Exhibit 13
CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On December 3, 1996, Consolidated Freightways Corporation (the
Company) began operating as an independent, separately traded public
company. The Company was spun off from its former parent, Consolidated
Freightways, Inc., now called CNF Transportation Inc., in a tax free
distribution (the Distribution) to shareholders of the former parent at a
rate of one Company share for every two shares outstanding of the former
parent. The Company consists of Consolidated Freightways Corporation of
Delaware (CFCD), a nationwide motor carrier, and its Canadian operations,
including Canadian Freightways, Ltd. (CFL), Epic Express, Milne &
Craighead, Canadian Sufferance Warehouses and other related businesses as
well as the Leland James Service Corporation, an administrative service
provider.
The Company completed its first full year of operations under its
Business Accelerator System (BAS), resulting in a 1.9% increase in
revenues over the prior year. BAS, implemented in October 1995, is a
redesign of the freight system whereby freight is moved directionally from
point-to-point, reducing miles and handling, thereby lowering costs and
average transit times. Although implementation of BAS ultimately improved
on-time performance and reduced transit times, system implementation took
longer than expected and utilization during the first half of 1996 was
below expected levels. During the first half of the year, total and less-
than-truckload (LTL) tonnage decreased 7.2% and 4.4%, respectively,
compared with the prior year as shippers withheld freight due to service
interruptions during implementation. Operational refinements in the
second half of the year and an increased acceptance of the Company's
improved service resulted in total and LTL tonnage for the year ended
December 31, 1996 increasing 1.0% and 2.5% over the prior year. The
Company also benefited from a gradual lessening of excess industry capacity
and a stabilization of rates, although rates remained slightly below 1995
levels. The Company's 1995 revenues increased 8.8% over strike-affected
1994 levels, despite the loss of business in the fourth quarter following
implementation of BAS. In 1995, total tonnage increased 6.4% with higher
rated LTL tonnage increasing 10.6% over 1994 levels.
Operating expenses for the year ended December 31, 1996 increased
$63.7 million or 3.4% over the prior year as a result of higher operating
costs following the implementation of BAS and a 3.5% contractual labor wage
and benefit increase on April 1, 1996. The implementation of BAS resulted
in higher operating costs in relation to revenue levels during most of 1996
because of costs associated with completing operational refinements and
improving service levels in the new system. The results also include a
previously disclosed $15.0 million non-cash charge to increase workers'
compensation reserves. The Company also experienced a significant increase
in fuel costs during 1996, as fuel prices rose 20.9% over the prior year.
To partially offset this increase, the Company instituted a fuel surcharge
program in the second half of the year, recovering approximately $9.2
million or 80% of total increased fuel costs. Operating expenses for the
year ended 1995 increased $148.9 million or 8.7% over 1994 due primarily to
the implementation of BAS in the fourth quarter of 1995 and the absence in
1994 of certain operating expenses during the 1994 strike.
Selling and administrative expenses in 1996 increased $5.6 million or
2.5% over the prior year while 1995 expenses increased $22.9 million or
11.3% over 1994. These increases are consistent with the respective
increases in revenues.
Depreciation increased a marginal 1.0% over 1995 to $64.1 million due
to the Company incurring significantly lower capital expenditures in 1996
compared to the prior year. Depreciation was $63.6 million in 1995, a
decrease of $6.6 million or 9.4% from $70.2 million in 1994. This decrease
is primarily attributable to aging of the fleet and an increase in the
leasing of equipment which supplemented capital expenditures.
Management expects to restore profitability by enhancing revenues and
productivity. To grow revenues, management is initiating programs that
aggressively market its value-added services and international service
offerings and emphasize business with a higher profit contribution.
Additionally, the Company announced an average 5.65% rate increase
effective January 1, 1997. To enhance productivity, management will
continue to refine BAS by initiating programs to improve linehaul
efficiency and freight handling in its linehaul, dock and city operations
and increase its use of rail. High leverage areas such as workers'
compensation and cargo claims will receive special attention in an effort
to achieve lower overall costs.
Other Income (Expense)
Other net expense increased from 1995 to 1996 and from 1994 to 1995
primarily due to interest expense on increased borrowings from the former
parent which is included in Miscellaneous, net in the Statements of
Consolidated Operations. Gains from dispositions of properties and other
miscellaneous income have partially offset the increases in interest
expense.
Net Loss
The 1996 net loss of $55.6 million increased $25.7 million over the
$29.9 million net loss in 1995. The 1995 net loss was a 6.9% improvement
over the net loss in 1994 of $32.1 million, which included a $1.9 million
charge for the write-off of intrastate operating rights. For the years
ended December 31, 1996, 1995 and 1994, the effective income tax benefit
rates were 28.5%, 31.7% and 32.1%, respectively. The rates are different
from the statutory federal rate due to foreign taxes and non-deductible
items.
