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, 1997
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
175 Linfield Drive, Menlo Park, CA 94025
Telephone Number (415) 326-1700
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, 1997: 22,025,323
CONSOLIDATED FREIGHTWAYS CORPORATION
FORM 10-Q
Quarter Ended June 30, 1997
_____________________________________________________________________
_____________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3
Statements of Consolidated Operations -
Three and Six Months Ended June 30, 1997 and 1996 5
Statements of Consolidated Cash Flows -
Six Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 59,801 $ 48,679
Trade accounts receivable, net of allowances 317,664 285,410
Other receivables 8,495 3,339
Operating supplies, at lower of average
cost or market 9,491 11,511
Prepaid expenses 42,292 35,848
Deferred income taxes 33,254 35,470
Total Current Assets 470,997 420,257
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 78,751 78,989
Buildings and improvements 342,853 343,023
Revenue equipment 560,502 559,823
Other equipment and leasehold improvements 116,921 115,317
1,099,027 1,097,152
Accumulated depreciation and amortization (697,272) (680,464)
401,755 416,688
OTHER ASSETS
Deposits and other assets 11,399 10,808
Deferred income taxes 9,581 9,334
20,980 20,142
TOTAL ASSETS $ 893,732 $ 857,087
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 77,305 $ 87,511
Accrued liabilities 218,755 187,267
Accrued claims costs 84,574 95,780
Federal and other income taxes 12,809 4,083
Total Current Liabilities 393,443 374,641
LONG-TERM LIABILITIES
Long-term debt 15,100 15,100
Accrued claims costs 116,289 110,200
Employee benefits 115,189 113,312
Other liabilities and deferred credits 33,001 33,136
Total Liabilities 673,022 646,389
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 (5,070) (4,910)
Retained earnings 168,386 158,214
Total Shareholders' Equity 220,710 210,698
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 893,732 $ 857,087
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(Dollars in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
REVENUES $ 578,623 $ 529,997 $ 1,124,256 $ 1,032,541
COSTS AND EXPENSES
Salaries, wages and benefits 378,483 367,631 736,480 723,982
Operating expenses 88,243 84,751 178,985 167,576
Purchased transportation 45,591 41,197 88,928 78,785
Operating taxes and licenses 18,557 19,259 36,598 38,259
Claims and insurance 17,561 14,068 31,360 28,313
Depreciation 13,512 16,758 26,692 33,850
561,947 543,664 1,099,043 1,070,765
OPERATING INCOME (LOSS) 16,676 (13,667) 25,213 (38,224)
OTHER INCOME (EXPENSE)
Investment income 237 93 431 171
Interest expense (871) (195) (1,170) (435)
Miscellaneous, net (711) (729) (1,144) (2,352)
(1,345) (831) (1,883) (2,616)
Income (loss) before income
taxes (benefits) 15,331 (14,498) 23,330 (40,840)
Income taxes (benefits) 8,413 (6,566) 13,158 (12,772)
NET INCOME (LOSS) $ 6,918 $ (7,932) $ 10,172 $ (28,068)
Primary average shares outstanding 22,025,323 22,025,323 22,025,323 22,025,323
Fully diluted average
shares outstanding (1) 22,766,560 22,025,323 22,025,323 22,025,323
Primary Earnings (Loss) per Share: $ 0.31 $ (0.36) $ 0.46 $ (1.27)
Fully Diluted Earnings (Loss) per Share $ 0.30 $ (0.36) $ 0.46 $ (1.27)
<FN>
(1) The three months ended June 30, 1997 includes the dilutive effects of the Company's
restricted stock plan. See Note 2.
