Exhibit 13
Consolidated Freightways Corporation
and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Consolidated Freightways Corporation (the Company) completed
its first year as an independent company in 1997, earning
operating income of $45.3 million. This is a $118.4 million
improvement over the $73.1 million loss in 1996. 1997 includes a
$14.3 million non-cash charge for the issuance of common stock
under the Company's restricted stock plan, which was not incurred
in 1996. Excluding this charge, 1997 operating income improved
$132.7 million over the prior year. The 1997 net income of $20.4
million or $0.92 per basic share compares to a net loss of $55.6
million or $2.52 per basic share in 1996. Excluding the charge,
net income in 1997 was $28.9 million or $1.31 per basic share.
These significant improvements were attributable to improved
revenue yield coupled with aggressive cost containment programs.
Revenues for 1997 increased 7.1% over the prior year to $2.3
billion, with net revenue per hundred weight increasing 6.2%.
This reflects the general rate increase implemented in January,
1997, combined with management's efforts to improve the freight
mix. The Company also benefited by higher yields from premium
service offerings. Overall, the less-than truckload (LTL)
industry benefited from higher rates in 1997, as tighter capacity
resulted in a stable pricing environment. Total tonnage
increased 0.9%, while higher rated LTL tonnage increased 1.6%.
Salaries, wages and benefits in 1997 increased 0.7% over
the prior year. These expenses reflect Teamsters wage and benefit
increases of approximately $30 million, an increase of $21.1
million of incentive compensation for non-contractual employees
and expenses associated with increased business levels. The
Company also incurred a $14.3 million non-cash charge in 1997 for
the issuance of approximately 1.1 million common shares to all
eligible, full-time employees under its restricted stock plan.
These additional expenses were offset by increased use of rail
services, a significant reduction in workers' compensation claims
cost through aggressive cost containment, workplace safety and
return to work initiatives, and efficiencies in linehaul, dock
and city operations. The 1996 expenses were adversely impacted by
the implementation of the Business Accelerator System (BAS) and
also reflect a 3.5%, April 1, 1996, contractual wage and benefit
increase. Also included in 1996 expenses were salary and
benefits for administrative services which were outsourced to the
former parent in 1997 and a $15.0 million charge to increase
workers' compensation reserves.
Operating expenses increased 5.4% in 1997 compared to the
prior year due primarily to charges for administrative services
outsourced to the former parent. During 1997, the fees for
these services were $22.6 million. In 1996, the expense
allocations from the former parent were included in salaries,
wages and benefits as noted in the previous paragraph. The
Company also experienced an increase in repair and maintenance
expense in 1997 due to its aging fleet. This was partially
offset by a 6.1% decrease in fuel costs due to lower fuel prices
per gallon and a higher proportion of freight transported via
rail, as discussed below. In 1996, operating expenses increased
0.7% over 1995 due to expenses associated with implementing BAS.
Also in 1996, the Company experienced a 20.9% increase in fuel
prices. The Company was able to recover approximately 80% of its
increased fuel costs through a fuel surcharge program.
Purchased transportation increased 6.7% and 17.1% in 1997
and 1996, respectively, as the Company increased its use of lower
cost rail services in strategic lanes. Rail miles as a
percentage of total inter-city miles in 1997 increased to 27.9%
from 26.0% in 1996 and 21.9% in 1995.
Operating taxes and licenses decreased 2.9% and 3.4% in 1997
and 1996, respectively. These decreases are the result of lower
fuel taxes, licensing fees and highway use taxes as a higher
proportion of freight was transported via rail, as discussed
above. Additionally, the Company has successfully challenged
and reduced property tax assessments on its terminal properties.
Claims and insurance increased 11.4% in 1997 in line with
increased revenue levels. In 1996, claims and insurance expense
decreased 4.5% over 1995 levels due to improved cargo loss and
damage experience.
Depreciation expense decreased 17.5% from 1996 levels due to
a higher proportion of fully depreciated equipment in 1997 and
the transfer of $57.6 million of excess properties to the former
parent concurrent with the spin-off. Depreciation increased 0.9%
in 1996 due to increased capital expenditures during 1995 and
1996.
The above combination of increased revenues and cost
containment efforts resulted in an improvement in the operating
ratio to 98.0% in 1997 from 103.4% in 1996.
