marketplace regarding the Company's liquidity,
customer service issues and by the loss of two large customers due to
aggressive competitive pricing. Revenue per hundredweight decreased
2.4% to $16.89 despite a 5.95% general rate increase and a $5.50
increase in the absolute minimum shipment charge, both of which are
applicable to approximately 30% of tonnage, effective June 3rd. The
decrease was 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%. Revenues for the six months ended June 30, 2002 decreased
18.9% on a 16.5% decrease in tonnage. Shipments decreased 15.4% and
the weight per shipment decreased 1.3% to 983 lbs. Revenue per
hundredweight decreased 2.9% to $17.01. Excluding the fuel surcharge,
revenue per hundredweight decreased 1.4%.
Salaries, wages and benefits decreased 12.9% and 13.9% in the
three and six-month periods, respectively, due primarily to lower
tonnage levels. Beginning in the third quarter of 2001, management
implemented workforce reductions in response to continued lower
tonnage levels. The workforce was approximately 20% and 18% lower in
the three and six-month periods, respectively, compared with the
prior year. However, those workforce reductions were insufficient
relative to actual tonnage declines. Additionally, based upon an
actuarial analysis of the Company's workers' compensation reserve as
of June 30, 2002, it was determined that the reserve was
approximately $10.0 million understated. Accordingly, an
approximately $10.0 million charge was recorded in the quarter ended
June 30, 2002. The Company was also impacted by a 2.0% contractual
wage and benefit increase that was effective April 1, 2002 as well as
severance due to a management change in May 2002. The Company did
benefit from improved cross-dock and pick-up and delivery
efficiencies as a result of process improvement programs.
Operating expenses decreased 16.8% in the three-month period
compared with the prior year. Excluding gains on sales of properties
of $1.4 million in the three-month period and $0.4 million in the
same period last year, operating expenses decreased 16.0%. Lower
tonnage levels, an approximate 19% decrease in the average fuel cost
per gallon, lower maintenance costs 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. This
offset higher than usual legal costs, an increase to the allowance
for bad debt due to accounts receivable collection issues and
facility closure costs related to the Company's air freight
subsidiary. Operating expenses for the six-month period decreased
13.8% for the reasons noted above. The average fuel cost per gallon
decreased approximately 25% from the same period last year.
Excluding gains on sales of operating properties of $3.9 million in
the six-month period and $20.0 million in the same period last year,
operating expenses decreased 19.2%. The Company was also impacted in
the three and six-month periods by excess fixed costs as the Company
worked to reduce its freight flow infrastructure to reflect lower
tonnage levels.
Purchased transportation decreased 20.0% and 19.5% in the three
and six-month periods, respectively, 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 during the three-month
period decreased to 26.6% from 28.3% in the prior year. For the six-
month period, rail miles decreased to 25.7% from 27.1% in the prior
year.
Operating taxes and licenses decreased 14.0% and 13.5% in the
three and six-month periods, respectively, reflecting lower fuel
taxes and licensing fees due to lower tonnage levels.
Claims and insurance decreased 65.9% and 41.9% in the three and
six- month periods, respectively. Based upon an actuarial analysis
of the Company's vehicular reserve as of June 30, 2002, it was
determined that the reserve was approximately $10.0 million
overstated. Accordingly, the excess accrual of approximately $10.0
million was reversed to income during the quarter ended June 30,
2002. Additionally, cargo claims expense decreased in the three and
six-month periods due to lower tonnage and improved claims
experience.
Depreciation decreased 3.3% and 0.6% in the three and six-month
periods, respectively, due to lower capital expenditures, a higher
proportion of the fleet becoming fully depreciated and asset sales.
The Company wrote-off approximately $11.0 million of deferred
costs during the three months ended June 30, 2002 related to internal
use software under development that the Company no longer intends to
complete.
The operating loss was $53.9 million for the three-month period
compared with a $31.7 million operating loss for the same period last
year. The operating ratio deteriorated to 111.2% from 105.4%. The
Canadian operations contributed $3.4 million of operating income
compared with $3.8 million for the same period last year. Excluding
gains on sales of operating properties, the operating loss was $55.2
million compared with a $32.1 million operating loss for the same
period last year. The operating ratio was 111.4% compared with
105.4%, excluding the gains. For the six-month period, the operating
loss was $84.8 million compared with $31.5 million in the same period
last year. The operating ratio deteriorated to 109.0% from 102.7%.
