-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JXxDfYjtqahEkqAxjRRIdHaHpBo0qc2Ea4NCv/EWevyoL838QZquRiJ8J/u+ihQF FMa4XKt7UtgNsO/dkKva8g== 0001022581-98-000002.txt : 19980330 0001022581-98-000002.hdr.sgml : 19980330 ACCESSION NUMBER: 0001022581-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSOLIDATED FREIGHTWAYS CORP CENTRAL INDEX KEY: 0001022581 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 770425334 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12149 FILM NUMBER: 98576660 BUSINESS ADDRESS: STREET 1: 175 LINFIELD DR CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4153261700 MAIL ADDRESS: STREET 1: 175 LINFIELD DRIVE CITY: MENLO PARK STATE: CA ZIP: 94025 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 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 (650) 326-1700 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Common Stock ($.01 par value) NASDAQ 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_______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___X___ Aggregate market value of voting stock held by persons other than Directors, Officers and those shareholders holding more than 5% of the outstanding voting stock, based upon the closing price per share on the National Automated System of the National Association of Securities Dealers Inc. Automated Quotation System on February 27, 1998: $288,354,420 Number of shares of Common Stock outstanding as of February 27, 1998: 23,020,286 DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV Consolidated Freightways Corporation 1997 Annual Report to Shareholders (only those portions referenced herein are incorporated in this Form 10-K). Part III Part III is incorporated by reference from the proxy statement to be filed in connection with the Company's 1998 Annual Meeting of Shareholders. (Only those portions referenced herein are incorporated in this Form 10-K). Page 1 CONSOLIDATED FREIGHTWAYS CORPORATION FORM 10-K Year Ended December 31, 1997 _______________________________________________________________________ INDEX Item Page PART I 1. Business 3 2. Properties 8 3. Legal Proceedings 9 4. Submission of Matters to a Vote of Security Holders 9 PART II 5. Market for the Company's Common Stock and Related Security Holder Matters 9 6. Selected Financial Data 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 7A. Quantitative and Qualitative Disclosures About Market Risk 10 8. Financial Statements and Supplementary Data 10 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 PART III 10. Directors and Executive Officers of the Company 11 11. Executive Compensation 11 12. Security Ownership of Certain Beneficial Owners and Management 11 13. Certain Relationships and Related Transactions 12 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 12 SIGNATURES 13 INDEX TO FINANCIAL INFORMATION 15 Page 2 CONSOLIDATED FREIGHTWAYS CORPORATION FORM 10-K Year Ended December 31, 1997 _______________________________________________________________________ PART I ITEM 1. BUSINESS (a) General Development of Business Consolidated Freightways Corporation is a holding company that was incorporated in Delaware in 1996. It is herein referred to as the "Registrant" or "Company". Formerly a subsidiary of CNF Transportation Inc. (the former parent) through December 1, 1996, the Company was spun- off in a tax free distribution (the Distribution) to shareholders of the former parent. The Company consists of Consolidated Freightways Corporation of Delaware (CFCD), a nationwide motor carrier, incorporated in 1958 as successor to the original trucking company organized in 1929, and its Canadian operations, including Canadian Freightways, Ltd., 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, 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. (b) Financial Information About Industry Segments The Company operates in a single industry segment. (c) Narrative Description of Business The Company, headquartered in Menlo Park, California, is the holding company of CFCD, a full-service trucking company providing less-than- truckload freight services nationwide and in Canada and Mexico, and one- stop international freight service between the United States and 70 countries worldwide through operating agreements with ocean carriers and a network of international partners. Operations consist of an extensive transportation network that typically moves shipments of manufactured or non-perishable processed products having relatively high value and requiring consistent, expedited service, compared to the bulk raw materials characteristically transported by railroads, pipelines and water carriers. Less-than-truckload (LTL) is an industry designation for shipments weighing less than 10,000 pounds. CFCD is one of the nation's largest LTL motor carriers in terms of 1997 revenues. The Company also provides logistics services through its wholly-owned subsidiary, Redwood Systems, Inc. (Redwood). Established in January 1997, Redwood is a third party, non-asset based logistics company that offers complete supply chain management services including dedicated contract warehousing and carriage, just-in-time delivery and specialized time-definite distribution, information-based logistics services and worldwide multi-modal logistics. Page 3 CFCD's primary competitors in the national LTL market are Yellow Freight System, Inc., Roadway Express, Inc. and Arkansas Best Corporation. CFCD also competes for LTL freight with regional LTL motor carriers, small package carriers, private carriage and freight forwarders. Competition for freight is based primarily upon price, service consistency and transit time. In an effort to provide faster service and to better compete, CFCD implemented a comprehensive reengineering of its line-haul operations in October 1995. This reengineering, called the Business Accelerator System (BAS), replaced CFCD's traditional hub-and-spoke network with one that moves freight directionally from point-to-point and streamlines the freight network. BAS has the effect of reducing miles and freight handling, thereby reducing transit times and costs as well as more efficiently using system capacity. This reengineering, in conjunction with value added service offerings and use of lower-cost rail services allowed the Company to return to profitability in 1997. As a large carrier of LTL general freight, at December 31, 1997, CFCD operated approximately 39,100 vehicle units including inter-city tractors and trailers and pick-up and delivery units. It had a network of 357 U.S. and Canadian freight terminals, metro centers and regional consolidation centers. CFCD's operations are supported by a sophisticated data processing system for the control and management of the business. 