Liquidity and Capital Resources
As of December 31, 1996, the Company had $48.7 million in cash and
cash equivalents. Prior to the Distribution, the Company participated in
the former parent's centralized cash management system and, consequently,
its operating and capital expenditures needs were met by the former parent
to the extent that cash from operations was insufficient. During the
period January 1, 1996 until the Distribution date, the former parent
provided funds to the Company of $59.5 million compared with $67.1 million
for the year ended December 31, 1995. As of the Distribution date, the
Company no longer has any similar financial arrangements with the former
parent. Net cash flow from operations during the year ended December 31,
1996, of $2.5 million was primarily the result of depreciation and
amortization and changes in working capital which offset the net loss.
This compares to $41.8 million provided by operations in 1995. Capital
expenditures for the year ended December 31, 1996, were $48.2 million, a
decrease of $63.8 million from 1995. Capital expenditures decreased due
to the Company making significant fleet replacements in 1995 compared to
1996. The Company expects capital expenditures to be $29.0 million in
1997 and expects to fund these with cash from operations supplemented by
financing arrangements if necessary.
In November 1996, the Company entered into a $225.0 million secured
credit facility with several banks to provide for working capital and
letter of credit needs. Borrowings under the agreement, which expires in
2000, bear interest based upon either prime or LIBOR, plus a margin
dependent on the Company's financial performance. Borrowings and letters
of credit are secured by substantially all of the assets of CFCD (excluding
real property and certain rolling stock), all of the outstanding stock of
CFCD and 65% of the outstanding capital stock of CFL. As of December 31,
1996, the Company had no short-term borrowings and $50 million of letters
of credit outstanding under this facility. The continued availability of
funds under this credit facility will require that CFCD remain in
compliance with certain financial covenants. The most restrictive
covenants require the Company to maintain a minimum level of earnings
before interest, taxes, depreciation and amortization, minimum amounts of
tangible net worth and fixed charge coverage, and limit capital
expenditures. The Company is in compliance as of December 31, 1996 and
expects to be in compliance in 1997.
As of December 31, 1996, the Company's ratio of long-term debt
obligations to total capital (including long-term obligations) was 7%
compared with 6% as of December 31, 1995. The current ratio was 1.1 to 1
and 1.0 to 1 at December 31, 1996 and 1995, respectively.
Inflation
Significant increases in fuel prices, to the extent not offset by
increases in transportation rates, would have a material adverse effect on
the profitability of the Company. Historically, the Company has responded
to periods of sharply higher fuel prices by implementing fuel surcharge
programs or base rate increases, or both, to recover additional costs, but
there can be no assurance that the Company will be able to successfully
implement such surcharges or increases in response to increased fuel costs
in the future. As discussed above, the Company implemented a fuel
surcharge program in the second half of 1996 to partially offset the
significant increase in fuel prices during the year.
Other
The Company's operations necessitate the storage of fuel in
underground tanks as well as the disposal of substances regulated by
various federal and state laws. The Company adheres to a stringent site-by-
site tank testing and maintenance program performed by qualified
independent parties to protect the environment and comply with regulations.
Where clean-up is necessary, the Company takes appropriate action.
The Company has received notices from the Environmental Protection
Agency 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 statues at
various Superfund sites. Based upon cost studies performed by independent
third parties, the Company believes its obligations with respect to such
sites would not have a material adverse effect on the its financial
condition or results of operations.
CFCD and the International Brotherhood of Teamsters (IBT) are parties
to the National Master Freight Agreement which expires on March 31, 1998.
Although CFCD believes that it will be able to successfully negotiate a new
contract with the IBT, there can be no assurances 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
CFCD's business, financial condition or results of operations.
Certain statements included herein constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to a number of risks and
uncertainties. In that regard, the following factors, among others, could
cause actual results and other matters to differ materially from those in
such statements: changes in general business and economic conditions;
increasing domestic and international competition and pricing pressure;
changes in fuel prices; uncertainty regarding the Company's ability to
improve results of operations; labor matters, including changes in labor
costs, renegotiation of labor contracts and the risk of work stoppages or
strikes; changes in governmental regulation, and environmental and tax
matters. As a result of the foregoing, no assurance can be given as to
future results of operations or financial condition.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands)
1996 1995
ASSETS
Current Assets
Cash and cash equivalents $ 48,679 $ 26,558
Trade accounts receivable, net of
allowances (Note 2) 285,410 252,105
Other accounts receivable (Note 10) 3,339 4,397
Operating supplies, at lower of average cost
or market (Note 10) 11,511 19,312
