<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER , 1996
REGISTRATION NO. 001-12149
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
CONSOLIDATED FREIGHTWAYS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0425334
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
175 LINFIELD DRIVE 94025
MENLO PARK, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (415) 326-1700
------------------------
Copies of Communications to:
STEPHEN D. RICHARDS BRIAN J. MCCARTHY
175 Linfield Drive 300 South Grand Avenue, Suite 3400
Menlo Park, California 94025 Los Angeles, California 90071
- --------------------------------------------------------------------------------
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
(Title of Class)
Securities to be registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class to be registered which each class is to be registered
COMMON STOCK, PAR VALUE $0.01 PER NASDAQ STOCK MARKET'S NATIONAL MARKET
SHARE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
PURSUANT TO ITEM 501(B) OF REGULATION S-K
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<CAPTION>
ITEM FORM 10 ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- ---- -------------------------------------------------- --------------------------------------------------
<C> <S> <C>
1 Business.......................................... Business; Selected Historical Financial Data
2 Financial Information............................. Selected Historical Financial Data; Management's
Discussion and Analysis of Financial Condition
and Results of Operations
3 Properties........................................ Business -- Properties
4 Security Ownership of Certain Beneficial Owners
and Management................................... Security Ownership of Certain Beneficial Owners
and Management
5 Directors and Executive Officers.................. Management
6 Executive Compensation............................ Executive Compensation and Other Matters
7 Certain Relationships and Related Transactions.... Relationship between CFI and the Company after the
Distribution; Executive Compensation and Other
Matters
8 Legal Proceedings................................. Business -- Legal Proceedings
9 Market Price of and Dividends on the Registrant's
Common Equity and Related Shareholder Matters.... The Distribution -- Listing and Trading of the
Common Stock; Risk Factors -- No Current Public
Market for the Common Stock; Possibility of
Significant Price Fluctuations; Dividend Policy;
Description of Company Capital Stock
10 Recent Sales of Unregistered Securities........... None
11 Description of Registrant's Securities to be
Registered....................................... Description of Company Capital Stock; Purposes and
Antitakeover Effects of Certain Provisions of the
Company's Charter and Bylaws
12 Indemnification of Directors and Officers......... Liability and Indemnification of Directors and
Officers
13 Financial Statements and Supplementary Data....... Selected Historical Financial Data; Pro Forma
Consolidated Financial Statements; Index to
Combined Financial Statements
14 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. None
15 Financial Statements and Exhibits................. Index to Combined Financial Statements; Index to
Exhibits
</TABLE>
<PAGE>
November , 1996
Dear Shareholder:
I am pleased to inform you that the Board of Directors of Consolidated
Freightways, Inc. ("CFI") has approved a distribution to our shareholders of all
the outstanding shares of common stock of Consolidated Freightways Corporation
(the "Company"). The stock distribution will be made to holders of record of CFI
common stock on November 15, 1996. You will receive one share of Company common
stock for every two shares of CFI common stock you hold on the record date.
As a result of the distribution of Company common stock to CFI's
shareholders, you will own shares in two separate and distinct companies. CFI,
which intends to change its name to CNF Transportation, Inc., will be focused on
its core businesses -- regional trucking, national and international airfreight
and logistics management. The Company will concentrate on full service,
less-than-truckload trucking in North America, and on streamlining its
operations, providing more fully integrated services, and expanding its customer
base. In addition, the Company will focus on expanding its international freight
services. The distribution is also expected to allow financial markets to better
understand and recognize the merits of the two businesses. CFI will continue to
be listed on the New York Stock Exchange ("NYSE"). The Company's common stock
has been approved for listing, subject to official notice of issuance, on the
Nasdaq Stock Market's National Market.
Your Board of Directors believes that the distribution will enable both CFI
and the Company to enhance their competitive positions in their respective
markets in a manner which can increase the value of each of their businesses,
thereby positioning them to produce greater total shareholder value over the
long term. In addition, the Company's equity-based incentive compensation
arrangements will better enable the Company to attract, retain and motivate its
employees by offering additional economic rewards tied directly to the Company's
performance.
The enclosed Information Statement explains the proposed distribution in
detail and provides financial and other important information regarding the
Company. We urge you to read it carefully. Holders of CFI's common stock are not
required to take any action to participate in the distribution. A shareholder
vote is not required in connection with this matter and, accordingly, your proxy
is not being sought.
Sincerely,
Donald E. Moffitt
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS PRELIMINARY INFORMATION
STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY THESE SECURITIES.
<PAGE>
SUBJECT TO COMPLETION DATED OCTOBER 31, 1996
INFORMATION STATEMENT
CONSOLIDATED FREIGHTWAYS CORPORATION
COMMON STOCK
---------------------
This Information Statement is being furnished to shareholders of
Consolidated Freightways, Inc., a Delaware corporation ("CFI"), in connection
with the distribution (the "Distribution") by CFI to holders of its common
stock, par value $0.01 per share ("CFI Common Stock") of all the outstanding
shares of common stock, par value $0.01 per share (the "Common Stock"), of its
wholly owned subsidiary Consolidated Freightways Corporation (the "Company").
The Distribution will be effective December 2, 1996, to holders of record of
CFI Common Stock at the close of business on November 15, 1996 (the "Record
Date"), subject to the satisfaction or waiver of certain conditions, on the
basis of one share of Common Stock for every two shares of CFI Common Stock held
on the Record Date. Certificates representing the shares of Common Stock will be
mailed on or about December 2, 1996. No consideration will be paid by holders of
CFI Common Stock for the shares of Common Stock to be received in the
Distribution, nor will they be required to surrender or exchange shares of CFI
Common Stock in order to receive Common Stock. See "The Distribution."
There is no current trading market for Common Stock, although a "when
issued" market is expected to develop on or about the Record Date. The Common
Stock has been approved for listing, subject to official notice of issuance, on
the Nasdaq Stock Market's National Market under the symbol "CFWY." See "The
Distribution -- Listing and Trading of the Common Stock."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION
OF CERTAIN RISK FACTORS RELATING TO THE DISTRIBUTION.
NO VOTE OF SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
------------------------
THE DATE OF THIS INFORMATION STATEMENT IS NOVEMBER , 1996.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS INFORMATION STATEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY CFI OR THE COMPANY. THIS INFORMATION STATEMENT IS FOR
INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK OR ANY OTHER SECURITIES.