The 1995 and 1996 operating results were adversely affected
by the implementation of BAS. BAS, implemented in October 1995,
was 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. 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 1995 levels while
revenues increased 1.9%. The excess costs related to BAS,
combined with a depressed pricing environment, resulted in an
operating loss of $73.1 million in 1996. The operating ratio in
1996 was 103.4% compared with 102.0% in 1995.
Other expense, net, decreased 30.4% in 1997 from 1996 levels
primarily due to investment income on the Company's short-term
investments. In 1996, other expense, net increased over 1995 due
primarily to interest expense on increased borrowings from the
former parent which is included in Miscellaneous, net in the
Statements of Consolidated Operations.
The Company's effective income tax (benefit) rates in 1997,
1996 and 1995 differ from the statutory Federal rate due
primarily to foreign taxes and non-deductible items.
Management is in the initial phases of replacing or
converting the Company's financial and operational systems and
applications for Year 2000 compliance. Based upon a current
assessment of systems and applications requiring modification,
management expects to spend $25 to $30 million over the next two
years. Of this amount, approximately $11 million relates to the
purchase of new hardware and software, which will be capitalized
and amortized over their estimated useful lives. Management
expects to have all of its financial and operational systems
converted by mid 1999. However, to the extent systems are not
converted by the year 2000, there could be a material adverse
effect on the Company's operations.
On February 9, 1998, Consolidated Freightways Corporation of
Delaware (CFCD), a wholly-owned subsidiary of the Company, along
with three other national motor freight carriers, agreed on a
tentative five-year National Master Freight Agreement with the
International Brotherhood of Teamsters (IBT). The current
agreement expires on March 31, 1998. The agreement, subject to
ratification by members of the IBT, will grant among other
things, a one-time, $750 signing bonus and increased wage and
pension benefits for CFCD's union employees. With ratification
of the proposed agreement as well as a continued stable pricing
environment in 1998, management will continue to focus on yield
enhancement and efficient use of existing capacity. Management
will also continue with its aggressive workers' compensation
claims containment programs which proved successful in 1997 and
with refinements to improve operating efficiencies. In an effort
to offset increased operating costs in 1998, management
implemented a 5.5% general rate increase in January, which will
apply to approximately 40% of customer revenues. As discussed
in Footnote 8 in the Company's 1997 Consolidated Financial
Statements, the Company has a restricted stock plan. If
performance conditions are met, approximately 1.1 million shares
of common stock will be issued in December, 1998, and
compensation expense recognized based on the then market price of
the stock. Based on the market price of the stock on December
31, 1997, the Company would recognize a $9.0 million non-cash
charge, net of related tax benefits.
Liquidity and Capital Resources
As of December 31, 1997, the Company had $107.7 million in
cash and cash equivalents. Net cash flow from operations for the
year ended December 31, 1997 was $77.4 million, primarily from
net income and depreciation and amortization. Management expects
cash flows from operations in 1998 to be sufficient for working
capital and capital expenditure needs. Capital expenditures for
the year ended December 31,1997 were $22.7 million compared with
$48.2 million in 1996, as management opted to minimize capital
expenditures during its first year of operations as an
independent company. The Company expects 1998 capital
expenditures to be approximately $70 million, primarily for the
replacement of aging trucks, tractors and trailers. Management
expects to fund these capital expenditures 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 $100.0
million while letters of credit are limited to $150.0 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 CFCD, all
of the outstanding stock of CFCD and 65% of the outstanding
capital stock of Canadian Freightways Limited, a wholly owned
subsidiary of CFCD. As of December 31, 1997, the Company had no
short-term borrowings and $93.1 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 December 31, 1997 and expects to be in
compliance with these covenants throughout 1998.
As of December 31, 1997, the Company's ratio of long-term
debt to total capital was 6% compared with 7% as of December 31,
1996. The current ratio was 1.3 to 1 and 1.1 to 1 as of December
31, 1997 and 1996, 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.
However, 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.
Other
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. Under CERCLA, PRP's are jointly and severally
liable for all site remediation and expenses. 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 statements included or incorporated by reference
herein constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended,
and are subject to a number of risks and uncertainties. Any such
forward-looking statements included or incorporated by reference
herein should not be relied upon as predictions of future events.