Prepaid expenses (Note 10) 35,848 35,192
Deferred income taxes (Note 6) 35,470 18,059
Total Current Assets 420,257 355,623
Property, Plant and Equipment, at cost (Note 10)
Land 78,989 103,432
Buildings and improvements 343,023 386,920
Revenue equipment 559,823 575,528
Other equipment and leasehold improvements 115,317 145,374
1,097,152 1,211,254
Accumulated depreciation and amortization (680,464) (709,943)
416,688 501,311
Other Assets (Note 10)
Deposits and other assets 10,808 9,764
Deferred income taxes (Note 6) 9,334 -
20,142 9,764
Total Assets $ 857,087 $ 866,698
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands)
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities (Note 10)
Accounts payable $ 87,511 $ 92,584
Accrued liabilities (Note 3) 187,267 189,669
Accrued claims costs (Note 2) 95,780 81,955
Federal and other income taxes (Note 6) 4,083 1,349
Total Current Liabilities 374,641 365,557
Long-Term Liabilities (Note 10)
Long-term debt (Note 4) 15,100 15,100
Accrued claims costs (Note 2) 110,200 103,070
Employee benefits (Note 7) 113,312 105,096
Other liabilities 33,136 9,878
Deferred income taxes (Note 6) - 8,889
Total Liabilities 646,389 607,590
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
and outstanding 22,025,323 shares 220 220
Additional paid-in capital 57,174 57,174
Cumulative translation adjustment (4,910) (5,611)
Retained earnings 158,214 207,325
Total Shareholders' Equity 210,698 259,108
Total Liabilities and Shareholders' Equity $ 857,087 $ 866,698
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
Years Ended December 31,
(Dollars in thousands except per share data)
1996 1995 1994
REVENUES $ 2,146,172 $ 2,106,529 $ 1,936,412
COSTS AND EXPENSES
Operating expenses 1,923,260 1,859,513 1,710,640
Selling and administrative expenses 231,876 226,246 203,338
Depreciation 64,102 63,556 70,177
2,219,238 2,149,315 1,984,155
OPERATING LOSS (73,066) (42,786) (47,743)
OTHER INCOME (EXPENSE)
Investment income 263 756 497
Interest expense (843) (918) (880)
Miscellaneous, net (Note 10) (4,131) (850) 3,648
(4,711) (1,012) 3,265
Loss before income tax benefits
and extraordinary charge (77,777) (43,798) (44,478)
Income tax benefits (Note 6) (22,201) (13,889) (14,274)
Loss before extraordinary charge (55,576) (29,909) (30,204)
Extraordinary charge from write-off of
intrastate operating rights, net of
related income tax benefits of $1,229 - - 1,912
NET LOSS (55,576) $ (29,909) $ (32,116)
Average shares outstanding (Note 2) 22,025,323 22,025,323 22,025,323
LOSS PER SHARE
Loss before extraordinary charge $ (2.52) $ (1.36) $ (1.37)
Extraordinary charge - - (0.09)
Loss per share $ (2.52) $ (1.36) $ (1.46)
<FN>
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended December 31,
(Dollars in thousands)
1996 1995 1994
Cash and Cash Equivalents, Beginning
of Period $ 26,558 $ 23,116 $ 10,764
Cash Flows from Operating Activities
Net loss (55,576) (29,909) (32,116)
Adjustments to reconcile net loss to
cash provided by operating activities:
Depreciation and amortization 64,565 63,902 73,443
Increase (decrease) in deferred income
taxes (Note 6) (27,203) 18,556 (17,734)
Gains from property disposals, net (3,089) (2,360) (749)
Changes in assets and liabilities:
Receivables (34,484) (4,851) (21,362)
Accounts payable 1,199 5,677 851
Accrued liabilities 4,612 (1,883) 19,110
Accrued claims costs 22,531 4,811 1,622
Income taxes 2,715 (791) 185
Employee benefits 7,216 (13,515) 13,553
Other 20,059 2,135 (3,064)
Net Cash Provided by Operating Activities 2,545 41,772 33,739
Cash Flows from Investing Activities
Capital expenditures (48,203) (111,962) (32,120)
Proceeds from sales of property 8,329 6,529 4,942
Net Cash Used by Investing Activities (39,874) (105,433) (27,178)
Cash Flows from Financing Activities
Former parent investment and advances, net (Note 10) 59,450 67,103 5,791
Net Cash Provided by Financing Activities 59,450 67,103 5,791
Increase in Cash and Cash Equivalents 22,121 3,442 12,352
Cash and Cash Equivalents, End of Period $ 48,679 $ 26,558 $ 23,116
<FN>
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in thousands)
Common Stock Additional Cumulative
Number of Paid-in Translation Retained
Shares Amount Capital Adjustment Earnings Total
Balance, December 31, 1993 22,025,323 $ 220 $ 57,174 $ (3,533) $ 213,213 $ 267,074
Net cash infusion from former parent (Note 10) - - - - 5,791 5,791
Net asset transfers to former parent - - - - (2,790) (2,790)
Dividend of equity interest in affiliates - - - - (23,250) (23,250)
Net loss - - - - (32,116) (32,116)
Translation adjustment - - - (1,130) - (1,130)
Balance, December 31, 1994 22,025,323 220 57,174 (4,663) 160,848 213,579
Net cash infusion from former parent (Note 10) - - - - 67,103 67,103
Net asset transfers from former parent - - - - 9,283 9,283
Net loss - - - - (29,909) (29,909)
Translation adjustment - - - (948) - (948)
Balance, December 31, 1995 22,025,323 220 57,174 (5,611) 207,325 259,108
Net cash infusion from former parent (Note 10) - - - - 59,450 59,450
Net asset transfers to former parent (Note 10) - - - - (52,985) (52,985)
Net loss - - - - (55,576) (55,576)
Translation adjustment - - - 701 - 701
Balance, December 31, 1996 22,025,323 $ 220 $ 57,174 $ (4,910) $ 158,214 $ 210,698
<FN>
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Consolidated Financial Statements and Basis of Presentation: The
accompanying consolidated financial statements include the accounts of
Consolidated Freightways Corporation (the Company) and its wholly owned
subsidiaries. The Company was a wholly owned subsidiary of Consolidated
Freightways, Inc., (the former parent) through December 1, 1996. On
December 2, 1996, the Company was spun-off in a tax free distribution (the
Distribution) to shareholders of the former parent at a rate of one Company
share for every two shares outstanding of the former parent.