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. There is a broad diversity in the customers served, size of shipments, commodities transported and length of haul. No single commodity accounted for more than a small fraction of total revenues. CFCD operates daily schedules utilizing relay drivers who drive approximately eight to ten hours each day and sleeper teams which in 1997 approximated 33% of all linehaul miles in North America. Road equipment consists of one tractor pulling two 28-foot double trailers or, to a limited extent, one semi-trailer or three 28-foot trailers. CFCD generally utilizes trailer equipment that is 102 inches in width. In 1997, CFCD operated in excess of 426 million linehaul miles in North America, almost all of which was conducted by equipment in doubles and triples configuration. The accident frequency of the triples configuration was lower than all other types of vehicle combinations used by CFCD. CFCD and several Canadian subsidiaries serve Canada through terminals in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Quebec, Saskatchewan and in the Yukon Territory. The Canadian operations utilize a fleet of over 1,250 trucks, tractors and trailers. Page 4 Cyclicality and Seasonality The LTL trucking industry is affected directly by the state of the overall economy and seasonal fluctuations, which affect the amount of freight to be transported. Freight shipments, operating costs and earnings are also affected adversely by inclement weather conditions. The months of September, October and November of each year usually have the highest business levels while the first quarter has the lowest. Employees At December 31, 1997, approximately 85% of the Company's domestic employees were represented by various labor unions, primarily the International Brotherhood of Teamsters (IBT). CFCD and the 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, new five-year NMFA with the IBT. 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. Labor costs, including fringe benefits, averaged approximately 66% of the Company's 1997 revenues. The Company had approximately 21,600, 20,300 and 20,200 employees at December 31, 1997, 1996 and 1995, respectively. Fuel The Company's average annual fuel cost per gallon (without tax) was $.576 in 1995. During 1996, the Company experienced a significant increase in fuel prices, with the average annual fuel cost per gallon increasing to $.697. To partially offset this increase, the Company instituted a fuel surcharge program in the second half of 1996. This program continued throughout 1997, as the average annual fuel cost per gallon was $.659. As fuel prices moderated towards the latter half of 1997 and into 1998, the Company eliminated its fuel surcharge effective February 3, 1998. 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. Federal and State Regulation Regulation of motor carriers has changed substantially in recent years. The process started with the Motor Carrier Act of 1980, which allowed easier access to the industry by new trucking companies, removed many restrictions on expansion of services by existing carriers, and increased price competition by narrowing the antitrust immunities available to the industry's collective ratemaking organizations. This deregulatory trend was continued by subsequent legislation in 1982, 1986, 1993 and 1994. The process culminated with federal pre-emption of most economic regulation of intrastate trucking regulatory bodies effective January 1, 1995, and with legislation which terminated the Interstate Commerce Commission (ICC) effective January 1, 1996. Page 5 Currently, the motor carrier industry is subject to federal regulation by the Federal Highway Administration (FHWA) and the Surface Transportation Board (STB), both of which are units of the United States Department of Transportation (DOT). The FHWA performs certain functions inherited from the ICC relating chiefly to motor carrier registration, cargo and liability insurance, extension of credit to motor carrier customers, and leasing of equipment by motor carriers from owner-operators. In addition, the FHWA enforces comprehensive trucking safety regulations relating to driver qualifications, drivers' hours of service, safety-related equipment requirements, vehicle inspection and maintenance, recordkeeping on accidents, and transportation of hazardous materials. Because of its large and increasing use of rail "piggyback" (trailer-on-flatcar) service permitted under its current collective bargaining agreements, CFCD must also comply with the hazardous materials transportation regulations of DOT's Federal Railroad Administration. As pertinent to the general freight trucking industry, the STB has authority to resolve certain types of pricing disputes and authorize certain types of intercarrier agreement under jurisdiction inherited from the ICC. At the state level, federal preemption of economic regulation does not prevent the states from regulating motor vehicle safety on their highways. In addition, federal law allows all states to impose insurance requirements on motor carriers conducting business within their borders, and empowers most states to require motor carriers conducting interstate operations through their territory to make annual filings verifying that they hold appropriate registrations from FHWA. Motor carriers also must pay state fuel taxes and vehicle registration fees, which normally are apportioned on the basis of mileage operated in each state. Canadian Regulation Although the provinces in Canada have regulatory authority over intra-provincial operations of motor carriers, they have elected to substantially eliminate intra-provincial regulation of the general freight trucking industry. Federal legislation to phase in deregulation of the extra-provincial motor carrier industry took effect January 1, 1988 and the phase in was completed in 1997. The new legislation relaxed economic regulation of extra-provincial trucking by easing market entry restrictions, and implemented safety regulations of trucking services under Federal jurisdiction. CFCD and its Canadian affiliates wrote off substantially all of the unamortized cost of their Canadian operating authorities in 1992. General The research and development activities of the Company are not significant. During 1997, 1996 and 1995 there was no single customer of the Company that accounted for 10% or more of consolidated revenues. Page 6 The Company is subject to Federal, state and local environmental laws and regulations relating to, among other things, contingency planning for spills of petroleum products, and its disposal of waste oil. Additionally, the Company is subject to significant regulations dealing with underground fuel storage tanks. The Company stores some of its fuel for its trucks and tractors in approximately 302 underground tanks located in 48 states. The Company believes that it is in substantial compliance with all such environmental laws and regulations and is not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on the Company's competitive position, operations or financial position. However, there can be no assurances that environmental matters existing with respect to the Company, or compliance by the Company with laws relating to environmental matters, will not have a material adverse effect on the Company's business, financial position or results of operations. The Company has in place policies and methods designed to conform with these regulations. The Company estimates that capital expenditures for upgrading underground tank systems and costs associated with cleaning activities for 1998 will not be material. 