Certain such forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "approximately," "intends,"
"plans," "pro forma," "estimates," or "anticipates" or the
negative thereof or other variations thereof or comparable
terminology, or by discussions of strategy, plans or intentions.
Such forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise
and they may be incapable of being realized. In that regard, the
following factors, among others, and in addition to matters
discussed elsewhere herein and in documents incorporated by
reference herein, could cause actual results and other matters to
differ materially from those in such forward-looking statements:
changes in general business and economic conditions; increases in
domestic and international competition and pricing pressure;
increases in fuel prices; uncertainty regarding the Company's
ability to improve results of operations; labor matters,
including shortages of drivers and increases in labor costs;
changes in governmental regulation; environmental and tax
matters; increases in costs associated with the conversion of
financial and operational systems and applications for Year 2000
compliance and failure to convert all systems by the year 2000.
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
STATEMENTS OF CONSOLIDATED OPERATIONS
Years Ended December 31,
(Dollars in thousands except per share data)
1997 1996 1995
REVENUES $ 2,299,075 $ 2,146,172 $ 2,106,529
COSTS AND EXPENSES
Salaries, wages and benefits 1,509,665 1,498,707 1,452,415
Operating expenses 363,615 345,006 342,762
Purchased transportation 191,041 179,126 152,953
Operating taxes and licenses 72,882 75,083 77,733
Claims and insurance 63,741 57,214 59,896
Depreciation 52,872 64,102 63,556
2,253,816 2,219,238 2,149,315
OPERATING INCOME (LOSS) 45,259 (73,066) (42,786)
OTHER INCOME (EXPENSE)
Investment income 1,894 263 756
Interest expense (3,213) (843) (918)
Miscellaneous, net (Note 10) (1,958) (4,131) (850)
(3,277) (4,711) (1,012)
Income (loss) before income taxes (benefits) 41,982 (77,777) (43,798)
Income taxes (benefits) (Note 6) 21,623 (22,201) (13,889)
NET INCOME (LOSS) $ 20,359 $ (55,576) $ (29,909)
Basic average shares outstanding 22,066,212 22,025,323 22,025,323
Diluted average shares outstanding 22,755,714 22,025,323 22,025,323
Basic Earnings (Loss) per Share: (Note 2) $ 0.92 $ (2.52) $ (1.36)
Diluted Earnings (Loss) per Share: (Note 2) $ 0.89 $ (2.52) $ (1.36)
<FN>
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands)
1997 1996
ASSETS
Current Assets
Cash and cash equivalents $ 107,721 $ 48,679
Trade accounts receivable, net
of allowances (Note 2) 310,601 285,410
Other accounts receivable 10,300 3,339
Operating supplies, at lower of average cost
or market 8,741 11,511
Prepaid expenses 39,696 35,848
Deferred income taxes (Note 6) 16,554 35,470
Total Current Assets 493,613 420,257
Property, Plant and Equipment, at cost
Land 78,227 78,989
Buildings and improvements 342,413 343,023
Revenue equipment 559,610 559,823
Other equipment and leasehold improvements 116,390 115,317
1,096,640 1,097,152
Accumulated depreciation and amortization (713,653) (680,464)
382,987 416,688
Other Assets
Deposits and other assets 9,468 10,808
Deferred income taxes (Note 6) 11,728 9,334
21,196 20,142
Total Assets $ 897,796 $ 857,087
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands)
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 83,127 $ 87,511
Accrued liabilities (Note 3) 212,644 187,267
Accrued claims costs (Note 2) 82,023 95,780
Federal and other income taxes (Note 6) 7,706 4,083
Total Current Liabilities 385,500 374,641
Long-Term Liabilities
Long-term debt (Note 4) 15,100 15,100
Accrued claims costs (Note 2) 112,173 110,200
Employee benefits (Note 7) 115,220 113,312
Other liabilities 26,356 33,136
Total Liabilities 654,349 646,389
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 23,038,437
and 22,025,323 shares, respectively 230 220
Additional paid-in capital 71,461 57,174
Cumulative translation adjustment (6,572) (4,910)
Retained earnings 178,573 158,214
Treasury stock, at cost (18,151 shares) (245) -
Total Shareholders' Equity 243,447 210,698
Total Liabilities and Shareholders' Equity $ 897,796 $ 857,087
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)
1997 1996 1995
Cash and Cash Equivalents, Beginning
of Period $ 48,679 $ 26,558 $ 23,116
Cash Flows from Operating Activities
Net income (loss) 20,359 (55,576) (29,909)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 54,679 64,565 63,902
Increase (decrease) in deferred income taxes (Note 6) 16,522 (35,634) 18,556
