Cc, Inc.

Continental Carriers, Inc.

Continental Carriers Inc., established in 1952, is a regulated general commodities motor carrier whose routes ran the length of the Pacific Coast, from Oregon and California to the industrial Midwest, and from Chicago to several points in Texas. Continental Carriers struggled early, experiencing little growth, until the mid-1970ЎЇs. Continental needed help in reducing operating costs and also sought improvement in terminal facilities. John Evans, president of CCI, made this possible. Entering CCI as a former executive of a major eastern carrier, he concentrated his efforts on expanding CCIЎЇs revenues on existing routes through an intensive marketing effort and a renewed emphasis on improving service. Evans also turned the company around by reducing its operating costs through a combination of extensive computerization of operations and improving the terminal facilities. By the late 1980ЎЇs, Evans, along with the directors of the firm, realized that the key to continued expansion in revenues and income was a policy of selected acquisitions.

Continental Carriers currently has the opportunity to purchase Midland Freight Inc. for a mere $50 million in cash. The decision to move ahead with the purchase has already been unanimously approved by the Board of Directors. No interference from the ICC is expected and the deal should be completed by the first of October. Given that Midland will add nearly $8.5 million to CCIЎЇs earnings before interest and taxes, it is not foreseeable that external financing would be hard to obtain. However, obtaining a loan and taking on debt goes against past policies for CCI. Throughout their history, it has been company policy to avoid long-term debt. Currently, CCI has no fixed debt on their balance sheet.

The problem facing Continental Carriers is not the inability to raise funding for the acquisition, but instead how to go about doing so. One option is to issue shares of common stock. The problem with this is that it would take an issuance of roughly three million new shares. An issuance of this amount would greatly reduce the percentage of common stock owned by company management. In the event that an individual or competing company decided to buy most of these newly issued shares, management of CCI could possibly lose controlling interests in the company.

Continental Carriers, Inc. should move ahead with the bond issuance and begin planning beyond the end of its payments immediately. CCI can produce a cash budget based upon cash flows in years past. These cash flows are not provided in the case material, but the company should have them on file. In addition to paying out the $2.5 million sinking fund each year, the company could also set aside a predetermined amount of expendable cash. This cash would be put into an interest bearing account, and would be off limits to the company for expenditures not relating to the bond issue. At the end of the 15 years, the $12.5 million due to bondholders can easily be accounted for in this separate account. The lump payment at the end does not appear so intimidating to the board of directors when it is divided into smaller parts each year. A payment of only $833,333, or $800,000 drawing 6.8% interest, each of the 15 years would produce the necessary $12.5 million needed to