------------------------
TABLE OF CONTENTS
PAGE
-----
Summary................................................................ 1
Summary Historical and Pro Forma Financial Data........................ 7
The Distribution....................................................... 9
Risk Factors........................................................... 14
Relationship between CFI and the Company after the Distribution........ 22
Financing.............................................................. 26
Regulatory Approvals................................................... 26
Dividend Policy........................................................ 26
Pro Forma Capitalization............................................... 27
Pro Forma Consolidated Financial Statements............................ 28
Selected Historical Financial Data..................................... 34
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 36
Business............................................................... 42
Management............................................................. 49
Executive Compensation and Other Matters............................... 53
Consolidated Freightways Corporation 1996 Stock Incentive Plan......... 56
Security Ownership of Certain Beneficial Owners and Management......... 61
Description of Company Capital Stock................................... 64
Purposes and Antitakeover Effects of Certain Provisions of the
Company's Charter and Bylaws.......................................... 65
Liability and Indemnification of Directors and Officers................ 69
Independent Accountants................................................ 70
Additional Information................................................. 70
Index to Combined Financial Statements................................. F-1
i
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS INFORMATION STATEMENT. THIS SUMMARY IS INCLUDED FOR CONVENIENCE ONLY AND
SHOULD NOT BE CONSIDERED COMPLETE. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
THE MORE DETAILED INFORMATION, INCLUDING THE FINANCIAL STATEMENTS AND NOTES
THERETO, SET FORTH ELSEWHERE IN THIS INFORMATION STATEMENT, WHICH SHOULD BE READ
IN ITS ENTIRETY. CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS SUMMARY ARE
DEFINED ELSEWHERE IN THIS INFORMATION STATEMENT. UNLESS THE CONTEXT OTHERWISE
REQUIRES, REFERENCES IN THIS INFORMATION STATEMENT TO THE COMPANY PRIOR TO THE
CONSUMMATION OF THE DISTRIBUTION SHALL MEAN, COLLECTIVELY, CONSOLIDATED
FREIGHTWAYS CORPORATION OF DELAWARE AND ITS SUBSIDIARIES ("CFCD") AND LELAND
JAMES SERVICE CORPORATION ("LJSC").
THE COMPANY
The Company is a newly formed corporation which will be an independent,
publicly held company upon completion of the Distribution. It will succeed to
substantially all of the businesses currently conducted by CFCD, and will assume
substantially all of the related liabilities. As a result of the Distribution,
CFI will own no shares of Common Stock of the Company.
CFCD is a full-service trucking company competing primarily in the North
American less-than-truckload ("LTL") segment of the general freight industry. It
operates a network of 373 service centers in all 50 states, eight provinces of
Canada and Puerto Rico with a fleet of approximately 40,800 trucks, tractors and
trailers and approximately 21,000 employees as of June 30, 1996. Comprehensive
service in Mexico is currently provided through sales and service personnel on
both sides of the United States/Mexico border and through Mexican carrier
partners. In addition to extensive coverage of Canada and Mexico, CFCD provides
one-stop international freight services between the United States and over 70
countries worldwide through operating agreements with ocean carriers and a
network of international partners. Based on 1995 revenues of approximately $2.1
billion, CFCD is one of the nation's largest LTL motor carriers.
In October of 1995, in an effort to meet the demand for faster service and
to better compete in the highly competitive trucking industry, CFCD launched one
of the most comprehensive shipment and service reengineerings in its history. It
dismantled its traditional hub and spoke freight flow system and established the
Business Accelerator System ("BAS"), which utilizes directional loading to
destination, scheduled departures and a stronger focus on customer service. In
so doing, CFCD created a more flexible and efficient freight transportation
system than the traditional hub and spoke system. As a result, customer service
has been improved by reducing transit time, lowering the risk of damaged or lost
freight and improving delivery reliability. BAS was designed to reduce costs by
eliminating unnecessary travel miles, reducing freight handling and more
effectively using system capacity. CFCD will seek to continue to improve service
and reduce costs by refining BAS.
Following the Distribution, the Company will continue to pursue its primary
strategic objective of being a leading single source freight transportation
company for LTL freight movements to customers originating or terminating
shipments in North America. Consistent with this objective, the Company will
emphasize improvement of operating efficiencies and reduction of costs.
The Company will seek to achieve its objective through the following key
strategies:
- Improve customer service by decreasing freight transit times, increasing
the reliability of on-time delivery and reducing damage and loss of
customer freight through refinements in the BAS.
- Grow revenues by increasing freight volumes with current and new
customers, offering additional value-added services and expanding service
internationally, where economically feasible.
- Implement compensation programs, including equity-based incentives, that
tie employee performance to cost reduction and customer service goals.
1
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- Reduce freight transportation costs by reducing freight handling costs and
eliminating circuitous transit miles through further implementation of its
point-to-point freight transportation system.
- Eliminate unnecessary corporate overhead and utilize advanced technologies
to maximize operating efficiencies and improve customer service.
- Implement programs designed to reduce workers' compensation expense.
The Company believes that there will always be a need for border-to-border,
coast-to-coast freight service and that it is positioned properly to sell its
services in the marketplace and to enhance its competitive position.
The Company's principal executive offices are located at 175 Linfield Drive,
Menlo Park, CA 94025, and its telephone number is (415) 326-1700.
THE DISTRIBUTION
<TABLE>
<S> <C>
DISTRIBUTING COMPANY................... Consolidated Freightways, Inc., a Delaware
corporation ("CFI"), which will continue to own the
capital stock of Emery Air Freight Corporation,
Con-Way Transportation Services, Inc. and Menlo
Logistics, Inc. (the businesses of and relating to
such latter three corporations, collectively, the
"Emery, Con-Way and Menlo Businesses"). References
in this Information Statement to CFI include its
consolidated subsidiaries, except where the context
indicates otherwise.
DISTRIBUTED COMPANY.................... Consolidated Freightways Corporation, a Delaware
corporation (the "Company"), formed to hold all of
the capital stock of Consolidated Freightways
Corporation of Delaware and its subsidiaries
("CFCD") and Leland James Service Corporation
("LJSC"), a corporation that provides
administrative support services to CFCD. CFCD and
LJSC currently are wholly owned direct subsidiaries
of CFI. References in this Information Statement to
the Company include its consolidated subsidiaries,
except where the context indicates otherwise.