Gains from property disposals, net (914) (3,089) (2,360)
Issuance of common stock under restricted
stock plan (Note 8) 14,297 - -
Changes in assets and liabilities:
Receivables (32,152) (34,484) (4,851)
Accounts payable (4,384) 1,199 5,677
Accrued liabilities 25,377 4,612 (1,883)
Accrued claims costs (11,784) 22,531 4,811
Income taxes 3,623 2,715 (791)
Employee benefits 1,908 7,216 (13,515)
Other (10,161) 28,490 2,135
Net Cash Provided by Operating Activities 77,370 2,545 41,772
Cash Flows from Investing Activities
Capital expenditures (22,674) (48,203) (111,962)
Proceeds from sales of property 4,591 8,329 6,529
Net Cash Used by Investing Activities (18,083) (39,874) (105,433)
Cash Flows from Financing Activities
Former parent investment and advances, net (Note 10) - 59,450 67,103
Purchase of treasury stock (245) - -
Net Cash Provided (Used) by Financing Activities (245) 59,450 67,103
Increase in Cash and Cash Equivalents 59,042 22,121 3,442
Cash and Cash Equivalents, End of Period $ 107,721 $ 48,679 $ 26,558
Supplemental Disclosure
Cash paid for income taxes (Note 2) $ 1,478 $ - $ -
Cash paid for interest (net of amounts capitalized) $ 1,444 $ 877 $ 1,485
<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 Treasury
Number of Paid-in Translation Retained Stock,
Shares Amount Capital Adjustment Earnings at cost Total
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
Issuance of common stock under
restricted stock plan (Note 8) 1,013,114 10 14,287 - - - 14,297
Purchase of 18,151 treasury shares - - - - - (245) (245)
Net income - - - - 20,359 - 20,359
Translation adjustment - - - (1,662) - - (1,662)
Balance, December 31, 1997 23,038,437 $ 230 $ 71,461 $ (6,572) $ 178,573 $(245) $ 243,447
<F/N>
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 and its wholly-owned subsidiaries (the
Company). 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,
Blackfoot Logistics, and other related businesses; Redwood Systems, a third
party logistics provider; and 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 Company was a wholly-owned subsidiary of CNF Transportation 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. 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 and are presented as if the Company had operated as an independent
stand-alone entity, except that it has not been allocated any portion of
the former parent's consolidated borrowings or interest expense thereon.
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 $7,467,000 and $9,692,000 as of December 31, 1997 and 1996,
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 and deferred
income taxes presented in periods prior to the Distribution represent a pro-
rata share of the former parent's consolidated income tax expense and
deferred income taxes 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 related to industrial revenue bonds, as
discussed in Note 4, and long-term tax liabilities. The interest expense as
presented for the years ended December 31, 1996 and 1995 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: The Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," in
1997. Basic earnings per share is calculated using only the weighted
average shares outstanding for the period. Diluted earnings per share
includes the dilutive effect of the Company's restricted stock. See
Footnote 8, "Stock Compensation Plans." The dilutive effect of the
restricted stock for the year ended December 31, 1997 was 689,502 shares.
Basic and diluted earnings per share for the years ended December 31, 1996
and 1995 were computed using 22,025,323 shares, which represents the number
of shares issued in the Distribution, and remain as previously reported.
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.
Recent Accounting Pronouncements: In June 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting
Comprehensive Income." This statement requires that all items of
comprehensive income be prominently displayed in the financial statements.
Reclassification of prior year financial statements is required. This
statement is effective for fiscal years beginning after December 15, 1997.
Adoption of this statement will not affect previously reported earnings.
Also in June 1997, the FASB issued SFAS 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 requires enhanced disclosures about
geographic, product and service information. This statement is effective
for fiscal years beginning after December 15, 1997. Management expects
that adoption of this statement will not have a material effect on the
Company's reporting requirements.