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. (d) Financial Information About Foreign and Domestic Operations and Export Sales. Approximately 5% of the Company's revenues are derived from international business. Page 7 ITEM 2. PROPERTIES The following summarizes the terminals and freight service centers operated by the Company at December 31, 1997. In general, the Company believes such facilities are suitable and adequate to handle CFCD's current business needs. These facilities generally consist of a large dock with loading doors, a small office and a large yard for the movement of tractors and trailers in the normal business operations. Owned Leased Total 226 131 357 The following table sets forth the location and square footage of CFCD's principal freight handling facilities: Location Square Footage Mira Loma, CA 280,672 ** Chicago, IL 231,159 Carlisle, PA 151,100 Kansas City, MO 131,916 ** Columbus, OH 118,774 ** Memphis, TN 118,745 Nashville, TN 118,622 * Indianapolis, IN 109,460 Orlando, FL 101,557 * Minneapolis, MN 94,890 Charlotte, NC 89,204 St. Louis, MO 88,640 ** Akron, OH 82,494 Sacramento, CA 81,286 Atlanta, GA 77,920 Houston, TX 77,346 Dallas, TX 75,358 * Freemont, IN 73,760 * Peru, IL 73,760 Buffalo, NY 73,380 Milwaukee, WI 70,661 Salt Lake City, UT 68,480 Seattle, WA 59,720 *** Springfield, MA 51,760 Portland, OR 47,824 Phoenix, AZ 20,237 * Facility partially or wholly financed through the issuance of industrial revenue bonds. Principal amount of debt is secured by the property. ** Property pledged as collateral for the benefit of CNF Transportation Inc. for workers' compensation claims prior to the Distribution, as required under the Reimbursement and Indemnification Agreement dated October 1, 1996. *** Property is leased from a subsidiary of CNF Transportation Inc. through December 1, 2005. Page 8 ITEM 3. LEGAL PROCEEDINGS The legal proceedings of the Company are summarized in Note 9 on pages 26 and 27 of the 1997 Annual Report to Shareholders and are incorporated herein by reference. Discussions of certain environmental matters are presented in Items 1 and 7. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is listed for trading on the Nasdaq Stock Market's National Market. The Company's common stock began trading on December 3, 1996. The market price range of the common stock for the period January 1, 1997 to December 31, 1997 was $7.00 to $18.50. Currently there are no cash dividends paid on the Company's common stock. The Company presently expects that it will not pay a dividend in 1998. The Company's dividend policy thereafter will be dependent on the circumstances then in existence. There can be no assurance, however, that the Company will pay any cash dividends on its common stock in the future. As of December 31, 1997, there were 31,650 holders of record of the common stock ($.01 par value) of the Company. ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data is presented in the "Five Year Financial Summary" on page 30 of the 1997 Annual Report to Shareholders and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is presented on pages 16 through 18 of the 1997 Annual Report to Shareholders and is incorporated herein by reference. Page 9 Certain statements included or incorporated by reference herein, including certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" referred to above, 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. ITEM 7A. QUANTITITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Auditors' Report are presented on pages 19 through 28, inclusive, of the 1997 Annual Report to Shareholders and are incorporated herein by reference. The unaudited quarterly financial data is included on page 29 of the 1997 Annual Report to Shareholders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The identification of the Company's Directors is presented on pages 2 and 3 of the Company's 1998 Proxy Statement and those pages are incorporated herein by reference. The Executive Officers of the Company, their ages at December 31, 1997 and their applicable business experience are as follows: W. Roger Curry, 59, President and Chief Executive Officer of the Company since December 2, 1996. Mr. Curry has served as President and Chief Executive Officer of CFCD since July 1994. Mr. Curry served as a Senior Vice President of the former parent from 1986 to December 2, 1996. In 1991, he was elected President of Emery Air Freight Corporation, relinquishing the position in 1994 to become President of CFCD. Patrick H. Blake, 48, Executive Vice President - Operations of the Company since December 2, 1996. Mr. Blake has served as Executive Vice President - Operations of CFCD since July 1994. He was Vice President Eastern Region of CFCD from 1992-1994 and a Division Manager from 1985- 1992. David F. Morrison, 44, Executive Vice President and Chief Financial Officer of the Company since December 2, 1996. Mr. Morrison served as Vice President and Treasurer of the former parent from October 1991 to October 1996 when he became Executive Vice President and Chief Financial Officer of CFCD. Stephen D. Richards, 54, Senior Vice President and General Counsel of the Company since December 2, 1996. Mr. Richards has been Vice President and General Counsel of CFCD since September 1995. He was Deputy General Counsel of the former parent for the preceding four years. Joseph R. Schillaci, 55, Executive Vice President - Sales and Marketing of the Company since April 1997. Prior to joining the Company, Mr. Schillaci was president and chief operating officer of Petro Travel Plazas, LP, a national fueling, maintenance and retail provider to the trucking industry, since 1993. Robert E. Wrightson, 58, Senior Vice President and Controller of the Company since December 2, 1996. Mr. Wrightson has served as Senior Vice President and Controller of CFCD since July 1994. Prior to joining CFCD, he was Vice President and Controller of the former parent, assuming that position in 1989. ITEM 11. EXECUTIVE COMPENSATION The required information for Item 11 is presented on pages 6 through 10, inclusive, of the Company's 1998 Proxy Statement, and those pages are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The required information for Item 12 is included on pages 4 and 12 of the Company's 1998 Proxy Statement and is incorporated herein by reference. Page 11 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Exhibits Filed 1. Financial Statements See Index to Financial Information. 2. Financial Statement Schedules See Index to Financial Information. 3. Exhibits See Index to Exhibits. (b) Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended December 31, 1997. Page 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSOLIDATED FREIGHTWAYS CORPORATION (Registrant) March 27, 1998 /s/W. Roger Curry W. Roger Curry President and Chief Executive Officer March 27, 1998 /s/David F. Morrison David F. Morrison Executive Vice President, Chief Financial Officer and Treasurer March 27, 1998 /s/Robert E. Wrightson Robert E. Wrightson Senior Vice President and Controller Page 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. March 27, 1998 /s/William D. Walsh William D. Walsh, Chairman of the Board March 27, 1998 /s/W. Roger Curry W. Roger Curry President, Chief Executive Officer and Director March 27, 1998 /s/G. Robert Evans G. Robert Evans, Director March 27, 1998 /s/Paul B. Guenther Paul B. Guenther, Director March 27, 1998 /s/John M. Lillie John M. Lillie, Director Page 14 CONSOLIDATED FREIGHTWAYS CORPORATION FORM 10-K Year Ended December 31, 1997 _______________________________________________________________________ INDEX TO FINANCIAL INFORMATION Consolidated Freightways Corporation and Subsidiaries The following Consolidated Financial Statements of Consolidated Freightways Corporation and Subsidiaries appearing on pages 19 through 28, inclusive, of the Company's 1997 Annual Report to Shareholders are incorporated herein by reference: Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 1997 and 1996 Statements of