DISTRIBUTION RATIO..................... One share of Common Stock for every two shares of
CFI Common Stock held of record as of the close of
business on the Record Date.
SECURITIES TO BE DISTRIBUTED........... Based on approximately 44 million shares of CFI
Common Stock outstanding on June 30, 1996,
approximately 22 million shares of Common Stock
will be distributed. The Common Stock to be
distributed will constitute all of the outstanding
Common Stock of the Company immediately after the
Distribution.
FRACTIONAL SHARE INTERESTS............. Fractional shares of Common Stock will not be
distributed. Fractional shares of Common Stock will
be aggregated and sold in the public market by the
Distribution Agent (as defined herein) and the
aggregate net cash proceeds will be distributed
ratably
</TABLE>
2
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to those shareholders entitled to fractional
interests. See "The Distribution -- Manner of
Effecting the Distribution."
ODD-LOT SHARES......................... CFI shareholders who are entitled to receive fewer
than 100 shares ("Odd-Lot") of Common Stock in the
Distribution may elect to sell such shares pursuant
to a program (the "Odd-Lot Program") being offered
as a convenience to shareholders who will receive
an Odd-Lot. Upon receipt of a shareholder's
election to sell such Odd-Lot shares, the
Distribution Agent will sell such shares on behalf
of such shareholder for cash in the open market at
the then current market price of the Common Stock
and remit the sale proceeds to such shareholders.
Brokerage fees and commissions incurred by the
Distribution Agent will be paid for by participants
in the Odd-Lot Program as pre-set commissions at a
per share amount. The Company will also pay the
fees charged by the Distribution Agent for its
services in administering the Odd-Lot Program. A
form containing the terms of the Odd-Lot Program
and an authorization form pursuant to which holders
of Odd-Lot shares may elect to participate in the
Odd-Lot Program will be mailed to all eligible
stockholders as soon as possible after the
Distribution Date. Participation in the Odd-Lot
Program is voluntary. CFI shareholders who are
entitled to receive fewer than 100 shares of Common
Stock must transmit a completed authorization form
to the Distribution Agent prior to February 1,
1997, to participate in the Odd-Lot Program. See
"The Distribution -- Manner of Effecting the
Distribution."
RECORD DATE............................ Close of business on November 15, 1996.
DISTRIBUTION DATE...................... December 2, 1996.
MAILING DATE........................... Certificates representing the shares of Common
Stock to be distributed pursuant to the
Distribution will be delivered to the Distribution
Agent on the Distribution Date. The Distribution
Agent will mail certificates representing the
shares of Common Stock or Odd-Lot Packages (as
defined below) to holders of CFI Common Stock on or
about December 2, 1996. Holders of CFI Common Stock
should not send stock certificates to CFI, the
Company or the Distribution Agent. See "The
Distribution -- Manner of Effecting the
Distribution."
DISTRIBUTION AGENT..................... The Bank of New York will be the distribution agent
(the "Distribution Agent") for the Distribution.
Shareholders of CFI with questions concerning the
Odd-Lot Program or other procedural issues related
to the Distribution may call the Distribution Agent
at (800) 274-2944.
CONDITIONS TO THE DISTRIBUTION......... The Distribution is conditioned upon, among other
things, declaration of the special dividend by the
Board of Directors of CFI (the "CFI Board") and
receipt of a
</TABLE>
3
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<TABLE>
<S> <C>
private letter ruling from the Internal Revenue
Service ("IRS"), which ruling has been received by
CFI as described below, or a legal opinion of
special tax counsel to the effect that, among other
things, the Distribution will generally qualify as
a tax-free distribution (see "-- Tax
Consequences"). The CFI Board has reserved the
right to waive certain conditions to the
Distribution or, even if the conditions to the
Distribution are satisfied, to abandon, defer or
modify the Distribution at any time prior to the
Distribution Date. See "The Distribution --
Conditions to Distribution; Right to Abandon, Defer
or Modify Distribution."
REASONS FOR THE DISTRIBUTION........... The Distribution is designed to separate two
increasingly competing businesses with distinct
financial, investment and operating characteristics
so that each can adopt strategies and pursue
objectives appropriate to its specific needs in
order to compete effectively against its
competitors, and to permit each business to offer
incentives that are more attractive and appropriate
for the recruitment and retention of key employees.
The CFI Board believes that the separation of CFI
into two publicly owned companies will also: (i)
allow investors to evaluate better the separated
companies and their future outlook; (ii) enable
management of each company to concentrate attention
and financial resources on its core businesses
without regard to the corporate objectives,
policies, marketing position and investment
requirements of the other; (iii) facilitate the
development of employee compensation programs
custom-tailored to each business' operations,
including stock-based and other incentive programs,
which will more directly reward employees of each
business based on the success of that business;
(iv) reduce customer confusion where both companies
solicit the same business; (v) better position each
company to achieve cost savings by allowing each
company to focus on its own businesses and tailor
its organization and administrative operations to
its specific needs; and (vi) permit each company to
implement its own business strategies without
concern as to the impact thereof on the other
company. See "The Distribution -- Background and
Reasons for the Distribution."
TAX CONSEQUENCES....................... CFI has received a private letter ruling from the
IRS to the effect, among other things, that receipt
of shares of the Common Stock by shareholders of
CFI will generally be tax-free, except to the
extent that cash is received in lieu of fractional
share interests and that CFI will generally not
recognize income, gain or loss as a result of the
Distribution. See "The Distribution -- Certain
Federal Income Tax Aspects of the Distribution."
</TABLE>
4
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<TABLE>
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PRE-DISTRIBUTION TRANSFER.............. Prior to the Distribution, CFCD and LJSC will
transfer certain assets and liabilities to CFI with
a net book value of approximately $58 million. See
"Risk Factors -- Certain Tax Considerations" and
"-- Fraudulent Transfer and Related
Considerations."
DIVIDEND POLICY........................ The Company's dividend policy will be established
by the Board of Directors of the Company (the
"Company Board") from time to time based on the
results of operations and financial condition of
the Company and other business considerations that
the Company Board considers relevant. The Company
presently expects that it will not pay a dividend
in 1996 or 1997, and that 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 the Common Stock. See "Risk
Factors -- Dividend Policy."