The Canadian operations contributed $5.9 million of operating income
in the six-month period compared with $6.6 million for the same
period last year. Excluding gains on sales of operating properties,
the operating loss was $88.7 million for the six-month period
compared with a $51.5 million operating loss for the same period last
year. The operating ratio was 109.4% compared with 104.4%, excluding
the gains.
Other expense, net, increased $3.0 million in the three-month
period and $5.2 million in the six-month period due primarily to
higher costs associated with increased letter of credit requirements
to support the Company's self-administered insurance programs and
increased interest expense on higher debt levels. The three and six-
month periods also reflect an approximate $0.5 million write-off of
deferred loan costs due to a reduction in borrowing capacity under
the Company's real estate credit facility. The six-month period
reflects the write-off of approximately $1.2 million of costs
associated with financing transactions that the Company decided not
to pursue.
The Company's effective tax rate differs from the statutory
federal rate due to foreign taxes and the recording of deferred tax
valuation allowances. As disclosed in CFC's 2001 Annual Report to
Shareholders, due to domestic cumulative losses over the past three
years, current accounting standards required the Company to assess
the realizability of its domestic net deferred tax asset as of June
30, 2001. A review of all available positive and negative evidence
needed to be considered, including the Company's performance, the
market environment in which the Company operates and available tax
planning strategies. Through the use of tax planning strategies,
involving the sale of appreciated assets, the Company determined that
it was more likely than not that $62.6 million of its domestic net
deferred tax asset as of June 30, 2001 would be realized.
Accordingly, the Company recorded a valuation allowance of $14.1
million in the quarter ended June 30, 2001. The Company subsequently
reviewed the realizability of its net deferred tax asset and recorded
valuation allowances as necessary. As of December 31, 2001, the
Company had recorded $40.0 million of valuation allowances resulting
in a net deferred tax asset of $62.6 million. The Company recorded
$14.0 million and $19.3 million of additional valuation allowance in
the quarters ended March 31, 2002 and June 30, 2002, respectively, to
offset the tax benefit related to the operating loss from ongoing
operations. However, due to the Chapter 11 filing, the Company
concluded that it was necessary to establish a full valuation
allowance against its net deferred tax asset. Accordingly, the
Company recorded an additional $62.6 valuation allowance in the
quarter ended June 30, 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 (NMFA), which expires on
March 31, 2003.
On April 1, 2002, a 2.0% wage and benefit increase went into
effect for employees covered by the NMFA. The current NMFA allows for
an increase in the amount of the Company's contribution to the union,
health and welfare plans effective August 1, 2002.
As discussed above, the Company experienced lower average fuel
costs per gallon during the first six months of 2002 compared with
the same period last 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.
LIQUIDITY AND CAPITAL RESOURCES
On September 3, 2002, the Debtors intend to file a petition for
relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Central District of
California. The Company has arranged for a debtor in possession
credit facility (the "DIP Facility") with General Electric Capital
Corporation ("GECC") in order to provide liquidity during the
bankruptcy proceeding. The DIP Facility will provide the Company
with $225 million in financing for working capital and letter of
credit needs and is secured by accounts receivable, real estate and
rolling stock. Borrowings will bear interest at the Prime rate as
defined in the DIP Facility plus 550 basis points. The DIP Facility
matures on the earlier of on or about September 4, 2003 or the date a
plan of liquidation becomes effective. The DIP Facility may be
terminated upon the occurrence of an event of default under the DIP
Facility and contains mandatory paydown provisions upon the
occurrence of certain asset sales. The DIP Facility contains certain
performance covenants that the Company must maintain and covenants
that limit the Company's ability to incur additional indebtedness or
pay dividends, among other things. The DIP Facility replaces the
Company's accounts receivable securitization agreement and real
estate credit facility previously provided by GECC, both of which are
discussed in Note 5 "Debt." Outstanding borrowings of $34.8 million
and outstanding letters of credit of $130.6 million under these
agreements will be transferred to the DIP Facility on or about
September 4, 2002. Deferred costs related to the accounts receivable
securitization agreement and real estate credit facility were $4.0
million and $0.7 million, respectively, as of June 30, 2002. Those
costs along with costs incurred in entering into the DIP Facility
will be amortized over the life of the DIP Facility.
There can be no assurances as to the impact of the Debtors'
Chapter 11 filing on the debt instruments listed below. Since some
of these facilities are in bankruptcy-remote entities, such entities
will not have the benefit of the automatic stay which arises with
respect to the Debtors.