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Six Months Ended
June 30,
1997 1996
(Dollars in thousands)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 48,679 $ 26,558
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 10,172 (28,068)
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 27,574 35,105
Increase (decrease) in deferred income taxes 1,969 (8,303)
Gains from property disposals, net (804) (1,404)
Changes in assets and liabilities:
Receivables (37,410) (37,097)
Prepaid expenses (6,444) (3,566)
Accounts payable (10,206) 1,317
Accrued liabilities 31,488 17,713
Accrued claims costs (5,117) 4,538
Income taxes 8,726 (1,349)
Employee benefits 1,877 3,594
Other 324 5,327
Net Cash Provided (Used) by Operating Activities 22,149 (12,193)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (12,653) (29,409)
Proceeds from sales of property 1,626 3,363
Net Cash Used by Investing Activities (11,027) (26,046)
CASH FLOWS FROM FINANCING ACTIVITIES
Former parent investments and advances -- 49,438
Net Cash Provided by Financing Activities -- 49,438
Increase in Cash and Cash Equivalents 11,122 11,199
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 59,801 $ 37,757
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of
Consolidated Freightways Corporation and subsidiaries (the Company)
have been prepared by the Company, without audit by independent
public accountants, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management,
the consolidated financial statements include all normal recurring
adjustments necessary to present fairly the information required to
be set forth therein. Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted from these statements pursuant to such rules and regulations
and, accordingly, should be read in conjunction with the consolidated
financial statements included in the Company's 1996 Annual Report to
Shareholders.
There have been no significant changes in the accounting
policies of the Company. There were no significant changes in the
Company's commitments and contingencies as previously described in
the 1996 Annual Report to Shareholders and related annual report to
the Securities and Exchange Commission on Form 10-K.
2. Stock Compensation
Under the Company's Stock Option and Incentive Plan, the
Company previously granted 2,146,450 shares of restricted stock to
non-employee directors and certain designated employees in December
1996. During the three months ended June 30, 1997, the Company
granted a net additional 460,817 shares to certain designated
employees. As of June 30, 1997, these granted but unissued shares
had an aggregate market value of $42.7 million. Subsequent to June
30, 1997, the Company granted an additional 680,925 shares to the
remainder of its regular full-time 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 anniversary of the grant.
The grants made in 1997 are subject to the same vesting schedule and
restrictions as the initial grant. If performance conditions are met
in December 1997, approximately 1,096,100 shares of common stock, or
one-third of the total grant, will be issued and compensation expense
will be recognized based on the then market price of the stock. Based
on the market price of the stock on June 30, 1997, the Company would
recognize a $10.8 million non-cash charge, net of related tax
benefits.
3. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 128
"Earnings per Share." This statement changes the method of
calculating earnings per share. Primary earnings per share is
replaced with Basic Earnings per Share and is calculated using only
the weighted average shares outstanding for the period, without
giving effect to potentially dilutive instruments. Fully diluted
earnings per share is calculated similar to that under APB 15, except
that under the treasury stock method, the average stock price for the
period is used instead of the higher of the average or closing stock
price. This statement is effective for financial statements of
periods ending after December 15, 1997, with restatement of prior
period earnings per share required. Earlier application is not
permitted. If the Company adopted this statement as of January 1,
1997, basic and fully diluted earnings per share for the three and
six months ended June 30, 1997 would have been $0.31 and $0.31 and
$0.46 and $0.46, respectively. For the three and six months ended
June 30, 1996, basic and fully diluted earnings (loss) per share
would have been ($0.36) and ($0.36) and ($1.27) and ($1.27),
respectively.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
requires that all items of comprehensive income be prominently
displayed in the financial statements. Comprehensive income is the
change in equity during a period from transactions or other events
with non-owner sources. This statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of prior year
financial statements is required. If the Company adopted this
statement as of January 1, 1997, comprehensive income for the three
and six months ended June 30, 1997 would have been $6,835,000 and
$10,076,000, respectively. For the three and six months ended June
30, 1996, comprehensive loss would have been $(7,951,000) and
$(27,842,000), respectively.
Also in June 1997 the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires the
presentation of financial information on the same basis that it is
used within an organization to evaluate segment performance and
allocate resources. It also will require enhanced disclosures about
geographic, product and service information. This statement is
effective for financial statements of periods beginning after
December 15, 1997. Management expects that adoption of this
statement will not have a material effect on its reporting
requirements.