The Company, incorporated in the state of Delaware, consists of
Consolidated Freightways Corporation of Delaware (CFCD), a nationwide motor
carrier, and its Canadian operations, including Canadian Freightways, Ltd.
(CFL), Epic Express, Milne & Craighead, Canadian Sufferance Warehouses and
other related businesses as well as the Leland James Service Corporation
(LJSC), an administrative service provider. The Company provides less-than-
truckload transportation and logistics services nationwide and in parts of
Canada, Mexico, the Caribbean area, Latin and Central America, Europe and
Pacific Rim countries. Approximately 95% of the Company's revenues are
domestic.
The amounts included in the accompanying consolidated financial
statements through December 1, 1996 are based upon historical amounts
included in the consolidated financial statements of the former parent.
The consolidated financial statements are presented as if the Company had
operated as an independent stand-alone entity prior to the Distribution,
except that it has not been allocated any portion of the former parent's
consolidated borrowings or interest expense thereon. These consolidated
financial statements include the net assets and results of operations
directly related to the Company for all periods presented.
2. Principal Accounting Policies
Recognition of Revenues: Transportation freight charges are
recognized as revenue when freight is received for shipment. The estimated
costs of performing the total transportation services are then accrued.
This revenue recognition method does not result in a material difference
from in-transit or completed service methods of recognition.
Cash and Cash Equivalents: The Company considers highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Trade Accounts Receivable, Net: Trade accounts receivable are net of
allowances of $9,692,000 and $9,349,000 at December 31, 1996 and 1995,
respectively.
Property, Plant and Equipment: Property, plant and equipment are
depreciated on a straight-line basis over their estimated useful lives,
which are generally 25 years for buildings and improvements, 6 to 10 years
for tractor and trailer equipment and 3 to 10 years for most other
equipment. Leasehold improvements are amortized over the shorter of the
terms of the respective leases or the useful lives of the assets.
Expenditures for equipment maintenance and repairs are charged to
operating expenses as incurred; betterments are capitalized. Gains or
losses on sales of equipment are recorded in operating expenses.
Income Taxes: The Company follows the liability method of accounting
for income taxes. Prior to the Distribution, the Company was included in
the consolidated federal income tax return and consolidated unitary state
income tax returns of the former parent. Income tax benefits presented in
periods prior to the Distribution represent a pro-rata share of the former
parent's consolidated income tax expense and approximate those that would
have been recorded had the Company filed separate tax returns. Income tax
payments related to domestic operations prior to the Distribution were
settled in the current period through the advance account with the former
parent. Deferred income taxes presented for periods prior to the
Distribution represent a pro-rata share of the former parent's deferred
income tax accounts and approximate those that would have been recorded had
the Company filed separate income tax returns.
Accrued Claims Costs: The Company provides for the uninsured costs of
medical, casualty, liability, vehicular, cargo and workers' compensation
claims. Such costs are estimated each year based on historical claims and
unfiled claims relating to operations conducted through December 31. The
actual costs may vary from estimates based upon trends of losses for filed
claims and claims estimated to be incurred. The long-term portion of
accrued claims costs relates primarily to workers' compensation claims
which are payable over several years.
Interest Expense: The interest expense presented in the Statements of
Consolidated Operations is primarily related to industrial revenue bonds as
discussed in Note 4. The interest expense as presented is not necessarily
intended to reflect the expense that would have been incurred had the
Company been an independent stand-alone company prior to the Distribution.
Earnings per Share: Earnings per share are based upon the weighted
average number of common shares outstanding. The number of shares used to
compute earnings per share was 22,025,323 for all periods presented which
represents the number of shares issued in the Distribution.
Estimates: Management makes estimates and assumptions when preparing
the financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions affect the amounts reported in
the accompanying financial statements and notes thereto. Actual results
could differ from those estimates.
Reclassification: Certain amounts in prior year's financial
statements have been reclassified to conform to the current year
presentation.
3. Accrued Liabilities
Accrued liabilities consisted of the following as of December 31:
1996 1995
(Dollars in thousands)
Accrued holiday and vacation pay $ 70,728 $ 67,515
Other accrued liabilities 40,579 45,425
Wages and salaries 27,287 24,150
Accrued union health and welfare 21,296 21,667
Accrued taxes other than income taxes 18,040 19,757
Estimated revenue adjustments 9,337 11,155
Total accrued liabilities $187,267 $189,669
4. Long-Term Debt
As of December 31, 1996 and 1995, long-term debt consisted of
$15,100,000 of industrial revenue bonds with rates between 7.0% and 7.25%,
due at various dates in 2003 and 2004.