As previously disclosed in CFC's 2001 Annual Report to
Shareholders, the Company self-administers for medical, casualty,
liability, vehicular, cargo and workers' compensation claims within
deductibles limits that range between $1.0 million and $8.0 million
depending on the insurance program. For self-administered insurance
programs, the Company is required to post letters of credit to ensure
payments under its worker compensation and liability insurance
coverage. Outstanding letters of credit related to these programs as
of June 30, 2002 were $117.0 million and were issued under the
Company's $200.0 million accounts receivable securitization
agreement, discussed above. Due to adverse conditions in the
insurance market and the Company's financial position, the Company
expected that in order to maintain these insurance programs, it would
have needed to provide for a substantial amount of liquidity at the
October 1, 2002 insurance renewal date. The Company also has $97.3
million of surety bonds, of which $82.6 million support the insurance
programs. Adverse conditions in the insurance market and the
Company's financial position resulted in the cancellation of a $25
million insurance bond effective October 1, 2002 and most likely
would have impacted the ability of the Company to renew its other
insurance related bonds as of October 1, 2002. The Company would
have been required to post collateral to secure the bonds. The
inability of the Company to negotiate successfully with its surety
insurance companies and renew its insurance related surety bonds as
of October 1, 2002 would have required the Company to secure
alternative financing arrangements.
In July 2002, the Company completed a $6.9 million financing
agreement secured by terminal properties. Under the agreement, the
Company contributed 4 terminal properties with a net book value of
approximately $14.3 million to CFCD 2002A LLC, a wholly owned,
consolidated special purpose company. CFCD 2002A LLC used the
properties as collateral for the borrowings. Borrowings bear interest
at 13%. Interest payments are due monthly with principal due in 3
years. Loan proceeds, net of deferred loan costs, of $6.5 million
were used to pay down borrowings under the Company's credit
facilities and to fund operations.
Also in July 2002, the Company entered into a three-year $14.5
million credit facility to provide for working capital and letter of
credit needs. The agreement is secured by accounts receivable of the
Company's Canadian subsidiaries, a general security interest in all
other Canadian assets as well as a second position on current and
future mortgaged Canadian properties. Borrowings bear interest at
the Canadian prime rate plus 0.875%. Letters of credit are limited
to approximately $12.0 million. The availability of funds under the
agreement would have required the Canadian subsidiaries to maintain a
minimum tangible net worth. Approximately $10.0 million of the
availability was used for letter of credit needs of the Canadian
subsidiaries.
Cash Flows for the Six Months Ended June 30, 2002 and 2001
Cash and cash equivalents were $10.8 million as of June 30,
2002. Drafts outstanding, which are included in Accounts Payable on
the Consolidated Balance Sheet, were $20.3 million. Cash flow used
by operations for the six months ended June 30, 2002 were $27.8
million compared with $13.3 million used by operations in the same
period of 2001.
Cash flows provided by investing activities of $4.8 million in
the six-month period compares with cash flows used by investing
activities of $63.4 million in the same period last year. The
reduction in capital and software expenditures from $66.5 million in
the prior year period to $3.0 million in the current year reflects
management's efforts to improve the Company's liquidity by deferring
all non-essential expenditures. The prior year reflects the purchase
of strategic terminals in Brooklyn, NY, Phoenix, AZ and Laredo, TX as
well as revenue equipment previously under lease. Proceeds on sales
of property of $7.7 million primarily reflects the sale of surplus
terminal properties. This compares with $3.1 million in the prior
year.
As a result of the Debtors' petition for relief under Chapter
11, there will be no availability of funds under any of the debt
instruments listed below. Further, the Company will likely be in
default on substantially all of its pre-petition debt obligations,
some of which may be automatically accelerated. Except as otherwise
may be determined by the bankruptcy court, the stay protection
afforded by the Chapter 11 case prevents any action from being taken
with regard to any of the defaults under pre-petition debt
obligations of Debtors. Since some of these facilities are in
bankruptcy-remote entities, such entities will not have the benefit
of the automatic stay which arises with respect to the Debtors.
Cash flows provided by financing activities for the six-month
period was $5.9 million compared with $68.0 million in the prior
year. The Company secured $78.9 million of long-term financing in the
six-month period as discussed below. Proceeds, net of deferred
financing fees, of $68.1 million were used to pay down $59.0 million
of borrowings under the Company's credit facilities. The remainder
was used to fund operating activities. Of the availability created
by the paydown of borrowings under the credit facilities, $20.0
million was used to issue letters of credit to support the Company's
self-administered insurance program. Availability was further
reduced by $17 million due to mandatory paydown provisions as
discussed above. The Company paid approximately $2.6 million in the
six months ended June 30, 2002 for amendments to accounts receivable
securitization agreement and real estate credit facility.