Reclassification: Certain amounts in prior years' 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:
1997 1996
(Dollars in thousands)
Accrued holiday and vacation pay $ 75,002 $ 70,728
Other accrued liabilities 59,378 46,219
Wages and salaries 26,663 27,287
Accrued union health and welfare 22,281 21,296
Accrued taxes other than income taxes 19,854 18,040
Accrued incentive bonus 9,466 3,697
Total accrued liabilities $ 212,644 $ 187,267
4. Long-Term Debt
As of December 31, 1997 and 1996, 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.
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 $100.0 million while letters of credit
are limited to $150.0 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 CFCD, all of the outstanding
stock of CFCD and 65% of the outstanding capital stock of CFL. As of
December 31, 1997, the Company had no short-term borrowings and $93.1
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 December 31, 1997, and
expects to be in compliance with these covenants throughout 1998.
The Company's interest expense, as presented on the Statements of
Consolidated Operations, is net of capitalized interest of $0, $339,000 and
$361,000 for the years ended December 31, 1997, 1996 and 1995,
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 as of December 31, 1997 and 1996 by 10.6% and 11.6%,
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, 2002.
5. Leases
The Company is obligated under various non-cancelable leases which
expire at various dates through 2013.
Future minimum lease payments under all leases with initial or
remaining non-cancelable lease terms in excess of one year as of December
31, 1997, are $21,680,000 in 1998, $18,608,000 in 1999, $3,058,000 in 2000,
$1,156,000 in 2001, $478,000 in 2002, and $604,000 thereafter.
Rental expense for operating leases is comprised of the following:
1997 1996 1995
(Dollars in thousands)
Minimum rentals $37,091 $47,146 $56,118
Less sublease rentals (635) (1,029) (5,768)
Net rental expense $36,456 $46,117 $50,350
6. Income Taxes
The components of pretax income (loss) and income taxes (benefits) are
as follows:
1997 1996 1995
(Dollars in thousands)
Pretax income (loss)
U.S. corporations $ 31,296 $(86,829) $(53,674)
Foreign corporations 10,686 9,052 9,876
Total pretax income (loss) $ 41,982 $(77,777) $(43,798)
Income taxes (benefits)
Current
U.S. Federal $ (296) $ 11,014 $(32,078)
State and local 88 (2,048) (4,630)
Foreign 5,309 4,467 4,263
5,101 13,433 (32,445)
Deferred
U.S. Federal 14,526 (35,098) 16,183
State and local 1,884 (536) 1,861
Foreign 112 - 512
16,522 (35,634) 18,556
Total income taxes (benefits) $ 21,623 $(22,201) $(13,889)
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 as of December 31 relate to the following:
1997 1996
(Dollars in thousands)
Deferred taxes - current
Assets
Reserves for accrued claims costs $ 23,079 $ 29,434
Other reserves not currently deductible 2,821 16,573
Liabilities
Unearned revenue, net (9,346) (10,537)
Total deferred taxes - current 16,554 35,470
Deferred taxes - non current
Assets
Reserves for accrued claims costs 43,675 42,477
Employee benefits 22,934 20,452
Retiree health benefits 24,054 23,539
Federal net operating loss and
credit carryovers 1,743 5,418
Liabilities
Depreciation (63,937) (63,939)
Tax benefits from leasing transactions (13,875) (15,166)
Other (2,866) (3,447)
Total deferred taxes - non current 11,728 9,334
Net deferred taxes $ 28,282 $ 44,804
For income tax reporting purposes, the Company had alternative minimum
tax credit carryovers of $1.6 million as of December 31, 1997. The
carryovers have no expiration date.
Income taxes (benefits) varied from the amounts calculated by applying
the U.S. statutory income tax rate to the pretax income (loss) as set forth
in the following reconciliation:
1997 1996 1995
U.S. statutory tax rate 35.0% (35.0)% (35.0)%
State income taxes (benefits), net of
federal income tax benefit 4.7 (2.0) (3.0)
Foreign taxes in excess of
U.S. statutory rate 4.0 1.7 3.0
Non-deductible operating
expenses 3.8 2.6 4.1
Fuel tax credits (0.6) (0.4) (1.1)
Foreign tax credits (0.2) 0.7 --
Other, net 4.8 3.9 0.3
Effective income tax rate 51.5% (28.5)% (31.7)%
The cumulative undistributed earnings of the Company's foreign
subsidiaries (approximately $67 million as of December 31, 1997), 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 be $3.3 million.