In November 1996, the Company entered into a $225.0 million secured
credit facility with several banks to provide for working capital and
letter of credit needs. Borrowings under the agreement, which expires in
2000, bear interest based upon either prime or LIBOR, plus a margin
dependent on the Company's financial performance. Borrowings and letters
of credit are secured by substantially all of the assets (excluding real
property and certain rolling stock) of CFCD, all of the outstanding stock
of CFCD and 65% of the outstanding capital stock of CFL. As of December
31, 1996, the Company had no short-term borrowings and $50 million of
letters of credit outstanding under this facility. The continued
availability of funds under this credit facility will require that CFCD
remain in compliance with certain financial covenants. The most
restrictive covenants require the Company to maintain a minimum level of
earnings before interest, taxes, depreciation and amortization, minimum
amounts of tangible net worth and fixed charge coverage, and limit capital
expenditures. The Company is in compliance as of December 31, 1996 and
expects to be in compliance with these covenants in 1997.
Cash paid for interest was $877,000, $1,485,000, and $1,084,000,
including $339,000, $361,000 and $249,000 of interest capitalized, for the
years ended December 31, 1996, 1995 and 1994, respectively.
Based on interest rates currently available to the Company for debt
with similar terms and maturities, the fair value of long-term debt
exceeded book value at December 31, 1996 and 1995 by 11.6% and 11.3%,
respectively.
There are no aggregate annual maturities or sinking fund requirements
of long-term debt for each of the next five years ending December 31, 2001.
5. Leases
The Company is obligated under various non-cancelable leases which
expire at various dates through 2003.
Future minimum lease payments under all leases with initial or
remaining non-cancelable lease terms in excess of one year as of December
31, 1996, are $25,234,000 in 1997, $20,207,000 in 1998, $3,953,000 in 1999,
$2,386,000 in 2000, $1,388,000 in 2001, and $1,205,000 thereafter.
Rental expense for operating leases is comprised of the following:
1996 1995 1994
(Dollars in thousands)
Minimum rentals $47,146 $56,118 $49,452
Less sublease rentals (1,029) (5,768) (5,641)
$46,117 $50,350 $43,811
6. Income Taxes
The components of pretax income (loss) and income taxes (benefits) are
as follows:
1996 1995 1994
(Dollars in thousands)
Pretax income (loss)
U.S. corporations $(86,829) $(53,674) $(53,144)
Foreign corporations 9,052 9,876 8,666
Total pretax loss $(77,777) $(43,798) $(44,478)
Income taxes (benefits)
Current
U.S. Federal $ 11,014 $ (32,078) $(2,656)
State and local (2,048) (4,630) 1,439
Foreign 4,467 4,263 4,677
13,433 (32,445) 3,460
Deferred
U.S. Federal (35,098) 16,183 (16,834)
State and local (536) 1,861 (705)
Foreign - 512 (195)
(35,634) 18,556 (17,734)
Total income tax benefits $(22,201) $(13,889) $(14,274)
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. Although
realization is not assured, management believes it more likely than not
that all deferred tax assets will be realized.
The components of deferred tax assets and liabilities in the
Consolidated Balance Sheets at December 31 relate to the following:
1996 1995
(Dollars in thousands)
Deferred taxes - current
Assets
Reserves for accrued claims costs $ 29,434 $ 16,224
Other reserves not currently deductible 16,573 11,822
Liabilities
Unearned revenue, net (10,537) (9,987)
Total deferred taxes - current 35,470 18,059
Deferred taxes - non current
Assets
Reserves for accrued claims costs 42,477 31,326
Employee benefits 20,452 14,953
Retiree health benefits 23,539 22,216
Federal net operating loss and foreign tax
credit carryovers 5,418 2,744
Liabilities
Depreciation (63,939) (59,717)
Tax benefits from leasing transactions (15,166) (18,047)
Other (3,447) (2,364)
Total deferred taxes - non current 9,334 (8,889)
Net deferred taxes $ 44,804 $ 9,170
For income tax reporting purposes, the Company has net operating loss
carryovers of $9.0 million as of December 31, 1996. The related tax
benefit of $3.2 million expires in 2011. The Company has $2.2 million of
foreign tax credit carryovers as of December 31, 1996 which expire in 1998.
Income tax benefits varied from the amounts calculated by applying the
U.S. statutory income tax rate to the pretax loss as set forth in the
following reconciliation:
1996 1995 1994
U.S. statutory tax rate (35.0)% (35.0)% (35.0)%
State income taxes (benefits), net of
federal income tax benefit (2.0) (3.0) 0.4
Foreign taxes in excess of
U.S. statutory rate 1.7 3.0 3.3
Non-deductible operating
expenses 2.6 4.1 4.0
Fuel tax credit (0.4) (1.1) (0.6)
Foreign tax credit effects 0.7 -- (2.8)
Other, net 3.9 0.3 (1.4)
Effective income tax rate (28.5)% (31.7)% (32.1)%
The cumulative undistributed earnings of the Company's foreign
subsidiaries (approximately $61 million at December 31, 1996), which if
remitted are subject to withholding tax, have been reinvested indefinitely
in the respective foreign subsidiaries' operations unless it becomes
advantageous for tax or foreign exchange reasons to remit these earnings.