TRADING MARKET......................... There is not currently a public market for the
Common Stock, although the Company expects that a
"when-issued" trading market will develop on or
about the Record Date. The Common Stock has been
approved for listing, subject to official notice of
issuance, on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the
symbol "CFWY." See "Risk Factors -- No Current
Public Market for the Common Stock; Possibility of
Significant Price Fluctuations" and "The
Distribution -- Listing and Trading of the Common
Stock."
CERTAIN PROVISIONS OF CHARTER AND BYLAWS... Certain provisions of the Company's Certificate of
Incorporation and Bylaws, as each will be in effect
following the Distribution, could have the effect
of making it more difficult for a third party to
acquire control of the Company in a transaction not
approved by the Company's Board of Directors. These
provisions have been designed to permit the Company
to develop its business without disruptions caused
by the threat of a takeover not deemed by the Board
of Directors to be in the best interests of the
Company and its shareholders. See "Purposes and
Antitakeover Effects of Certain Provisions of the
Company's Charter and Bylaws." Provisions of the
Company's Certificate of Incorporation eliminate
certain liabilities of its directors in connection
with the performance of their duties. See
"Liability and Indemnification of Directors and
Officers -- Limitation of Liability."
RELATIONSHIP BETWEEN CFI AND THE
COMPANY AFTER THE DISTRIBUTION........ CFI will have no stock ownership in the Company
upon consummation of the Distribution. For purposes
of governing certain ongoing relationships between
the Company and CFI after the Distribution and to
provide for an orderly transition, the Company and
CFI have
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5
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<TABLE>
<S> <C>
entered into or will enter into certain agreements.
Such agreements include, among others: (i) the
Distribution Agreement, providing for, among other
things, the Distribution and the division between
the Company and CFI of certain assets and
liabilities; (ii) the Employee Benefit Matters
Agreement, providing for certain allocations of
responsibilities with respect to employee
compensation, benefit and labor matters; (iii) the
Tax Sharing Agreement pursuant to which the Company
and CFI will allocate tax liabilities that relate
to periods prior to the Distribution Date, and
based on subsequent actions of the Company will
allocate to the Company any liability that would
arise if the Distribution were not tax-free; (iv)
the Transition Services Agreement, providing for
the performance of certain services for the Company
by a subsidiary of CFI; (v) the Alternative Dispute
Resolution Agreement, providing for the resolution
of disputes arising between CFI and the Company;
and (vi) the Reimbursement and Indemnification
Agreement, providing for the Company to reimburse
or indemnify CFI for liabilities incurred on behalf
of CFCD in connection with certain workers'
compensation and other claims. See "Relationship
Between CFI and the Company after the
Distribution."
</TABLE>
RECENT RESULTS
For the quarter ended September 30, 1996, the Company's revenue increased
approximately 6.6% to $560.0 million from $525.4 million in the third quarter of
1995, while the third quarter of 1996 operating loss of $2.3 million was a 70.9%
improvement over the $7.9 million loss in the third quarter of 1995. Net loss
for the quarter ended September 30, 1996 was $1.8 million, a 61.7% improvement
over the $4.7 million loss in the third quarter of 1995. Management believes
these results are primarily attributable to improved freight volumes which
resulted from the implementation of BAS and a continued focus on customer
service.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary historical combined and pro forma
consolidated financial data for the Company. The summary historical combined
statement of operations data for the three years ended December 31, 1995 and the
summary historical combined balance sheet data as of December 31, 1995 and 1994
have been derived from and should be read in conjunction with the audited
combined financial statements of the Company contained elsewhere in this
Information Statement. The summary historical statement of operations data for
the six months ended June 30, 1996 and 1995 and the years ended December 31,
1992 and 1991 and the summary historical balance sheet data as of June 30, 1996
and 1995 and as of December 31, 1992 and 1991 have been derived from unaudited
historical combined financial statements of the Company which in the opinion of
management include all normal recurring adjustments necessary to present fairly
the information required to be set forth therein. The historical data set forth
below and the historical combined financial statements of the Company contained
elsewhere in this Information Statement are presented as if the Company were a
stand-alone entity for all periods presented, except that the Company has not
been allocated any portion of CFI's consolidated borrowings or interest expense
thereon (other than borrowings incurred directly by CFCD and interest expense
thereon), or costs of maintaining letters of credit and surety bonds in
connection with certain insurance programs. In addition, the historical
financial statements include in selling and administrative expenses an
allocation of corporate overhead costs incurred by CFI using both incremental
and proportional methods on a revenue and capital basis. Although management
believes that the allocation methods used provide the Company with a reasonable
share of such expenses, there can be no assurance that these costs will not
increase, perhaps substantially, after the Distribution. The historical combined
financial information presented below does not purport to be indicative of the
results of operations or financial position that would have been attained if the
Company had been a stand-alone independent company during the periods shown or
of the Company's future performance as an independent company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined Financial Statements of the Company and the notes thereto included
elsewhere herein.
The summary pro forma consolidated financial data has been derived from the
Company's historical combined financial statements for the six months ended June
30, 1996 and the year ended December 31, 1995 included elsewhere in this
Information Statement and should be read in conjunction with the information set
forth therein and the Pro Forma Consolidated Financial Statements included
elsewhere herein. The pro forma consolidated statement of operations data
assumes the Distribution was completed on January 1, 1996 or January 1, 1995, as
applicable. The pro forma consolidated balance sheet data assumes the
Distribution was completed on June 30, 1996. The pro forma adjustments are based
upon available information and upon certain assumptions that the Company and CFI
believe are reasonable which are described in the Notes to the Pro Forma
Consolidated Financial Statements included elsewhere herein. The pro forma
consolidated financial data is presented for informational purposes only and
does not purport to be indicative of the results of operations or financial
position that would have occurred had the Distribution occurred on those
respective dates, or which may be obtained in the future. See "Pro Forma
Consolidated Financial Statements" and the Combined Financial Statements of the
Company and the notes thereto included elsewhere herein.