Consolidated Operations - Years Ended December 31, 1997, 1996 and 1995 Statements of Consolidated Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Statements of Consolidated Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements In addition to the above, the following consolidated financial information is filed as part of this Form 10-K: Page Consent of Independent Public Accountants 16 Report of Independent Public Accountants 16 Schedule II - Valuation and Qualifying Accounts 17 The other schedules have been omitted because either (1) they are neither required nor applicable or (2) the required information has been included in the consolidated financial statements or notes thereto. Page 15 SIGNATURE CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 333-16851, 333-16835 and 333-25167. /s/Arthur Andersen LLP ARTHUR ANDERSEN LLP Portland, Oregon March 27, 1998 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Consolidated Freightways Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Consolidated Freightways Corporation's 1997 Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 27, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule on page 17 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP ARTHUR ANDERSEN LLP Portland, Oregon January 27, 1998 Page 16 SCHEDULE II CONSOLIDATED FREIGHTWAYS CORPORATION VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1997 (In thousands) DESCRIPTION ALLOWANCE FOR DOUBTFUL ACCOUNTS ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD 1997 $ 9,692 $ 8,374 $ - $(10,599)(a) $ 7,467 1996 $ 9,349 $ 6,534 $ - $ (6,191)(a) $ 9,692 1995 $11,049 $ 2,326 $ - $ (4,026)(a) $ 9,349 a) Accounts written off net of recoveries. Page 17 INDEX TO EXHIBITS ITEM 14(a)(3) Exhibit No. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: 2.1 Distribution Agreement between Consolidated Freightways Corporation and Consolidated Freightways, Inc., dated November 25, 1996. (Exhibit 2.1 to the Company's Form 8-K dated March 12, 1997.) (*) (3) Articles of incorporation and bylaws: 3.1 Amended and Restated Certificate of Incorporation of Consolidated Freightways Corporation. (Exhibit 3.1 to the Company's Form 10 filed October 2, 1996) (*) 3.2 Amended and Restated Bylaws of Consolidated Freightways Corporation. (Exhibit 3.2 to the Company's Form 10 filed October 2, 1996)(*) (10) Material Contracts: 10.1 Transition Services Agreement between Consolidated Freightways Corporation and CNF Service Company, Inc., dated as of December 2, 1996. (Exhibit 10.1 to the Company's Form 8-K dated March 12, 1997.) (*) 10.2 Alternative Dispute Resolution Agreement Between Consolidated Freightways Corporation and Consolidated Freightways,Inc., dated as of December 2, 1996. (Exhibit 10.2 to the Company's Form 8-K dated March 12, 1997.) (*) 10.3 Employee Benefit Matters Agreement between Consolidated Freightways Corporation and Consolidated Freightways, Inc., dated as of December 2, 1996. (Exhibit 10.3 to the Company's Form 8-K dated March 12, 1997.) (*) 10.4 Tax Sharing Agreement between Consolidated Freightways Corporation and Consolidated Freightways, Inc., dated as of December 2, 1996. (Exhibit 10.4 to the Company's Form 8-K dated March 12,1997.) (*) 10.5 Reimbursement and Indemnification Agreement between Consolidated Freightways Corporation of Delaware and Consolidated Freightways, Inc., dated as of October 1, 1996. (Exhibit 10.5 to the Company's Form 8-K dated March 12, 1997.) (*) 10.6 Consolidated Freightways Corporation 1996 Stock Option and Incentive Plan. (Exhibit 10.6 to the Company's Form 10 filed October 2, 1996)(*)(#) 10.7 Loan and Security Agreement among Consolidated Freightways Corporation of Delaware, BankAmerica Business Credit Inc. and various other financial institutions dated as of November 27, 1996. (Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1996.)(*) 10.8 Consolidated Freightways Corporation 1996 Restricted Stock Award Agreements. (Exhibit 10.8 to the Company's Form 10-K for the year ended December 31, 1996.) (*)(#) 10.9 Consolidated Freightways Corporation Senior Executive Incentive Plan for 1998. (#) (*) Previously filed with the Securities and Exchange Commission and incorporated by reference. (#) Designates a contract or compensation plan for Management or Directors. Page 18 INDEX TO EXHIBITS ITEM 14(a)(3) Exhibit No. 10.10 Consolidated Freightways Corporation Deferred Compensation Plan for Executives. (Exhibit 10.10 to the Company's Form 10-K for the year ended December 31, 1996.) (*)(#) 10.11 Consolidated Freightways Corporation Supplemental Executive Retirement Plan. (Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 1996.) (*)(#) 10.12 Consolidated Freightways Inc. Executive Split-Dollar Life Insurance Plan. (Exhibit 10.12 to the Company's Form 10-K for the year ended December 31, 1996.) (*)(#) 10.13 Participation Agreement dated as of December 22, 1995 between Consolidated Freightways Corporation of Delaware, as lessee, and ABN AMRO Bank N.V., as lessor, as amended. (Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1997.) (*) 10.14 Participation Agreement dated as of September 30, 1994 between Consolidated Freightways Corporation of Delaware, as lessee, and BA Leasing & Capital Corporation and various other financial institutions, as lessors, as amended. (Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 1997.) (*) 10.15 Reimbursement and Security Agreement dated July 3, 1997 between Consolidated Freightways Corporation and CNF Transportation Inc. (Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1997.) (*) 10.16 Third Amendment to Participation Agreement and Master Lease intended as Security dated December 12, 1997 between Consolidated Freightways Corporation of Delaware and ABN AMRO Bank N.V. 10.17 Amendment No. 3 to Loan and Security Agreement dated November 1, 1997 between Consolidated Freightways Corporation of Delaware and BankAmerica Business Credit, Inc. (13) Annual Report to Security Holders: Consolidated Freightways Corporation 1997 Annual Report to Shareholders. (Only those portions referenced herein are incorporated in this Form 10-K. Other portions such as the "Letter to Shareholders" are not required and therefore not "filed" as part of this Form 10-K.) (21) Significant Subsidiaries of the Company (27) Financial Data Schedule (*) Previously filed with the Securities and Exchange Commission and incorporated by reference. (#) Designates a contract or compensation plan for Management or Directors. Page 19 EX-10 2 EXHIBIT 10.9 Exhibit 10.9 CONSOLIDATED FREIGHTWAYS CORPORATION SENIOR EXECUTIVE INCENTIVE PLAN FOR 1998 THE PLAN In order to motivate certain employees of Consolidated Freightways Corporation (CFC) more effectively and efficiently, CFC establishes an Incentive Plan (Plan) under which payments will be made to designated eligible senior executive personnel out of calendar year 1998 Incentive Profits. DESIGNATION OF PARTICIPANTS Participants in this Plan shall be designated full-time executive personnel of CFC. A master list of all Plan participants will be maintained in the office of the President of CFC. ELIGIBILITY FOR PAYMENT Participants will commence participation at the beginning of the first full calendar quarter following becoming eligible. Calendar quarters begin January 1, April 1, July 1, and October 1 or the first working day thereafter. An employee who commences participation in the 1998 Plan year, and who participates less than four full quarters, will receive a pro rata