7. Employee Benefit Plans
The Company maintains a non-contributory defined benefit pension plan
(the Pension Plan) covering the Company's non-contractual employees in the
United States. The Company's annual pension provision and contributions
are based on an independent actuarial computation. 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. Approximately 89% of the Pension Plan assets
are invested in publicly traded stocks and bonds. The remainder is
invested in temporary cash investments and real estate funds.
The following information sets forth the Company's pension liabilities
included in Employee Benefits in the Consolidated Balance Sheets as of
December 31:
1997 1996
(Dollars in thousands)
Accumulated benefit obligation, including
vested benefits of $204,997 in 1997 and
$183,600 in 1996 $(214,289) $(191,225)
Effect of projected future compensation
levels (29,580) (22,767)
Projected benefit obligation (243,869) (213,992)
Pension Plan assets at market value 244,286 213,787
Pension Plan assets greater (less) than
projected benefit obligation 417 (205)
Unrecognized prior service costs 8,056 9,841
Unrecognized net gain (49,484) (49,123)
Unrecognized net asset at transition, being
amortized over 18 years (6,621) (7,725)
Pension Plan liability $ (47,632) $ (47,212)
Weighted average discount rate 7.5% 8.0%
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 includes the following:
1997 1996 1995
(Dollars in thousands)
Cost of benefits earned during
the year $ 5,975 $ 7,055 $ 5,610
Interest cost on projected
benefit obligation 17,172 16,596 15,130
Actual gain arising from
plan assets (36,697) (32,163) (34,490)
Net amortization and deferral 13,970 13,628 20,330
Net pension cost $ 420 $ 5,116 $ 6,580
The Company's Pension Plan includes a program to provide additional
benefits for compensation excluded from the basic Pension Plan. The annual
provision for this plan is based upon independent actuarial computations
using assumptions consistent with the Pension Plan. As of December 31,
1997, the liability associated with this plan was $1,177,000. The pension
cost was $175,000 for the year ended December 31, 1997.
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 $126,606,000 in 1997,
$116,712,000 in 1996, and $104,042,000 in 1995 for such plans. Those
contributions were made in accordance with negotiated labor contracts and
generally were based on time worked.
The Company maintains a retiree health plan which 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 total post
retirement benefit liabilities included in Employee Benefits in the
Consolidated Balance Sheets as of December 31:
1997 1996
(Dollars in thousands)
Accumulated post retirement benefit obligation
Retirees and other inactives $33,601 $31,895
Participants currently eligible to retire 6,796 6,451
Other active participants 6,379 6,055
46,776 44,401
Unrecognized prior service cost 352 395
Unrecognized valuation gain 17,853 20,207
Accrued post retirement benefit liability $64,981 $65,003
Weighted average discount rate 7.5% 8.0%
Average health care cost trend rate
First year 6.5% 9.0%
Declining to (year 1999) 5.5% 6.0%
Net periodic post retirement benefit costs include the following
components:
1997 1996 1995
(Dollars in thousands)
Cost of benefits earned during
the year $ 409 $ 540 $ 432
Interest cost on accumulated post
retirement obligation 3,472 4,000 3,768
Net amortization and deferral (1,023) (103) (526)
Net periodic post retirement
benefit cost $ 2,858 $ 4,437 $ 3,674
A one percent annual increase in the health care cost trend rate
assumption would have increased the accumulated post retirement benefit
obligation by $1,977,000 as of December 31, 1997. The net periodic post
retirement benefit cost would have increased by $148,000 for the year ended
December 31, 1997.
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. The Company's contribution, which is
charged as an expense, vests immediately with the employee and totaled
$1,993,000 in 1997, $1,926,000 in 1996, and $1,990,000 in 1995.
The Company has adopted various plans relating to the achievement of
specific goals to provide incentive bonuses for designated employees.