In February 2002, the Company secured a $50.4 million financing
agreement secured by terminal properties. Loan proceeds, net of
deferred loan costs, of $17.9 million were funded in February and
loan proceeds, net of deferred loan costs, of $23.5 million were
funded in April. Under the agreement, the Company contributed 39
terminal properties to CFCD 2002 LLC, a wholly owned, consolidated
special purpose company. The properties had a net book value of
approximately $65.0 million as of June 30, 2002. CFCD 2002 LLC used
the properties as collateral for the borrowings. Borrowings bear
interest at the six month LIBOR plus 375 basis points (5.85% as of
June 30, 2002). 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. The initial $17.9 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-administered
insurance program. The $23.5 million of proceeds was used to pay
down borrowings under the Company's real estate credit facility and
to fund operations.
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 $12.0 million as of June 30, 2002. The borrowings bear
interest at 7.2%. Principal and interest are payable monthly. Loan
proceeds, net of deferred loan costs, of $3.9 million, were used to
pay down borrowings under the Company's credit facilities and to fund
operations.
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 June 30, 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. Loan proceeds, net of deferred loan
costs, of $5.4 million were used to pay down borrowings under the
Company's credit facilities and to fund operations.
In June 2002, the Company completed an $18.9 million financing
agreement secured by terminal properties. Under the agreement, the
Company contributed 3 terminal properties with a net book value of
approximately $22.1 million to CFCD 2002A LLC, a wholly owned,
consolidated special purpose company. CFCD 2002A LLC used the
properties as collateral for the borrowings. Borrowings bear interest
at 13%. Interest payments are due monthly with principal due in 3
years. Loan proceeds, net of deferred loan costs, of $17.4 million
were used to pay down borrowings under the Company's credit
facilities and to fund operations.
The following are the Company's contractual cash obligations
under its operating lease, capital lease and long-term debt
agreements and interest thereon as of June 30, 2002.
Contractual Cash Obligations
As of June 30, 2002
(Dollars in thousands)
Payments Due In
Less than 1 to 3 4 to 5 After
1 Years Years 5 Total
Year Years
Operating Leases $28,615 $49,160 $18,839 $13,869 $110,483
Capital Lease
Obligation 121 271 314 72 778
Long-Term Debt 4,940 46,883 5,302 37,898 95,023
Interest on
Long-Term Debt and
Capital Lease
Obligation (a) 6,874 11,629 4,986 12,557 36,046
Total $40,550 $107,943 $29,441 $64,396 $242,330
(a) Assumes no change in LIBOR.
OTHER
Recent Accounting Pronouncements
Please refer to Footnote 8 "Recent Accounting Pronouncements"
under Part I, Item I "Financial Statements" for a discussion of
recent accounting pronouncements.
Changes in Senior Management
On May 28, 2002, the Board of Directors named John P. Brincko as
president and chief executive officer and elected him to the Board of
Directors. He replaced Patrick H. Blake, who retired from the
Company and the Board. On July 2, 2002, Stephen S. Sokol was named
executive vice president of finance and chief financial officer. He
succeeds Robert E. Wrightson, who retired from the Company. Thomas
A. Paulsen, who was executive vice president and chief operating
officer, left the Company. Robert E. Warner, previously an operations
vice president, was named executive vice president of terminal
operations. Phillip W. Seeley, previously vice president of
administration, was named executive vice president of process
improvement.
Forward Looking Statements
Certain statements in this Form 10-Q are forward-looking
statements that are subject to material risks and uncertainties.
Investors are cautioned that any such forward-looking statements are
not guarantees of future performance or results and involve risks and
uncertainties, and that actual results or developments may differ
materially from those expressed or implied in the forward-looking
statements as a result of various factors. These risks and
uncertainties include, but are not limited to, uncertainties relating
to general economic and business conditions, the availability and
cost of capital, government and regulatory policies and changes in
the competitive environment in which the Company operates. These
risks and uncertainties also include matters arising out of the
Company's delay in filing with the Securities and Exchange Commission
its Form 10-Q for the quarter ended June 30, 2002, the Chapter 11
bankruptcy filing, liquidity short falls and the announced delisting
of CFC's common stock by Nasdaq. Additional information regarding
risks, uncertainties and other factors that may affect the business
and financial results of the company can be found in the Company's
filings with the Securities and Exchange Commission. The Company
does not undertake to update any forward-looking statements in this
Form 10-Q or with respect to matters described herein.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risks related to changes in
interest rates. As of June 30, 2002, approximately $50.0 million of
the Company's long-term debt was at variable interest rates. The
Company does not currently use derivative instruments to manage the
risk of change in interest rates; however, it may do so in the
future. A theoretical 10% change in the interest rate on the
Company's variable rate long-term debt would not have a material
adverse effect on the Company's financial position or results of
operations. Please refer to the Cash Contractual Obligations table
in the Liquidity Section above.