payment based on the number of full calendar quarters of Plan participation. Subject to the following exceptions, no person shall receive any payment under this Plan unless on the date that the payment is actually made that person is then currently (i) employed by CFC or any of its subsidiaries and (ii) a Plan participant. EXCEPTION 1. A Plan participant who is employed by CFC through December 31, 1998 but leaves that employment or otherwise becomes ineligible after December 31, 1998 but before the final payment is made relating to 1998, unless terminated for cause, shall be entitled to receive payments under this Plan resulting from 1998 Incentive Profits. EXCEPTION 2. An appropriate pro rata payment will be made (1) to a Plan participant who retires prior to December 31, 1998 pursuant to the Consolidated Freightways Corporation Retirement Plan or to the provisions of the Social Security Act and who, at the time of retirement, was an eligible participant in this Plan, (2) to the heirs, legatees, administrators or executors of a Plan participant who dies prior to December 31, 1998 and who, at the time of death, was an eligible participant in this Plan, (3) to an eligible Plan participant who is placed on an approved Medical, Sabbatical, or Military Leave of Absence prior to December 31, 1998, or (4) to an eligible Plan participant who is transferred to another subsidiary of Consolidated Freightways Corporation and who remains an employee through December 31, 1998. METHOD OF PAYMENT Each Plan participant will also be assigned an incentive participation factor as a percent of Annual Salary. Incentive will be earned on CFC pretax pre-incentive profit. PERSONAL DATA SHEET A "Personal Data Sheet" for calculation of incentive will be prepared for each Plan participant which designates (1) the unit to which the participant is assigned, (2) his assigned participation, (3) the minimum level of profit achievement required, (4) the Factor level of achievement for profit, and (5) the incentive earnings at the Factor profit goal. DATE OF PAYMENT The President of CFC may authorize a partial payment of the estimated annual earned incentive, in December, 1998. The final payment to eligible participants, less any previous partial payment, will be made on or before March 15, 1999. INCENTIVE PROFIT Incentive Profit is defined as the pre-tax earnings of Consolidated Freightways Corporation before deducting any amounts expensed under this or any subsidiary incentive plan, and before deducting any amounts expensed under the restricted stock plan and before deducting income taxes, but after deducting expenses incurred from any bonus plan(s). ANNUAL COMPENSATION Annual Compensation for incentive purposes for each Plan participant is his annualized salary before any incentive, or other special compensation as of the first pay period following the date the participant becomes eligible to participate in this Plan. MAXIMUM PAYMENT Payments under this Plan are not limited by each participant's participation factor. LAWS GOVERNING PAYMENTS No payment shall be made under this Plan in an amount which is prohibited by law. AMENDMENT, SUSPENSION, AND ADMINISTRATION OF PLAN The Board of Directors of CFC may at any time amend, suspend, or terminate the operation of this Plan, by thirty-day written notice to the Plan participants, and will have full discretion as to the administration and interpretation of this Plan. No participant in this Plan shall at any time have any right to receive any payment under this Plan until such time, if any, as any payment is actually made. DURATION OF PLAN This Plan is for the calendar year 1998 only. EX-10 3 EXHIBIT 10.16 Exhibit 10.16 THIRD AMENDMENT TO PARTICIPATION AGREEMENT AND MASTER LEASE INTENDED AS SECURITY AND FIRST AMENDMENT TO SECURITY AGREEMENT dated as of December 12, 1997 among CONSOLIDATED FREIGHTWAYS CORPORATION OF DELAWARE, a Delaware corporation (the "Lessee"), the Lessors referred to below (the "Lessors"), and ABN AMRO BANK N.V., as agent (the "Agent") for the Lessors thereunder. PRELIMINARY STATEMENTS: WHEREAS, the parties hereto are parties to that certain Participation Agreement dated as of December 22, 1995, as amended by a first amendment thereto dated as of March 25, 1996 and a second amendment thereto dated as of January 23, 1997 (the "Second Amendment") (said Participation Agreement as so amended being the "Participation Agreement"). WHEREAS, pursuant to the Participation Agreement, the Agent and the Lessee entered into that certain Master Lease Intended as Security, dated as of December 22, 1996, as amended by and a first amendment thereto dated as of March 25, 1996 and a second amendment thereto dated as of January 23, 1997 (said Master Lease Intended as Security as so amended being the "Lease"); WHEREAS, pursuant to the Second Amendment, the Lessee executed a Security Agreement dated as of January 23, 1997 in favor of the Agent (said Security Agreement being the "Security Agreement"); and WHEREAS, the Lessee has requested that the Participation Agreement and the Security Agreement be amended as set forth herein; NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms used herein and not otherwise defined herein shall have the meanings given to such terms in the Participation Agreement. SECTION 2. Amendments to Participation Agreement. The Participation Agreement is, effective as of the date hereof, hereby amended as follows: (a) Section 6.1(i)(iv) is amended in full to read as follows: "(iv) not make or incur, or permit any of its Subsidiaries to make or incur, any Capital Expenditures if, after giving effect thereto, the aggregate amount of all such Capital Expenditures, net of proceeds from sales of fixed assets, would exceed $30,000,000 for Fiscal Year 1997, $70,000,000 for Fiscal Year 1998 and $100,000,000 for Fiscal Year 1999, provided, however, that up to $15,000,000 of permitted Capital Expenditures unused in any one year may be carried over to the following year." (b) Schedule X is amended by adding the following definition: "'Security Agreement' shall mean the Security Agreement dated as of January 23, 1997 by the Lessee in favor of the Agent, as amended, modified or supplemented from time to time." (c) Clause (a) at the definition of "Casualty" in Schedule X is amended in full to read as follows: " . . . (a) the loss of such vehicle or the use thereof due to theft, disappearance, destruction, damage beyond repair or rendition of such Vehicle permanently unfit for normal use for any reason whatsoever in the business judgment of the Lessee; . . ." (d) The definitions of "Adjusted Net Earnings" and "Operative Agreement(s)" in Schedule X are amended in full to read as follows: " 'Adjusted Net Earnings' shall mean with respect to any fiscal period of the Lessee, the Adjusted Net Earnings from Operations for such fiscal period plus the sum of the following to the extent deducted in computing Adjusted Net Earnings from Operations: (a) interest expense, (b) accrued income taxes, (c) depreciation and amortization expense, (d) the non-cash expense related to the Consolidated Freightways Corporation 1996 Stock Option and Incentive Plan (commonly referred to as the Restricted Stock Awards Program), as amended from time to time, and (e) miscellaneous expenses (including Letter of Credit Fees) less miscellaneous income for such period. 