4. Contingencies
The Company and its subsidiaries are defendants 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 adverse effect on the Company's consolidated financial
position or results of operations.
CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company earned net income of $6.9 million and $10.2 million
for the three and six months ended June 30, 1997, on year-over-year
revenue increases of 9.2% and 8.9%, respectively. This compares with
net losses of $7.9 million and $28.1 million for the same periods in
the prior year. The increases in revenues were due to increased net
revenue per hundred weight and increased tonnage levels. Net revenue
per hundred weight increased 5.6% and 4.1%, respectively, over the
same periods in the prior year as the Company continued to benefit
from the retention of the general rate increase implemented on
January 1, 1997. Year-over-year total and higher rated less-than-
truckload tonnage increased 3.9% and 4.1%, respectively, for the
three months ended June 30, 1997 and 5.2% and 5.2%, respectively, for
the six months ended June 30, 1997. The increases in tonnage levels
were primarily attributable to the fact that the prior year tonnage
levels were depressed following the implementation of the Business
Accelerator System (BAS), a re-engineering of the Company's freight
flow system, in October 1995.
Operating income was $16.7 million for the three months ended
June 30, 1997, an increase of $30.3 million over the same period last
year while the six month operating income of $25.2 million was a
$63.4 million improvement. The operating ratio for the three months
ended June 30, 1997 improved to 97.1% from 102.6% in the prior year
while the operating ratio for the six month period improved to 97.8%
from 103.7%. The improvements were due to the previously mentioned
increases in net revenue per hundred weight combined with lower cost
per hundred weight. Cost per hundred weight decreased 1.4% and 3.2%
for the three and six months ended June 30, 1997, respectively,
compared with the prior year for reasons discussed below. Prior year
results were adversely impacted by depressed tonnage levels and
expenses incurred associated with the implementation of BAS.
Salaries, wages and benefits increased 3.0% and 1.7% for the
three and six months ended June 30, 1997, respectively, on tonnage
increases of 3.9% and 5.2%, respectively, discussed above. The
marginal increases in salaries, wages and benefits were due to
productivity gains, improved workers' compensation claims experience
and increased use of purchased transportation, offset by an
approximately $10 million increase in Teamster wages and benefits in
the second quarter. Operating expenses increased 4.1% and 6.8% for
the three and six month periods in line with increased business
levels and partially due to higher vehicle maintenance expense
associated with an aging linehaul fleet. The Company continued its
use of lower cost rail services in strategic lanes during the second
quarter of 1997, which resulted in increased purchased
transportation expense of 10.7% over the prior year. For the six
months ended June 30, 1997, rail miles as a percentage of total
inter-city miles increased to 26% from 23% in the previous year.
Claims and insurance expense increased 24.8% and 10.8% for the three
and six month periods, respectively, reflecting increased business
levels and higher than anticipated claims expense. Depreciation
expense decreased approximately 21.1% from the six month period
last year due primarily to a higher proportion of fully depreciated
equipment in 1997. Also contributing to the decrease was the
transfer of $57.6 million of excess properties to the former parent
concurrent with the spin-off.
Other expense, net, for the three months ended June 30, 1997
increased 61.9% over the same period last year primarily due to
interest expense on other long- term liabilities, excluding long-term
debt. For the six months ended June 30, 1997, other expense, net,
decreased 28.0% primarily due to the absence in 1997 of interest
expense on borrowings from the former parent, which was included in
Miscellaneous, net, offset partially by the above mentioned interest
expense on other long-term liabilities.
The Company's effective income tax (benefit) rates for the
three and six months ended June 30, 1997 and 1996 differ from the
statutory Federal rate due primarily to foreign taxes and non-
deductible items.
Management anticipates that tonnage growth experienced in the
first half of 1997 will not continue for the remainder of the year.