Therefore, no withholding or U.S. taxes have been provided. The amount of
withholding tax that would be payable on remittance of the undistributed
earnings would approximate $3 million.
7. Employee Benefit Plans
Effective December 2, 1996, the Company withdrew from the former
parent's pension plan and established the Consolidated Freightways
Corporation Pension Plan, (the Pension Plan), a defined benefit pension
plan. The Pension Plan covers the Company's non-contractual employees in
the United States. The actuarial present value of projected and accumulated
benefit obligations and the related components of pension cost for the
Company's active and inactive non-contractual employees were allocated to
the Company.
The Company's funding policy is to contribute the minimum required tax-
deductible contribution for the year. However, it may increase its
contribution above the minimum if appropriate to its tax and cash position
and the Pension Plan's funded status. Benefits under the Pension Plan are
based on a career average final five-year pay formula.
The Company's annual pension provision is based on an independent
actuarial computation. Approximately 89% of the Pension Plan assets are
invested in publicly traded stocks and bonds. The remainder is invested in
temporary cash investments, real estate funds and investment capital funds.
Following is additional information relating to the Pension Plan as of
December 31:
1996 1995
(Dollars in thousands)
Accumulated benefit obligation, including
vested benefits of $183,600 in 1996 and
$180,901 in 1995 $(191,225) $(192,450)
Effect of projected future compensation
levels (22,767) (35,060)
Projected benefit obligation (213,992) (227,510)
Pension Plan assets at market value 213,787 192,450
Pension Plan assets less than
projected benefit obligation (205) (35,060)
Unrecognized prior service costs 9,841 13,440
Unrecognized net gain (49,123) (3,370)
Unrecognized net asset at transition, being
amortized over 18 years (7,725) (11,760)
Pension Plan liability $ (47,212) $ (36,750)
Weighted average discount rate 8.0% 7.25%
Expected long-term rate of return
on assets 9.5% 9.5%
Rate of increase in future
compensation levels 5.0% 5.0%
Net pension cost was allocated from the former parent's Pension Plan
on an actuarially determined pro-rata basis and included the following:
1996 1995 1994
(Dollars in thousands)
Cost of benefits earned during
the year $ 7,055 $ 5,610 $ 8,408
Interest cost on projected
benefit obligation 16,596 15,130 9,707
Actual gain arising from
plan assets (32,163) (34,490) (1,330)
Net amortization and deferral 13,628 20,330 (8,837)
Net pension cost $ 5,116 $ 6,580 $ 7,948
Approximately 85% of the Company's domestic employees are covered by
union-sponsored, collectively bargained, multi-employer pension plans. The
Company contributed and charged to expense $116,712,000 in 1996,
$104,042,000 in 1995, and $89,470,000 in 1994 for such plans. Those
contributions were made in accordance with negotiated labor contracts and
generally were based on time worked.
Prior to the Distribution, the Company's non-contractual employees
participated in the former parent's retiree health plan. The Company has
subsequently established its own retiree health plan similar to the former
parent's. The Company was allocated a portion of the former parent's
liability based upon an actuarial computation. The plan provides benefits
to non-contractual employees at least 55 years of age with 10 years or more
of service. The retiree health plan limits benefits for participants who
were not eligible to retire before January 1, 1993, to a defined dollar
amount based on age and years of service and does not provide employer-
subsidized retiree health care benefits for employees hired on or after
January 1, 1993.
The following information sets forth the Company's allocated total
post retirement benefit amounts included in Employee Benefits in the
Consolidated Balance Sheets as of December 31:
1996 1995
(Dollars in thousands)
Accumulated post retirement benefit obligation
Retirees and other inactives $38,681 $37,828
Participants currently eligible to retire 8,237 8,115
Other active participants 6,456 9,681
53,374 55,624
Unrecognized valuation gain 11,629 5,693
Accrued post retirement benefit cost $65,003 $61,317
Weighted average discount rate 8.0% 7.25%
Average health care cost trend rate
First year 9.0% 10.0%
Declining to (year 1999) 6.0% 6.0%
Net periodic post retirement benefit costs were allocated to the
Company from the former parent's plan on an actuarially determined basis
and included the following components:
1996 1995 1994
(Dollars in thousands)
Cost of benefits earned during
the year $ 540 $ 432 $ 894
Interest cost on accumulated post
retirement obligation 4,000 3,768 3,602
Net amortization and deferral (103) (526) (246)
Net periodic post retirement
benefit cost $ 4,437 $ 3,674 $ 4,250
The increase in the accumulated post retirement benefit obligation and
the net periodic post retirement benefit cost, given a one percent increase
in the health care cost trend rate assumption, would be 10.4% for the year
ended December 31, 1996, 9.2% for the year ended December 31, 1995, and
9.6% for the year ended December 31, 1994.