The Company is also subject to market risks related to changes
in 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 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.
ITEM 4. Controls and Procedures.
There were no significant changes in internal controls or in
other factors that could significantly affect these controls
subsequent to management's evaluation.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Please refer to Footnote 10 "Contingencies" under Part I, Item I
"Financial Statements."
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Shareholders Meeting held June 17, 2002, the
following matters were presented with the indicated voting results:
For the purpose of electing members of the Board of Directors,
the votes representing shares of Common stock were cast as follows:
Nominee For Withheld
Robert W. Hatch 17,815,927 1,334,317
Henry C. Montgomery 17,810,574 1,339,670
Because the terms of office for their classes of directors had
not ended, the following directors did not stand for election and
continued in office after the Annual Shareholders Meeting: G. Robert
Evans, Paul B. Guenther, James B. Malloy, and William D. Walsh. As
discussed above, John P. Brincko was elected to the Board of
Directors on May 28, 2002, replacing Patrick H. Blake who retired.
For the purpose of approving the 2002 Stock Plan, the votes
representing shares of Common stock were cast as follows: For,
14,897,901; Against, 3,951,237; Abstain, 301,106.
ITEM 5. Stockholder Proposals
Pursuant to the Company's bylaws, stockholders who wish to bring
matters or propose nominees for director at the Company's 2003 annual
meeting of stockholders must provide specified information to the
Company between February 21, 2003 and March 23, 2003 (unless such
matters are included in the Company's proxy statement pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended, in
which case the information must be received by the Company by
December 31, 2002).
ITEM 6. Exhibits and Reports on Form 8-K
(a)Exhibits
10.01 Eighth Amendment, dated April 5, 2002, to the Credit
Agreement among Consolidated Freightways Corporation, as
Borrower and General Electric Capital Corporation, as
Lender, dated October 24, 2001.
10.02 Ninth Amendment, dated April 15, 2002, to the Credit
Agreement among Consolidated Freightways Corporation, as
Borrower and General Electric Capital Corporation, as
Lender, dated October 24, 2001.
Exhibits (continued)
10.03 Ninth Amendment, dated April 5, 2002, to the Letter
of Credit Agreement between Consolidated Freightways
Corporation and General Electric Capital Corporation
dated April 27, 2001.
10.04 Tenth Amendment, dated April 15, 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 April 5, 2002, to the
Securitization Agreement between Consolidated Freightways
Corporation and General Electric Capital
Corporation dated April 27, 2001.
10.06 Settlement Agreement and General Release of Claims
between Patrick H. Blake and Consolidated Freightways
Corporation dated as of May 28, 2002.
10.07 Services Agreement between Brincko Associates, Inc.,
Consolidated Freightways Corporation and Consolidated
Freightways Corporation of Delaware, dated as of
May 28, 2002.
10.08 Employment Agreement between Mr. Frits Kromhout, Consolidated
Freightways Corporation and Consolidated
Freightways Corporation of Delaware dated March 20, 2002.
10.09 Amended and Restated Loan Agreement between
CFCD 2002A LLC and JDI Sterling LLC, dated June 7, 2002.
99.1 Certification of Principal Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b)Reports on Form 8-K
A Form 8-K was filed on April 19, 2002 announcing the
funding of the remaining $25 million of a $45 million
financing agreement secured in February 2002.
A Form 8-K was filed on May 28, 2002 announcing the
dismissal of Arthur Andersen LLP and the engagement of
KPMG LLP to serve as the Company's independent public
accountants.
A Form 8-K was filed on May 29, 2002 announcing the
appointment of John P. Brincko as president and chief
executive officer and a member of the Board of Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, 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)
September 3, 2002 /s/Stephen Sokol
Stephen Sokol
Executive Vice President of
Finance and Chief Financial
Officer
September 3, 2002
/s/James R. Tener
James R. Tener
Vice President and Controller
CERTIFICATIONS
I, John Brincko, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Consolidated
Freightways Corporation;
2.Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3.Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
Date: September 3, 2002
/s/John Brincko
John Brincko
Chief Executive Officer
I, Stephen Sokol, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Consolidated
Freightways Corporation;
2.Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3.Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
Date: September 3, 2002
/s/Stephen Sokol
Stephen Sokol
Chief Financial Officer