7
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<CAPTION>
PRO FORMA
---------------------
HISTORICAL
SIX -------------------------
MONTHS
ENDED SIX MONTHS
JUNE YEAR ENDED ENDED
30, DEC. 31, JUNE 30,
------- ----------- -------------------------
1996 1995 1996 1995
------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................................... $1,033 $ 2,107 $ 1,033 $ 1,082
Costs and expenses................................ 1,071 2,150 1,071 1,075
Operating income (loss)........................... (38) (43) (38) 7
Net income (loss)................................. (27) (30) (28) 5
Earnings (loss) per share (assuming 22,006,500
shares outstanding).............................. (1.23) (1.37)
BALANCE SHEET DATA (AS OF END OF PERIOD):
Current assets.................................... $ 440 $ 448 $ 419
Total assets...................................... 877 950 939
Long-term debt.................................... 15 15 15
Equity............................................ 221 279 274
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT REVENUE PER HUNDRED
WEIGHT)
<S> <C> <C> <C> <C>
OTHER DATA (UNAUDITED):
EBITDA (e)........................................ $(6,682) $ 21,655 $ (8,949) $ 39,386
Cash Flows Provided (Used) by Operating Activities....................... (12,193) 44,270
Cash Flows Used by Investing Activities.................................. (26,046) (74,095)
Cash Flows Provided (Used) by Financing Activities....................... 49,438 47,009
Tons of freight (in thousands)........................................... 3,585 3,862
Revenue per hundred weight (f)........................................... $ 15.430 $ 14.723
Intercity miles (in thousands)........................................... 291,627 309,995
Shipments................................................................ 6,519,922 6,789,012
Average weight per shipment (in pounds) (f).............................. 1,100 1,111
Average length of haul (in miles) (f).................................... 1,281 1,330
Number of employees...................................................... 21,000 21,300
<CAPTION>
HISTORICAL
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 1994 (a) 1993 1992 1991
----------- ------------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................................... $ 2,107 $ 1,936 $ 2,074 $ 2,155 $ 2,132
Costs and expenses................................ 2,150 1,984 2,045 2,131 2,082
Operating income (loss)........................... (43) (48) 29 24(c) 50
Net income (loss)................................. (30) (32)(b) 20 (9)(d) 24
Earnings (loss) per share (assuming 22,006,500
shares outstanding)..............................
BALANCE SHEET DATA (AS OF END OF PERIOD):
Current assets.................................... $ 399 $ 391 $ 345 $ 311 $ 368
Total assets...................................... 910 853 879 885 947
Long-term debt.................................... 15 15 15 15 112
Equity............................................ 259 214 267 271 258
(DOLLARS IN THOUSANDS, EXCEPT REVENUE PER HUNDRED WEIGHT)
<S> <C> <C> <C> <C> <C>
OTHER DATA (UNAUDITED):
EBITDA (e)........................................ $ 21,022 $ 29,845 $ 120,951 $ 120,313 $ 138,827
Cash Flows Provided (Used) by Operating Activities 41,772 33,739 67,186 117,282 28,171
Cash Flows Used by Investing Activities........... (105,433) (27,178) (43,516) (88,699) (57,719)
Cash Flows Provided (Used) by Financing Activities 67,103 5,791 (20,193) (89,649) 26,315
Tons of freight (in thousands).................... 7,458 7,007 7,439 7,673 7,619
Revenue per hundred weight (f).................... $ 14.712 $ 15.034 $ 15.130 $ 15.181 $ 15.128
Intercity miles (in thousands).................... 630,020 582,380 611,886 643,034 638,967
Shipments......................................... 13,357,967 11,958,314 13,127,911 13,972,754 13,799,383
Average weight per shipment (in pounds) (f)....... 1,103 1,150 1,120 1,087 1,092
Average length of haul (in miles) (f)............. 1,319 1,348 1,369 1,383 1,391
Number of employees............................... 20,200 22,000 22,100 23,200 23,200
</TABLE>
- ----------------------------------
(a) The 1994 results were affected by losses related to a strike by the
International Brotherhood of Teamsters against CFCD from April 6, 1994 until
April 29, 1994 (the "1994 Strike").
(b) Includes $1.9 million extraordinary charge, net of related tax benefits, for
the write-off of certain intrastate operating rights.
(c) Includes special charges of $17.3 million related to operation changes at
CFCD and the write-off of certain Canadian operating rights.
(d) Includes $30.2 million cumulative effect of change in method of accounting
for post-retirement benefits and $4.7 million extraordinary charge from
early retirement of debt, net of related tax benefits.
(e) "EBITDA" means pretax income plus depreciation, amortization and interest.
EBITDA should not be considered in isolation from, or as a substitute for,
operating income, net income or cash flow and other consolidated operations
or cash flow statement data computed in accordance with generally accepted
accounting principles or as a measure of a company's results of operations
or liquidity. Although this measure of performance is not calculated in
accordance with generally accepted accounting principles, it is widely used
as a measure of a company's operating performance because it assists in
comparing performance on a consistent basis across companies without regard
to depreciation and amortization, which can vary significantly depending on
accounting methods (particularly where acquisitions are involved) or
non-operating factors such as historical cost bases and capital structure.
(f) Excluding Canada.
8
<PAGE>
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
CFI continually reviews its businesses, with a view to increasing
competitiveness and efficiency of its operations and to enhancing the long-term
interests of its shareholders. Following considerable review during 1995 and
1996 of available strategic alternatives for enhancing CFI shareholder value,
the Board of Directors of CFI concluded that the Distribution would be in the
best interests of the Company, CFI and CFI shareholders. CFI believes that the
Distribution will enable CFI and the Company to compete more effectively against
their competitors, allow investors to evaluate better the different merits of
the two groups of businesses and their future outlooks, and may enhance the
likelihood that each will achieve appropriate market recognition of its
performance. Accordingly, CFI believes that the Distribution will position each
company to enhance shareholder value and competitiveness.
To compete effectively, the Company needs to transform into an organization
that is significantly more flexible and responsive to its customers. There are
operational, management, employee and financial reasons why this transformation
will be aided by the creation of an independent, separately owned and publicly
traded company.
OPERATIONAL REASONS. As an independent company, the Company will be able to
pursue its business strategies without regard to their impact on CFI's other
business units. In the opinion of management of the Company, the Distribution
will enable the management of each company to focus its resources on the growth
and development of their respective business operations without regard to the
corporate policies, objectives, marketing position and investment requirements
of the other CFI business units and to develop appropriate operational,
marketing and financial strategies. In addition, management believes that the
Distribution will enable the Company to reduce costs.