The Company's non-contractual employees in the United States are
eligible to participate in the Company's Stock and Savings Plan. This is
a 401(k) plan which allows employees to make contributions that the Company
matches with common stock up to 50% of the first three percent of a
participant's basic compensation. Prior to the Distribution, the Company's
non-contractual employees participated in the former parent's Thrift and
Stock Plan. The Company's contribution, which is charged as an expense,
vests immediately with the employee and totaled $1,926,000 in 1996,
$1,990,000 in 1995, and $2,600,000 in 1994.
8. Stock Compensation Plans
The Company has adopted the Consolidated Freightways Corporation 1996
Stock Option and Incentive Plan (the Plan). The Company has reserved
3,303,798 shares for the Plan. Under the Plan, restricted stock can be
granted to officers, non-employee directors and certain designated
employees. The shares vest over three years and are contingent upon the
Company's stock price achieving pre-determined increases over the grant
price for 10 consecutive trading days following each year. All restricted
stock awards entitle the participant credit for any dividends. Upon
issuance of the restricted shares, unearned compensation is charged to
shareholders' equity. Compensation expense is recognized based upon the
current market price and the extent to which performance criteria are being
met. The Company had 2,146,450 granted but unissued shares of restricted
stock for which compensation expense will be recognized over future vesting
periods as appropriate. As of December 31, 1996 those shares had an
aggregate market value of $19,049,700. The weighted average market value
of the shares on the grant date was $7.475 per share.
The Plan also allows for officers, non-employee directors and certain
designated employees to be granted options to purchase common stock of the
Company. The terms of the options will be set at the date of grant. No
options have been granted as of December 31, 1996.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Adoption of SFAS 123 is optional, and the
Company has opted to account for stock-based compensation in accordance
with APB 25, "Accounting for Stock Issued to Employees." The Company will
make all disclosures required by SFAS 123.
9. Contingencies
The Company and its subsidiaries are involved in various lawsuits
incidental to their businesses. It is the opinion of management that the
ultimate outcome of these actions will not have a material impact on the
Company's financial position or results of operations.
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. Based upon cost studies
performed by independent third parties, the Company believes its
obligations with respect to such sites would not have a material adverse
effect on the its financial condition or results of operations.
CFCD and the International Brotherhood of Teamsters (IBT) are parties
to the National Master Freight Agreement which expires on March 31, 1998.
Although CFCD believes that it will be able to successfully negotiate a new
contract with the IBT, there can be no assurances 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
CFCD's business, financial condition or results of operations.
10. Related Party Transactions
Prior to the Distribution, the Company participated in the former
parent's centralized cash management system and, consequently, its
operating and capital expenditure needs were met by the former parent to
the extent that cash from operating activities was insufficient. The
related interest income (expense) on these advances included in
Miscellaneous, net in the Statements of Consolidated Operations was
approximately ($6,115,000), $(1,729,000), and $8,731,000 for the years
ended December 31 1996, 1995 and 1994, respectively.
The Company also received certain corporate support services from the
former parent, namely accounting, finance, legal and treasury services.
Costs were allocated to the Company using both incremental and proportional
methods on a revenue and capital basis. The resulting charge to the
Company was $10,600,000 for the period January 1, 1996 through the
Distribution date. For the years ended December 31, 1995 and 1994, the
charges were $11,946,000, and $14,749,000, respectively. These costs are
included in Selling and Administrative Expenses in the Statements of
Consolidated Operations. The Company believes that the allocation
methods used provided the Company with a reasonable share of such expenses
and approximate amounts which would have been incurred had the Company
operated on an independent, stand-alone basis.
LJSC provided various administrative services to the former parent and
its subsidiaries under service contracts at an aggregate charge of
$64,228,000 for the period January 1, 1996 through the Distribution date.
The aggregate charges for the years ended December 31, 1995 and 1994 were
$84,471,000 and $71,237,000, respectively. At the time of the
Distribution, certain administrative service departments of LJSC that
provided services to the former parent and its subsidiaries were
transferred to a subsidiary of the former parent. In connection with the
transfer of these departments, certain net assets and liabilities, in the
amounts of $11,163,000 and $13,795,000, respectively, were transferred
from LJSC to the former parent.
In connection with the Distribution, certain real properties of CFCD
with an aggregate net book value of $57,574,000 were transferred to
the former parent. Additionally, $1,957,000 of net liabilities were also
transferred from CFCD to the former parent.
The Company entered into a Transition Services Agreement with its
former parent under which the former parent will provide information
systems, data processing, computer and communications, payroll and other
administrative services. Services will be paid for by the Company based
upon an arm's length
negotiated basis. The agreement is for three years but contains provisions
that are cancelable by the Company on six months written notice. The
former parent can cancel any and all services, except telecommunications
and data processing, after the first anniversary of the agreement on six
months notice. For the period from the Distribution date to December 31,
1996, the Company was charged $2,600,000 for services under this agreement.
The Company also entered into agreements with its former parent to provide
for the allocation of taxes and certain liabilities arising from periods
prior to the Distribution.
As described in Note 2, the Company provides for the uninsured costs
of workers' compensation, vehicular, medical, casualty and cargo claims.