As discussed above, the tonnage increases in the six months ended
June 30, 1997 were due mainly to the fact that the prior year tonnage
levels were depressed following implementation of BAS. Also, as
management continues to emphasize account profitability, it
anticipates that some business will be lost. Management will
continue its emphasis on aggressive claim containment as well as
maximizing the efficient use of its existing capacity. The April 1,
1997 Teamster wage and benefit increase, which covers approximately
85% of the Company's domestic employees, will result in
approximately $20 million of additional wages and benefits in the
remainder of 1997 compared with the 1996 levels. As discussed in
Footnote 2 in Part 1 of this Form 10-Q, the Company has a restricted
stock program. If performance conditions are met in December 1997,
approximately 1,096,100 shares of common stock will be issued and
compensation expense will be recognized based on the then market
price of the stock. Based on the market price of the stock on June
30, 1997, the Company would recognize a $10.8 million non-cash
charge, net of related tax benefits.
The Company is currently studying the impact of Year 2000 issues
on its operations. Management does not expect that the final cost of
bringing computer systems into compliance will have a material
adverse effect on the Company's financial condition or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had $59.8 million in cash and
cash equivalents. Net cash flow from operations for the six months
ended June 30, 1997 was $22.1 million due primarily to net income and
depreciation and amortization offset by changes in components of
working capital. The increase in accounts receivable of $37.4
million reflects increased sales per day as well as a slight
deterioration in days sales outstanding for which management has
implemented programs aimed at increasing collections. The Company
occasionally borrowed funds under its secured credit facility during
the six months ended June 30, 1997, and ended the period with no
borrowings outstanding. Management expects cash flow from operations
for the remainder of 1997 will be sufficient for working capital and
capital expenditure requirements. Capital expenditures for the six
months ended June 30, 1997 were $12.7 million compared with $29.4
million in the same period of the previous year, reflecting fewer
required fleet replacements and facility expenditures. The Company
expects capital expenditures to be approximately $17 million for the
remainder of 1997 and will fund these with cash from operations
supplemented by financing arrangements, if necessary.
The Company has a $225.0 million secured credit facility with
several banks to provide for working capital and letter of credit
needs. Working capital borrowings are limited to $100 million while
letters of credit are limited to $150 million. 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 Consolidated Freightways Corporation of Delaware
(CFCD), a wholly owned subsidiary of the Company, all of the
outstanding stock of CFCD and 65% of the outstanding capital stock of
Canadian Freightways Limited (CFL), a wholly owned subsidiary of
CFCD. As of June 30, 1997, the Company had no short-term borrowings
and $83.3 million of letters of credit outstanding under this
facility. The continued availability of funds under this credit
facility will require that the Company 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 June 30, 1997 and expects to be in
compliance with these covenants for the remainder of the year.
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. The
Company currently has in place a fuel surcharge program in response
to the increased fuel prices that began in 1996 and continue in 1997.
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 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 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 there will be a successful
negotiation of a new contract with the IBT, there can be no
assurances of a successful negotiation 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.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously disclosed, 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 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
its financial condition or results of operations. Certain legal
matters are discussed in Note 4 in the Notes to Consolidated
Financial Statements in Part I of this form.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Shareholders Meeting held May 12, 1997, 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
W. Roger Curry 19,446,597 104,133
G. Robert Evans 19,462,109 88,621
James B. Malloy 19,461,069 89,661
The following directors did not stand for election and continued in
office as directors after the Annual Shareholders Meeting: Paul B.
Guenther, Robert W. Hatch, J. Frank Leach, John M. Lillie, Raymond
F. O'Brien and William D. Walsh.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Reimbursement and Security Agreement dated July 3, 1997
between Consolidated Freightways Corporation
and CNF Transportation Inc.
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended
June 30, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company (Registrant) has duly
caused this Form 10-Q Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Consolidated Freightways Corporation
(Registrant)
August 12, 1997 /s/David F. Morrison
David F. Morrison
Executive Vice President and
Chief Financial Officer
August 12, 1997 /s/Robert E. Wrightson
Robert E. Wrightson
Senior Vice President and Controller