Management of the Company believes that the Company will benefit by reducing
customer confusion caused when the Company and another CFI unit solicit the same
business. CFI entered the short-haul regional trucking business through the
establishment of regionally based subsidiaries in 1983. Since then, the markets
of CFCD and the regional trucking operations have converged. The regional
carriers have lengthened their average length of haul. CFCD, historically known
as a long-haul carrier, now derives the majority of its business from shipments
traveling intermediate routes between 500 and 1,500 miles in length. This has
led to increasing intercompany competition between CFCD and another CFI unit.
The competition has led to customer confusion as to who represents "CF", eroded
customer loyalty to the "CF" name and made each such CFI unit vulnerable to
other competitors. As a result of the Distribution, CFCD will have the exclusive
right to the "Consolidated Freightways" name, and will be able to sell its
services without confusion with the regional carrier operations of CFI and
clearly distinguish its business operations.
MANAGEMENT AND EMPLOYEE REASONS. The Company believes that its ability to
obtain employee support for necessary changes in its operations will be enhanced
if the Company is an independent entity. Employees will recognize that, as an
independent entity, the benefits arising from increased efficiency will
exclusively benefit the Company, its employees and shareholders. The Company
will be able, as a separately traded entity, to provide equity incentives that
are currently unavailable to Company employees. The use of Company stock to
motivate key employees will align management's objectives closely with those of
the Company's shareholders, fostering an "ownership mentality" created by
participation in the upside rewards that an improvement in financial performance
would generate. Similarly, subject to negotiation with the International
Brotherhood of Teamsters and its local unions (collectively, the "IBT") and
other unions representing CFCD employees, the Company will be able, as a
separately traded entity, to provide equity incentives to collective bargaining
unit employees the value of which will be tied to CFCD's improvements in
operations, improvements in efficiency and controlling costs. If CFCD were to
remain a part of a larger group of companies, this would be much more difficult.
Moreover, CFCD, as an independent company, will be better able to strengthen its
relationship with its workforce.
9
<PAGE>
FINANCIAL REASONS. An independent Company will have complete access to
Company capital (Company cash flow from operations used $12.2 million and
provided $41.8 million in the six months ended June 30, 1996 and the year ended
December 31, 1995, respectively) and will be able independently to determine its
capital structure. If capital is limited at CFI, the Company competes with CFI's
other business units.
For these and other reasons, the CFI Board has decided to separate CFI into
two publicly owned companies. The Company, a newly formed corporation, will
operate CFI's nationwide LTL trucking business through CFCD, a wholly owned
subsidiary of the Company. CFI will continue to own subsidiaries operating the
Emery, Con-Way and Menlo Businesses under the new name of "CNF Transportation,
Inc."
DISTRIBUTION AGENT
The Distribution Agent is The Bank of New York, Investor Relations, P.O. Box
11258, New York, NY 10286, telephone (800) 524-4458.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
in the Distribution Agreement (the "Distribution Agreement") that will be
executed on or prior to the Distribution Date between CFI and the Company.
In the event that all conditions to the Distribution are satisfied or waived
and subject to the right of the CFI Board to abandon, defer or modify the
Distribution and related transactions, the Distribution will be made on or about
the Distribution Date to shareholders of record of CFI on the Record Date. On
the Distribution Date, all shares of Common Stock will be delivered by CFI to
the Distribution Agent. On or about December 2, 1996, certificates representing
Common Stock will be mailed by the Distribution Agent to holders of record of
CFI Common Stock entitled thereto (other than those holders who are eligible to
participate in the Odd-Lot Program, as discussed below, who shall receive
information regarding the Odd-Lot Program ("Odd-Lot Packages")) on the basis of
one share of Common Stock for every two shares of CFI Common Stock held on the
Record Date. (Odd Lot Packages will also contain instructions pursuant to which
recipients thereof may elect to receive shares of Common Stock rather than
participate in the Odd Lot Program.) All such shares will be fully paid and
nonassessable and the holders thereof will not be entitled to preemptive rights.
See "Description of Company Capital Stock."
No certificates or scrip representing fractional shares of Common Stock will
be issued to holders of CFI Common Stock as part of the Distribution. The
Distribution Agent will aggregate fractional shares into whole shares and sell
them in the open market at then-prevailing prices on behalf of holders who
otherwise would be entitled to receive fractional share interests, and such
persons will receive instead a cash payment in the amount of their pro rata
share of the net sale proceeds. Sales of fractional shares of Common Stock are
expected to be made as soon as practicable after the Distribution Date, and
checks representing proceeds of these sales will be mailed thereafter. CFI will
bear the cost of brokerage commissions incurred in connection with such sales.
Each holder of CFI Common Stock who is entitled to receive an Odd-Lot may
elect to sell such shares pursuant to the Odd-Lot Program, described below. Upon
receipt of a shareholder's election to sell such Odd-Lot shares, the
Distribution Agent will sell such shares on behalf of such shareholder and remit
the proceeds to such shareholder. The Distribution Agent will sell the Odd-Lot
shares through broker-dealers for cash in the open market at the then-current
market price for the Common Stock and remit the sale proceeds to such holder as
soon as practicable after such sales. Such sales will be made in a manner
designed to obtain the best available price while avoiding any undue impact on
the market for the Common Stock. Brokerage fees and commissions incurred by the
Distribution Agent will be paid by for by participants in the Odd-Lot Program as
pre-set commissions at a per share amount. The Company will pay the other fees
charged by the Distribution Agent for its services in administering the Odd-Lot
Program. A form containing the terms of the Odd-Lot Program and an authorization
form pursuant to which holders of Odd-Lot shares may elect to participate in the
Odd-Lot Program will be mailed to eligible stockholders as soon as possible
after the Distribution Date.
10
<PAGE>
Participation in the Odd-Lot Program is voluntary. CFI shareholders who are
entitled to receive fewer than 100 shares of Common Stock must transmit a
completed authorization form to the Distribution Agent prior to February 1,
1997, to participate in the Odd-Lot Program.
Holders of CFI Common Stock will not be required to pay any cash or other
consideration for the shares of Common Stock received in the Distribution or to
surrender or exchange shares of CFI Common Stock or to take any other action in
order to receive Common Stock. The Distribution will not affect the number of,
or the rights attaching to, the outstanding shares of CFI Common Stock.