Total incentive bonuses earned by the participants were $25,690,000,
$4,614,000 and $1,288,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
8. Stock Compensation Plans
The Company has a Stock Option and Incentive Plan (the Plan) under
which shares of restricted stock were granted to its regular, full-time
employees. During December 1996, 2,146,450 shares were granted at a
weighted average price of $7.475 per share. During 1997, an additional
1,057,027 shares were granted at a weighted average price of $15.31 per
share. The shares vest over three years from the date of the original
grant 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. Compensation expense is recognized based upon the
current market price and the extent to which performance criteria are being
met. On December 16, 1997, restrictions on approximately one-third of the
shares lapsed. Accordingly, the Company recognized a non-cash charge of
$14,297,000. The Company has 2,144,122 granted but unissued shares of
restricted stock for which compensation expense will be recognized over
future vesting periods as appropriate. As of December 31, 1997, those
shares had an aggregate market value of $29,212,000. The Company has
100,321 shares remaining reserved under the Plan.
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, 1997.
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Adoption of this statement is optional, and the Company has
opted to account for stock-based compensation in accordance with APB 25,
"Accounting for Stock Issued to Employees." Had the Company adopted this
statement, pro forma net income for the year ended December 31, 1997 would
have been $16.6 million or $0.75 per basic share and $0.73 per diluted
share. This statement would have had an immaterial effect on the net loss
for the year ended December 31, 1996. The net loss for the year ended
December 31, 1995 would remain as reported.
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 adverse effect
on the Company's financial position or results of operations.
On February 12, 1998, the United States District Court for the Central
District of California dismissed two lawsuits filed against the Company and
its principal operating subsidiary. The court accepted the Company's
argument that the claims and issues in question are matters covered by the
collective bargaining agreement and subject to the arbitration and
grievance procedures. The underlying lawsuits, filed in October 1997,
claimed among other things, invasion of privacy by the use of video cameras
at a terminal facility, including restrooms, in order to combat a problem
with theft and drug use. Approximately five plaintiffs were non-employees
and were not covered by the collective bargaining agreement, and therefore
may pursue legal action in Riverside County Superior Court. It is the
opinion of management that the ultimate outcome of the remaining claims
will not have a material adverse effect on the Company's financial position
or results of operations.
Consolidated tax returns in which the Company was included in prior to
the spin-off from its former parent have been and are being examined by the
Internal Revenue Service (IRS). The tax sharing agreement entered into with
the former parent obligates the Company to pay additional taxes and
interest should certain issues identified by the IRS not be resolved in the
Company's favor. While favorable resolution is not assured, the Company
believes that the ultimate outcome will not have a material adverse effect
on its financial position or results of operations.
CFCD and the International Brotherhood of Teamsters (IBT) are parties
to the National Master Freight Agreement (NMFA) which expires on March 31,
1998. On February 9, 1998, CFCD, along with three other national motor
freight carriers, agreed on a tentative, five-year NMFA with the IBT,
subject to ratification by its members.
The Company has received notices from the Environmental Protection
Agency (EPA) and others that it has been identified as a potentially
responsible party (PRP) under the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA) or other Federal and state
environmental statutes at various Superfund sites. Under CERCLA, PRP's are
jointly and severally liable for all site remediation and expenses. Based
upon 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 position or results of operations.
10. Related Party Transactions
The Company is party to a Transition Services Agreement with its
former parent under which the former parent provides information systems,
data processing, computer and communications, payroll and other
administrative services. Services are 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, on six months notice. For the year
ended December 31, 1997, the Company was charged $22,649,000 for services
under the agreement. For the period from the Distribution date to December
31, 1996, the Company was charged $2,600,000. The Company is also party to
an agreement with its former parent which provides for the allocation of
taxes and certain liabilities arising from periods prior to the
Distribution.
Prior to the Distribution, the former parent administered uninsured
workers' compensation and employer's liability 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. As a condition of the Distribution, those guarantees and
collateral will remain in place until the pending claims are resolved. To
indemnify the former parent against liability relating to these claims, the
Company has pledged real properties and letters of credit in the amounts of
$50.0 million and $30.0 million, respectively, for the benefit of the
former parent. The potential liabilities, and related pledged collateral,
should be reduced over time as the Company's pending claims are resolved.