'Operative Agreement(s)' shall mean the Participation Agreement, the Lease, the Lease Supplements, the Delivery Date Notices, the Subleases, any Assumption Agreement, the Security Agreement, each Certificate of Title and each UCC financing statement filed or to be filed from time to time with respect to the security interests created pursuant to the Lease." SECTION 3. Amendments to Security Agreement. The Security Agreement is, effective as of the date hereof, hereby amended as follows: (a) Clause (vi) of Section 3(b) is amended in full to read as follows: ". . . (vi) any Lien in favor of BankAmerica Business Credit, Inc., as Agent, under the BABC Agreement in the Collateral described in Sections 1(b), 1(c) and 1(d) hereof to the extent that such Collateral applies both to Vehicles and to vehicles in which BankAmerica Business Credit, Inc., as Agent, has a security interest in connection with the BABC Agreement . . . " (b) The second sentence of Section 4(a) is amended in full to read as follows: ". . . Without limiting the generality of the foregoing, the Grantor will execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Agent may reasonably request, in order to perfect and preserve the security interest granted or purported to be granted hereby, including with respect to any replacement Vehicle or any Replacement Part (as hereinafter defined)." (c) The definition of "Partial Casualty" in Section 5(c) is amended in full to read as follows: " 'Partial Casualty' means any loss, damage, destruction, taking by eminent domain, loss of use or theft of any Vehicle or any portion of a Vehicle or the rendition of any Vehicle unfit for normal use for any reason whatsoever in the business judgment of the Grantor, in each case which does not constitute a Casualty." (d) Clause (a) of the definition of "Casualty" in Section 5(c) is amended in full to read as follows: ". . . (a) the loss of such Vehicle or the use thereof due to theft, disappearance, destruction, damage beyond repair or rendition of such Vehicle permanently unfit for normal use for any reason whatsoever in the business judgment of the Grantor;. . ." (e) The first sentence of Section 5(f)(i) is amended in full to read as follows: "Notwithstanding the other provisions of this Security Agreement, Grantor shall have no obligation to replace, repair, or maintain any Vehicle as to which a Casualty or Partial Casualty has occurred or repay any portion of the Lease Balance in respect thereof so long as the sum of the Specified Value (as hereinafter defined) of Vehicles which would be considered a Casualty or a Partial Casualty (and which have not been replaced or repaired at the time of determination) do not exceed in any year $1,250,000 or exceed on a cumulative basis from the date hereof to the date of determination $2,500,000. 'Specified Value' means as to any Vehicle either the orderly liquidation value thereof as specified in the appraisal attached as Schedule I hereto or, in the case of any replacement Vehicle, the orderly liquidation value as so specified of the respective replaced Vehicle." SECTION 4 Representations and Warranties of the Lessee. The Lessee represents and warrants as follows: (a) The Lessee is a corporation duly organized, validly existing and in good standing under the laws of Delaware. (b) The Lessee has all requisite corporate power and authority to execute, deliver and perform its obligations under this Amendment and each Operative Agreement, as amended hereby. (c) The execution, delivery and performance by the Lessee of this Amendment and the Operative Agreements, as amended hereby, and the performance by the Lessee of its respective obligations hereunder and thereunder, have been duly authorized by all necessary corporate action and do not and will not (i) violate any provision of the Lessee's certificate of incorporation or by-laws, (ii) violate any provision of any law, rule or regulation presently in effect applicable to the Lessee, which violation or violations would have, individually or in the aggregate, a Material Adverse Effect, (iii) result in a breach of, or constitute a default under, any indenture, loan or credit agreement, or any other agreement or instrument to which the Lessee is a party or by which the Lessee or its properties may be bound or affected, which breaches or defaults would have, individually or in the aggregate, a Material Adverse Effect, or (iv) result in, or require, the creation or imposition of any Lien of any nature upon or with respect to any of the properties now owned or hereafter acquired by the Lessee (other than the Security interest contemplated by the Lease and the Security Agreement). (d) No authorization, consent, license, approval or other action by or formal execution from, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Lessee of this Amendment or any of the Operative Agreements, as amended hereby. (e) This Amendment and each of the other Operative Agreements, as amended hereby, constitute legal, valid and binding obligations of the Lessee enforceable against the Lessee in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, arrangement, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. (f) There is no pending or, to the knowledge of Lessee, threatened action or proceeding affecting the Lessee or any of its Subsidiaries before any court, governmental agency or arbitrator, in which there is a reasonable probability of an adverse decision which, if adversely determined, would have a Material Adverse Effect or which purports to affect the legality, validity or enforceability of this Amendment or any of the other Operative Agreements, as amended hereby. SECTION 5. Reference to and Effect on the Operative Agreements. (a) Upon the effectiveness of this Amendment, on and after the date hereof each reference in the Participation Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Participation Agreement, and each reference in the other Operative Agreements to "the Participation Agreement", "thereunder", "thereof" or words of like import referring to the Participation Agreement, shall mean and be a reference to the Participation Agreement as amended hereby, each reference in the Lease to "this Lease", "hereunder", "hereof" or words of like import referring to the Lease, and each reference in the other Operative Agreements to "the Lease", "thereunder", "thereof" or words of like import referring to the Lease, shall mean and be a reference to the Lease as amended hereby. Each reference in the Security Agreement to "this Agreement," "hereunder," "hereof" or words of like import referring to the Security Agreement, and each reference in the other Operative Agreements to "the Security Agreement," "thereunder," "thereof" or words of like import referring to the Security Agreement, shall mean and be reference to the Security Agreement as amended hereby. (b) Except as specifically amended above, the Participation Agreement, the Lease and the Security Agreement, and all other Operative Agreements, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lessor or the Agent under any of the Operative Agreements, nor constitute a waiver of any provision of any of the Operative Agreements. SECTION 6. Costs, Expenses and Taxes. The Lessee agrees to pay on demand all costs and expenses of the Agent in connection with the preparation, execution, delivery, administration, modification and amendment of this Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities hereunder and thereunder. In addition, the Lessee shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder. SECTION 7. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. SECTION 8. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. CONSOLIDATED FREIGHTWAYS CORPORATION OF DELAWARE, as Lessee By:s/David F. Morrison Name:David F. Morrison Title:Executive Vice President and Chief Financial Officer ABN AMRO BANK N.V., not individually, but solely as Agent for the Lessors By:s/Kathleen L. Ross Name:Kathleen L. Ross Title:Group Vice President By:/s/David L. Thomas Name:David L. Thomas Title:Vice President ABN AMRO BANK N.V., as Lessor By:s/Kathleen L. Ross Name:Kathleen L. Ross Title:Group Vice President By:/s/David L. Thomas Name:David L. Thomas Title:Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Lessor By Name: Title: PNC LEASING CORP., as Lessor By:/s/David J. Krener Name:David J. Krener Title:Vice President THE BANK OF NEW YORK, as Lessor By:/s/Elizabeth T. Ying Name:Elizabeth T. Ying Title:Vice President LBS BANK - NEW YORK, as Lessor By:/s/Frank J. Horvat Name:Frank J. Horvat Title:Senior Vice President By:/s/Lisa A. Schumann Name:Lisa A. Schumann Title:Vice President PT BANK RAKYAT INDONESIA (PERSERO), as Lessor By:/s/Kemas M. Arief Name:Kemas M. Arief Title:General Manager By:/s/Hendrawan Tranggana Name:Hendrawan Tranggana Title:Deputy General Manager BANK POLSKA KASA OPIEKI S.A. PEKAO S.A. GROUP NEW YORK BRANCH By:/s/Hussein B. El-Tawil Name:Hussein B. El-Tawil Title:Vice President EX-10 4 EXHIBIT 10.17 Exhibit 10.17 AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT This Amendment No. 3 to Loan and Security Agreement is made as of November 1, 1997 by and among each of the undersigned and amends that certain Loan and Security Agreement, dated as of November 27, 1996 (as amended by Amendment No. 1 dated as of February 28, 1997 and Amendment No. 2 dated as of June 27, 1997, the "Loan Agreement"), among the financial institutions listed on the signature pages thereof as lenders (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), BankAmerica Business Credit, Inc., a Delaware corporation, as agent for the Lenders (in its capacity as agent, the "Agent"), NationsBank of Texas, N.A., as the L/C Issuer and as co-syndication agent for the Lenders, Caisse Nationale De Credit Agricole, as co-agent for the Lenders, Consolidated Freightways Corporation of Delaware, a Delaware corporation, (the "Borrower"), Consolidated Freightways Corporation (the "Parent"), Leland James Service Corporation ("Leland") and Redwood Systems, Inc. ("Redwood"). Capitalized terms used herein without definition have the meanings assigned thereto in the Loan Agreement. RECITALS A. The Borrower has requested that certain provisions of the Loan Agreement be amended as more fully described below. B. On the terms and subject to the conditions set forth in this Amendment, the parties to the Loan Agreement have agreed to the amendments to the Loan Agreement as set forth below. AGREEMENT In consideration of the foregoing, and for good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned hereby agree as follows: ARTICLE 1 AMENDMENTS TO LOAN AND SECURITY AGREEMENT 1.1 Amendment to the Definition of "Adjusted Net Earnings". The definition of "Adjusted Net Earnings" set forth in Section 1.1 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "Adjusted Net Earnings" means with respect to any fiscal period of the Borrower, the Adjusted Net Earnings from Operations for such fiscal period plus the sum of the following to the extent deducted in computing Adjusted Net Earnings from Operations: (a) interest expense, (b) accrued income taxes, (c) depreciation and amortization expense, (d) the non-cash expense related to the Consolidated Freightways Corporation 1996 Stock Option and Incentive Plan (commonly referred to as the Restricted Stock Awards Program), as amended from time to time, and (e) miscellaneous expenses (including Letter of Credit Fees) less miscellaneous income for such period." 1.2 Amendment to the Definition of "Applicable Margin". The definition of "Applicable Margin" set forth in Section 1.1 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "Applicable Margin" means (i) with respect to Base Rate Revolving Loans and all other Obligations (other than LIBOR Revolving Loans), one-quarter percent (0.25%); and (ii) with respect to LIBOR Revolving Loans, one and one-quarter percent (1.25%)." 1.3 Amendment to the Definition of "Default Rate". The definition of "Default Rate" set forth in Section 1.1 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "Default Rate" means a fluctuating per annum interest rate at all times equal to the sum of (a) the otherwise applicable Interest Rate, plus (b) two percent (2.0%). Each Default Rate shall be adjusted simultaneously with any change in the applicable Interest Rate. In addition, with respect to Letters of Credit, the Default Rate shall mean an increase in the Letter of Credit Fee by two (2) percentage points." 1.4 Amendment to the Definition of "Triggering Event". The definition of "Triggering Event" set forth in Section 1.1 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "Triggering Event" means the occurrence of any one of the following events: (a) an Event of Default, (b) Availability is $50,000,000 or less, (c) the average daily Dollar amount of Revolving Loans outstanding for the immediately preceding thirty (30) day period exceeds $40,000,000, or (d) the aggregate Dollar amount of Revolving Loans outstanding on any date exceeds $50,000,000." 1.5 Amendment to Section 3.1(a). The fourth sentence of Section 3.1(a) of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "Except as otherwise provided herein, the outstanding Obligations shall bear interest as follows: (i) for all Base Rate Revolving Loans and other Obligations (other than LIBOR Revolving Loans) at a fluctuating per annum rate equal to the Base Rate plus the Applicable Margin, and (ii) for all LIBOR Revolving Loans at a per annum rate equal to the LIBOR Rate plus the Applicable Margin; provided, however, that if the sum of outstanding Letters of Credit and outstanding Revolving Loans exceeds $150,000,000, the amount by which the Revolving Loans, when added to the outstanding Letters of Credit, exceeds $150,000,000 shall bear interest at the Interest Rate otherwise applicable to such Revolving Loans plus one-quarter of one percent (0.25%)." 1.6 Amendment to Section 3.6. Section 3.6 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "3.6 Letter of Credit Fee. The Borrower agrees to pay to the Agent, for the ratable account of the Lenders, for each Letter of Credit, a fee (the "Letter of Credit Fee") equal to one and one-eighths percent (1.125%) per annum of the undrawn face amount of each Letter of Credit issued for the Borrower's account at the Borrower's request, plus all out-of-pocket costs, fees and expenses incurred by the Agent in connection with the application for, issuance of, or amendment to any Letter of Credit. The Letter of Credit Fee shall be payable monthly in arrears on the first day of each month following any month in which a Letter of Credit was issued and/or in which a Letter of Credit remains outstanding. The Letter of Credit Fee shall be computed on the basis of a 360-day year for the actual number of days elapsed." 1.7 Amendment to Section 8.9. Section 8.9 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "8.9 Debt For Borrowed Money. After giving effect to the making of the Revolving Loans to be made on the Initial Funding Date, the Loan Parties and their Subsidiaries have no Debt For Borrowed Money, except (a) the Obligations, (b) Debt For Borrowed Money described on Schedule 8.9, and (c) trade payables and other contractual obligations arising in the ordinary course of business." 