HOLDERS OF CFI COMMON STOCK SHOULD NOT SEND CERTIFICATES TO THE COMPANY, CFI
OR THE DISTRIBUTION AGENT. THE DISTRIBUTION AGENT WILL MAIL THE STOCK
CERTIFICATES REPRESENTING SHARES OF COMMON STOCK OR ODD-LOT PACKAGES ON OR ABOUT
DECEMBER 2, 1996. CFI STOCK CERTIFICATES WILL CONTINUE TO REPRESENT SHARES OF
CFI COMMON STOCK AFTER THE DISTRIBUTION IN THE SAME AMOUNT SHOWN ON THE
CERTIFICATES.
RESULTS OF THE DISTRIBUTION
After the Distribution, the Company will be a separate public company which
will own and operate substantially all of the business formerly conducted by
CFCD and LJSC. The number and identity of the holders of Common Stock
immediately after the Distribution will be substantially the same as the number
and identity of the holders of CFI Common Stock on the Record Date. Immediately
after the Distribution, the Company expects to have approximately 15,850 holders
of record of Common Stock and approximately 22 million shares of Common Stock
outstanding based on the number of record shareholders and outstanding shares of
CFI Common Stock as of the close of business on June 30, 1996 and the
distribution ratio of one share of Common Stock for every two shares of CFI
Common Stock. The actual number of shares of Common Stock to be distributed will
be determined as of the Record Date. The Distribution will not affect the number
of outstanding shares of CFI Common Stock or any rights of CFI shareholders.
CERTAIN FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
CFI has received a private letter ruling from the IRS (the "Ruling") to the
effect that the Distribution will qualify as a tax-free distribution for Federal
income tax purposes and that CFI will not generally recognize income, gain or
loss as a result of the Distribution. Accordingly, the following are the
material Federal income tax consequences of the Distribution:
(1) No gain or loss will be recognized by a holder of CFI Common Stock as a
result of the receipt of shares of Common Stock in the Distribution,
except to the extent that cash is received in lieu of fractional shares
of Common Stock. A holder of CFI Common Stock who receives cash in lieu
of fractional shares will recognize capital gain or loss to the extent of
the difference between the holder's basis allocable (as described below)
to the fractional share and the amount of cash received for such
fractional share (assuming the fractional shares are held as capital
assets);
(2) The aggregate tax basis of the CFI Common Stock and the Common Stock in
the hands of a shareholder of CFI immediately after the Distribution will
be the same as the basis of the CFI Common Stock held by such shareholder
immediately before the Distribution, allocated in proportion to the fair
market value of the CFI Common Stock and the Common Stock at the time of
the Distribution;
(3) The holding period of the Common Stock received by the shareholders of
CFI in the Distribution will include the holding period of the CFI Common
Stock with respect to which the Distribution was made (assuming such CFI
Common Stock was held as a capital asset); and
(4) Generally, no gain or loss will be recognized by CFI or the Company as a
result of the Distribution.
CONSEQUENCES OF PARTICIPATION IN THE ODD-LOT PROGRAM. A holder of CFI
Common Stock who elects to sell shares of Common Stock pursuant to the Odd-Lot
Program will be treated as if such shares of Common Stock had been received by
the holder as part of the Distribution and then sold for cash. Accordingly, such
shareholder will recognize gain or loss equal to the difference between the cash
11
<PAGE>
so received and the amount of tax basis allocable (as described above) to such
shares of Common Stock. Such gain or loss will be capital gain or loss, provided
that such shares of Common Stock would have been held by such shareholder as a
capital asset at the time of the Distribution.
The Ruling is based on the accuracy of certain factual representations and
certain assumptions of CFI. Although CFI is not aware of any facts or
circumstances that would cause such representations or assumptions to be false,
no assurance can be given in this regard. See "Risk Factors -- Certain Tax
Considerations."
Treasury regulations governing section 355 of the Code require that each CFI
shareholder who receives shares of Common Stock pursuant to the Distribution
attach a statement to the Federal income tax return that will be filed by the
shareholder for the taxable year in which such shareholder receives the Common
Stock in the Distribution, which statement shows the applicability of section
355 of the Code to the Distribution. CFI will provide each CFI shareholder with
information necessary to comply with this requirement.
For a description of the Tax Sharing Agreement pursuant to which CFI and the
Company have provided for various tax matters, see "Relationship Between CFI and
the Company After the Distribution -- Tax Sharing Agreement." For a description
of certain additional tax considerations, see "Risk Factors -- Certain Tax
Considerations."
THE FOREGOING IS A SUMMARY OF THE ANTICIPATED MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW. IT DOES NOT PURPORT TO
ADDRESS ALL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION, OR TAX
CONSEQUENCES THAT MAY ARISE UNDER THE TAX LAWS OF OTHER JURISDICTIONS OR THAT
MAY APPLY TO PARTICULAR CATEGORIES OF SHAREHOLDERS, SUCH AS SHAREHOLDERS WHO
RECEIVED THEIR CFI COMMON STOCK PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE
AS COMPENSATION. EACH SHAREHOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO THE
PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH SHAREHOLDER, INCLUDING THE
APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF
POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED
ABOVE.
LISTING AND TRADING OF THE COMMON STOCK
There is not currently a public market for the Common Stock, although the
Company expects that a "when-issued" trading market will develop on or about the
Record Date. Prices at which the Common Stock may trade prior to the
Distribution on a "when-issued" basis or after the Distribution cannot be
predicted and the prices at which such trading occurs may fluctuate
significantly, particularly until the Common Stock issued in the Distribution is
fully distributed. The prices at which the Common Stock trades will be
determined by the marketplace and may be influenced by many factors, including,
among others, the operating results of the Company, the depth and liquidity of
the market for Common Stock, investor perception of the Company and the industry
in which the Company participates, and general economic and market conditions.
Such prices may also be affected by certain provisions of the Company's Restated
Certificate of Incorporation and Bylaws, as each will be in effect following the
Distribution, which may have antitakeover effects. See "Risk Factors -- No
Current Public Market for the Common Stock; Possibility of Significant Price
Fluctuations" and "-- Dividend Policy" and "Purposes and Antitakeover Effects of
Certain Provisions of the Company's Charter and Bylaws."