Prior to the Distribution, the former parent administered claims made
against the Company and, where required by law or contract, provided the
necessary guarantees or collateral for the performance of the Company's
obligations in each state. The former parent indemnified certain states,
insurance companies and sureties against the failure of the Company to pay
judgments for workers' compensation and casualty claims. In some cases,
these indemnities are supported by letters of credit under which the former
parent is liable to the issuing bank.
It is not feasible for the former parent to be removed from its
indemnification obligations to the states in which the Company operates
with respect to workers' compensation and employer's liability claims
arising prior to the Distribution date. The former parent will continue to
administer these claims for the Company. The Company entered into an
indemnification agreement with the former parent with respect to claims
incurred prior to the Distribution date which provides that the Company
will provide security to the former parent for its obligations. The
Company has pledged real properties and letters of credit in the amounts of
$50.0 million and $30.0 million, respectively, to secure those obligations.
The potential liabilities required to be indemnified by the former parent
should be reduced over time following the Distribution date as the
Company's pending claims are resolved.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
Quarterly Financial Data
(Unaudited)
(Dollars in thousands except per share data)
March 31 June 30 September 30 December 31
1996 - Quarter Ended
Revenues $502,544 $529,997 $559,605 $554,026
Operating loss (24,557) (13,667) (2,301) (32,541)(a)
Loss before income tax benefits (26,342) (14,498) (2,683) (34,254)
Income tax benefits (6,206) (6,566) (928) (8,501)
Net loss (20,136) (7,932) (1,755) (25,753)
Net loss per share (c) (0.91) (0.36) (0.08) (1.17)
March 31 June 30 September 30 December 31
1995 - Quarter Ended
Revenues $546,662 $535,473 $525,357 $499,037
Operating income (loss) 6,518 767 (7,907) (42,164)(b)
Income (loss) before income taxes (benefits) 6,188 1,324 (6,919) (44,391)
Income taxes (benefits) 1,980 424 (2,214) (14,079)
Net income (loss) 4,208 900 (4,705) (30,312)
Net income (loss) per share (c) 0.19 0.04 (0.21) (1.38)
<FN>
(a) Includes previously disclosed $15 million charge for the increase in workers' compensation reserve.
(b) Includes approximately $26 million of costs related to the implementation of BAS.
(c) Earnings per share are calculated based upon 22,025,323 shares, which represents the number of shares
issued in the Distribution.
Five Year Financial Summary
Consolidated Freightways Corporation
And Subsidiaries
Years Ended December 31
(Dollars in thousands except per share data)
(Unaudited)
1996 1995 1994 1993 1992
SUMMARY OF OPERATIONS
Revenues $ 2,146,172 $ 2,106,529 $ 1,936,412 $ 2,074,323 $ 2,154,697
Operating income (loss) (73,066) (42,786) (47,743) 29,403 23,665(b)
Depreciation and amortization 64,565 63,902 73,443 83,739 83,650
Investment income 263 756 497 459 1,315
Interest expense 843 918 880 443 5,870
Income (loss) before income taxes (benefits) (77,777) (43,798) (44,478) 36,769 30,190
Income taxes (benefits) (22,201) (13,889) (14,274) 16,628 4,496
Net income (loss) (55,576) (29,909) (32,116)(a) 20,141 (9,192)(c)
Cash from operations 2,545 41,772 33,739 67,186 117,282
PER SHARE
Net income (loss) (2.52) (1.36) (1.46)(a) 0.91 (0.42)(c)
Shareholders' equity 9.57 11.76 9.70 12.13 12.30
FINANCIAL POSITION
Cash and cash equivalents 48,679 26,558 23,116 10,764 7,287
Property, plant and equipment, net 416,688 501,311 452,878 500,866 543,245
Total assets 857,087 866,698 852,510 878,934 885,450
Capital expenditures 48,203 111,962 32,120 49,395 90,307
Long-term debt 15,100 15,100 15,100 15,100 15,100
Shareholders' equity 210,698 259,108 213,579 267,074 270,802
RATIOS AND STATISTICS
Current ratio 1.1 to 1 1.0 to 1 1.1 to 1 1.0 to 1 1.1 to 1
Net income (loss) as % of revenues (2.6)% (1.4)% (1.7)% 1.0% (0.4)%
Effective income tax rate (28.5)% (31.7)% (32.1)% 45.2% 14.9%
Long-term debt as % of
total capitalization 7% 6% 7% 5% 6%
Return on average invested capital (22)% (11)% (11)% 6% (3)%
Return on average shareholders' equity (24)% (13)% (13)% 8% (4)%
Average shares outstanding 22,025,323 22,025,323 22,025,323 22,025,323 22,025,323
Number of shareholders 13,500 n/a n/a n/a n/a
Number of employees 20,300 20,200 22,000 22,100 23,200
<FN>
(a) Includes $1.9 million ($.09 per share) extraordinary charge, net of related tax benefits, for the write-off of intrastate
operating rights.
(b) Includes special charges of $17.3 million related to operation changes at CFCD and the write-off of Canadian operating
rights.
(c) Includes $30.2 million ($1.37 per share) cumulative effect of change in method of accounting for post retirement benefits
and $4.7 million ($.21 per share) extraordinary charge from early retirement of debt.