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 expense on these advances, included in Miscellaneous, net
in the Statements of Consolidated Operations, was approximately $6,115,000
and $1,729,000 for the years ended December 31, 1996 and 1995,
respectively. Additionally, the Company 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. For
the years ended December 31, 1996 and 1995, the charges were $10,600,000
and $11,946,000, respectively. These costs are included in Operating
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 year ended December 31, 1995 were
$84,471,000. 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.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
Quarterly Financial Data
(Unaudited)
(Dollars in thousands except per share data)
March 31 June 30 September 30 December 31
1997 - Quarter Ended
Revenues $545,633 $578,623 $603,253 $571,566
Operating income (loss) 8,537 16,676 24,340 (4,294)(a)
Income (loss) before
income taxes (benefits) 7,999 15,331 23,383 (4,731)
Income taxes (benefits) 4,745 8,413 11,600 (3,135)
Net income (loss) 3,254 6,918 11,783 (1,596)
Basic earnings (loss) per share 0.15 0.31 0.53 (0.07)
Diluted earnings (loss) per share 0.15 0.31 0.51 (0.07)
Market price range $7.00-$12.25 $10.00-$16.813 $13.75-$18.50 $11.875-$18.438
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)(b)
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)
Basic loss per share (0.91) (0.36) (0.08) (1.17)
Diluted loss per share (0.91) (0.36) (0.08) (1.17)
Market price range N/A N/A N/A $6.00-$9.125
<F/N>
(a) Includes $14.3 million non-cash charge for the issuance of common stock under the Company's
restricted stock plan.
(b) Includes $15.0 million non-cash charge for the increase in workers' compensation reserve.
Five Year Financial Summary
Consolidated Freightways Corporation
And Subsidiaries
Years Ended December 31
(Dollars in thousands except per share data)
(Unaudited)
1997 1996 1995 1994 1993
SUMMARY OF OPERATIONS
Revenues $ 2,299,075 $ 2,146,172 $2,106,529 $1,936,412 $2,074,323
Operating income (loss) 45,259(a) (73,066)(b) (42,786)(c) (47,743) 29,403
Depreciation and amortization 54,679 64,565 63,902 73,443 83,739
Investment income 1,894 263 756 497 459
Interest expense 3,213 843 918 880 443
Income (loss) before income taxes (benefits) 41,982 (77,777) (43,798) (44,478) 36,769
Income taxes (benefits) 21,623 (22,201) (13,889) (14,274) 16,628
Net income (loss) 20,359 (55,576) (29,909) (32,116) 20,141
Cash from operations 77,370 2,545 41,772 33,739 67,186
PER SHARE
Basic earnings (loss) 0.92 (2.52) (1.36) (1.46) 0.91
Diluted earnings (loss) 0.89 (2.52) (1.36) (1.46) 0.91
Shareholders' equity 10.58 9.57 11.76 9.70 12.13
FINANCIAL POSITION
Cash and cash equivalents 107,721 48,679 26,558 23,116 10,764
Property, plant and equipment, net 382,987 416,688 501,311 452,878 500,866
Total assets 897,796 857,087 866,698 852,510 878,934
Capital expenditures 22,674 48,203 111,962 32,120 49,395
Long-term debt 15,100 15,100 15,100 15,100 15,100
Shareholders' equity 243,447 210,698 259,108 213,579 267,074
RATIOS AND STATISTICS
Current ratio 1.3 to 1 1.1 to 1 1.0 to 1 1.1 to 1 1.0 to 1
Net income (loss) as % of revenues 0.9% (2.6)% (1.4)% (1.7)% 1.0%
Effective income tax rate 51.5% (28.5)% (31.7)% (32.1)% 45.2%
Long-term debt as % of
total capitalization 6% 7% 6% 7% 5%
Return on average invested capital 8% (22)% (11)% (11)% 6%
Return on average shareholders' equity 9% (24)% (13)% (13)% 8%
Average shares outstanding 22,066,212 22,025,323 22,025,323 22,025,323 22,025,323
Market price range $7.00-$18.50 $6.00-$9.125 n/a n/a n/a
Number of shareholders 31,650 13,500 n/a n/a n/a
Number of employees 21,600 20,300 20,200 22,000 22,100
<F/N>
(a) Includes $14.3 million non-cash charge for the issuance of common stock under the Company's restricted stock plan.
(b) Includes $15.0 million non-cash charge for the increase in workers' compensation reserve.
(c) Includes approximately $26 million of costs related to implementation of the Business Accelerator System.