1.8 Amendment to Section 9.12. Section 9.12 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "9.12 Debt. None of the Loan Parties shall incur or maintain any Debt For Borrowed Money, other than: (a) the Obligations; (b) provided that no Event of Default has occurred and is continuing or would result from such action, Debt For Borrowed Money of the Parent and the Borrower in an aggregate amount outstanding at any time not to exceed $25,000,000, excluding Debt For Borrowed Money incurred to finance Capital Expenditures permitted under Section 9.21; and (c) other Debt For Borrowed Money existing on the Closing Date and reflected in the Financial Statements attached hereto as Exhibit F or listed on Schedule 8.9. The terms and conditions of any agreement (including amendments, modifications, waivers and restatements of existing agreements) entered into by the Borrower relating to Synthetic Leases shall not contain any financial covenants which are more restrictive on the Borrower than the financial covenants set forth in Sections 9.22, 9.23 and 9.24 of this Agreement and any amendments or modifications to the interest rate or the amortization shall be acceptable to the Agent." 1.9 Amendment to Section 9.21. Section 9.21 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "9.21 Capital Expenditures. None of the Loan Parties shall make or incur any Capital Expenditure if, after giving effect thereto, the aggregate amount of all Capital Expenditures (net of proceeds from sales of fixed assets) by the Loan Parties on a consolidated basis would exceed $30,000,000 for Fiscal Year 1997, $70,000,000 for Fiscal Year 1998 and $100,000,000 for each Fiscal Year thereafter until the Stated Termination Date; provided, however, that up to $15,000,000 of unused permitted Capital Expenditures in a given Fiscal Year may be carried over to the following Fiscal Year." ARTICLE 2 REPRESENTATIONS AND WARRANTIES Each Loan Party warrants and represents to the Agent and the Lenders that: 2.1 Representations and Warranties True and Correct. The representations and warranties contained in the Agreement and the other Loan Documents are correct in all material respects on and as of the date hereof except to the extent the Agent and the Lenders have been notified by the Borrower that any representation or warranty is not correct and the Majority Lenders have explicitly waived in writing compliance with such representation or warranty; and except with respect to Schedules 8.3, 8.5, 8.9, 8.15, 8.17, 8.18, 8.29 and 8.32 to the Loan Agreement to the extent that the Borrower has submitted to the Agent, the L/C Issuer and each Lender an update thereto. 2.2 No Default or Event of Default. No event has occurred and is continuing which constitutes a Default or an Event of Default. ARTICLE 3 MISCELLANEOUS 3.1 Effective Date. This Amendment shall be effective as of the date when the Agent has received a duly executed counterpart of this Amendment from each of the parties to the Loan Agreement. 3.2 Governing Law. This Amendment shall be interpreted and the rights and liabilities of the parties hereto determined in accordance with the internal laws (as opposed to the conflict of laws provisions) of the State of California. 3.3 Counterparts. This Amendment may be executed in any number of counterparts, and by the Agent, each Lender, the Borrower, Parent, Leland and Redwood in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. IN WITNESS WHEREOF, the parties have entered into this Amendment on the date first above written. "BORROWER" Consolidated Freightways Corporation of Delaware, a Delaware corporation By:/s/David F. Morrison Name:David F. Morrison Title:Executive Vice President and Chief Financial Officer "PARENT" Consolidated Freightways Corporation, a Delaware corporation By:/s/David F. Morrison Name:David F. Morrison Title:Executive Vice President and Chief Financial Officer "LELAND" Leland James Service Corporation, a Delaware corporation By:/s/David F. Morrison Name:David F. Morrison Title:Executive Vice President and Chief Financial Officer "REDWOOD" Redwood Systems, Inc., a Delaware corporation By:/s/David F. Morrison Name:David F. Morrison Title:Executive Vice President and Chief Financial Officer "AGENT" BankAmerica Business Credit, Inc., as the Agent By:/s/Gary P. Riley Name:Gary P. Riley Title:Vice President "LENDERS" Commitment: $75,000,000 BankAmerica Business Credit, Inc., as a Lender By:/s/Gary P. Riley Name:Gary P. Riley Title:Vice President Commitment: $35,000,000 NationsBank of Texas, N.A., as a Lender By:/s/Stacy Yenerich Name:Stacy Yenerich Title:Assistant Vice President Commitment: $20,000,000 Caisse Nationale De Credit Agricole, as a Lender By:/s/Dean Belice Name:Dean Belice Title:Senior Vice President Commitment: $35,000,000 Transamerica Business Credit Corporation, as a Lender By:/s/Robert Heinz Name:Robert Heinz Title:Senior Vice President Commitment: $25,000,000 Congress Financial Corporation (Western), as a Lender By:/s/Gregg L. Coiley Name:Gregg L. Coiley Title:Vice President Commitment: $20,000,000 The CIT Group/Business Credit, Inc., as a Lender By:/s/Robert Castine Name:Robert Castine Title:Assistant Vice President Commitment: $15,000,000 BTM Capital Corporation, as a Lender By:/s/William R. York Name:William R. York Title:Vice President "L/C ISSUER" NationsBank of Texas, N.A., as L/C Issuer By:/s/Stacy Yenerich Name:Stacy Yenerich Title:Assistant Vice President EX-13 5 EXHIBIT 13 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) 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 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 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 (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 (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.
EX-21 6 EXHIBIT 21 EXHIBIT 21 CONSOLIDATED FREIGHTWAYS CORPORATION SIGNIFICANT SUBSIDIARIES OF THE COMPANY December 31, 1997 The Company and its significant subsidiaries were: State or Percent of Province or Stock Owned Country of Parent and Significant Subsidiaries by Company Incorporation Consolidated Freightways Corporation Delaware Significant Subsidiaries of Consolidated Freightways Corporation Consolidated Freightways Corporation of Delaware 100 Delaware Canadian Freightways, Limited 100 Alberta, Canada Milne & Craighead Customs Brokers (Canada) Ltd. 100 Canada Canadian Freightways Eastern Limited 100 Ontario, Canada United Terminals LTD. 100 Canada Blackfoot Logistics 100 British Columbia Consolidadora De Fletes Mexico 100 Mexico Leland James Service Corporation 100 Delaware Redwood Systems, Inc. 100 Delaware Redwood Systems Logistics de Mexico 100 Mexico Redwood Systems Services de Mexico 100 Mexico EX-27 7 EXHIBIT 27.1
5 1000 YEAR DEC-31-1997 DEC-31-1997 107,721 0 328,368 (7,467) 8,741 493,613 1,096,640 (713,653) 897,796 385,500 15,100 0 0 71,691 171,756 897,796 0 2,299,075 0 2,253,816 3,277 0 3,213 41,982 21,623 20,359 0 0 0 20,359 .92 .89
EX-27 8 EXHIBIT 27.2 - RESTATED 9 MOS 1997
5 1000 9-MOS DEC-31-1997 SEP-30-1997 80,976 0 362,056 (12,268) 9,278 511,249 1,100,017 (706,038) 925,486 414,300 15,100 0 0 57,394 175,117 925,486 0 1,727,509 0 1,677,956 2,840 0 2,163 46,713 24,758 21,955 0 0 0 21,955 1.00 0.98
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