The Common Stock has been approved for listing, subject to official notice
of issuance, on the Nasdaq National Market. The Company expects to have, on the
Distribution Date, approximately 15,850 shareholders of record, based upon the
number of shareholders of record of CFI as of June 30, 1996.
CFI filed a request on October 23, 1996, for a no-action letter from the
staff (the "Staff") of the Securities and Exchange Commission to the effect
that, among other things, the Staff would not recommend enforcement action if
the Distribution were effected without registering the Common Stock under the
Securities Act of 1933, as amended (the "Securities Act"). On ,
1996,
12
<PAGE>
CFI received a favorable response from the Staff. Accordingly, the Company
believes that the shares of Common Stock issued in the Distribution will be
freely transferable, except for shares of Common Stock received by persons who
may be deemed to be "affiliates" of the Company under the Securities Act.
Persons who may be deemed to be affiliates of the Company after the Distribution
generally include persons that control, are controlled by, or are under common
control with, the Company and include executive officers and directors of the
Company, as well as any of its controlling shareholders. Persons who are
affiliates of the Company will be permitted to sell shares of the Common Stock
only pursuant to an effective registration statement under the Securities Act or
an exemption from the registration requirements of the Securities Act, such as
the exemption afforded by Rule 144 thereunder. The Company expects that
substantially all of the shares of the Common Stock issued in the Distribution
will be issued to persons who are not affiliates of the Company and therefore
will be freely transferable.
CONDITIONS TO DISTRIBUTION; RIGHT TO ABANDON, DEFER OR MODIFY DISTRIBUTION
The Distribution is conditioned upon, among other things: (i) the
consummation of certain internal corporate reorganizations; (ii) the successful
renegotiation of certain CFI credit facilities and debt instruments, including
the execution of certain consents, waivers and amendments thereto by lenders,
and the maintenance of CFI's investment grade debt ratings; (iii) the
establishment of a separate credit facility for CFCD; (iv) the receipt of
certain third-party consents relating to certain contracts, licenses and other
agreements; (v) the receipt of rulings from the Internal Revenue Service or an
opinion of special tax counsel to CFI to the effect that, among other things,
the Distribution will generally qualify as a tax-free distribution under section
355 of the Code; (vi) the receipt of a letter from the Commission confirming
that it will take no action with respect to certain matters relating to the
Distribution; (vii) the Registration Statement under the Exchange Act filed by
the Company with the Commission having become effective and no stop order being
in effect; (viii) there not being in effect any statute, rule, regulation or
order of any court, governmental or regulatory body that prohibits or makes
illegal the transactions contemplated by the Distribution; (ix) approval for
listing of the Common Stock on the Nasdaq National Market; and (x) declaration
of the special dividend by the Board of Directors of CFI. The CFI Board reserves
the right in its discretion to waive the satisfaction of any condition to the
Distribution, other than those set forth in clauses (i), (v), (vi), (vii), and
(x) above. Even if all the above conditions are satisfied, the CFI Board has
reserved the right to abandon, defer or modify the Distribution and the related
transactions described herein at any time prior to the Distribution Date.
FUTURE MANAGEMENT OF THE SEPARATE COMPANIES
THE COMPANY. Following the Distribution, it is intended that the Company
will continue to operate its businesses substantially in the manner in which
they have been operated by CFI in the recent past, including the further
implementation of certain structural changes. See "Business -- Strategy." The
Company will have substantially the same operating management as its current
businesses have. W. Roger Curry will serve as the Company's President and Chief
Executive Officer. In 1991, Mr. Curry was elected President of Emery Air Freight
Corporation, relinquishing such position in 1994 to become President and Chief
Executive Officer of CFCD. David F. Morrison will serve as the Company's Chief
Financial Officer. In 1991, Mr. Morrison joined CFI as Vice President and
Treasurer. The other executive officers of the Company are currently executive
officers of CFCD. See "Management -- Directors and Executive Officers."
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by CFI solely to provide
information to CFI shareholders who will receive Common Stock in the
Distribution as required by applicable law. It is not, and is not to be
construed as, an inducement or encouragement to buy or sell any securities of
CFI or the Company. The information contained in this Information Statement is
believed by CFI and the Company to be accurate as of the date set forth on its
cover. Changes may occur after that date, and neither the Company nor CFI will
update the information except in the normal course of their respective public
disclosure practices.
13
<PAGE>
RISK FACTORS
Shareholders of CFI should be aware that the Distribution and ownership of
the Common Stock involve certain risk factors, including those described below
and elsewhere in this Information Statement, which could adversely affect the
value of their holdings. Neither the Company nor CFI makes, nor is any other
person authorized to make, any representation as to the future market value of
the Common Stock. Any forward-looking statements contained in this Information
Statement should not be relied upon as predictions of future events. Such
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Such statements are necessarily
dependent on assumptions, data or methods that may be incorrect or imprecise and
they may be incapable of being realized. The following matters constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements. Actual results in the future could differ materially from those
described in the forward-looking statements as a result of the risk factors set
forth below (which list does not purport to be exhaustive) and the matters set
forth in this Information Statement generally.
OPERATING LOSSES
For the six months ended June 30, 1996 and the years ended December 31, 1995
and 1994, the Company had operating losses of $38.2 million, $42.8 million and
$47.7 million, respectively. Likewise, the Company had net losses of $28.1
million, $29.9 million and $32.1 million for the six months ended June 30, 1996
and the years ended December 31, 1995 and 1994, respectively. In that regard,
the historical combined financial statements of the Company do not reflect any
portion of CFI's consolidated borrowings or interest expense thereon (other than
borrowings incurred directly by CFCD and interest expense thereon) or the costs
of maintaining letters of credit or surety bonds required in connection with
certain insurance programs and, as the Company incurs indebtedness and obtains
letters of credit or surety bonds in the future, its results of operations and
liquidity may be adversely affected by interest expense thereon and the costs of
obtaining such letters of credit and surety bonds. See "-- Substantial Capital
Requirements; Unavailability of Future Financing from CFI; Need for Additional
Capital" and "-- Insurance, Workers' Compensation and Public Liability" below.
While in 1996 progress has been made in implementing BAS which should help to
enhance the Company's competitive position, there can be no assurance that the
Company's operating losses or net losses can be eliminated or as to future
results. The Company's cash flow from operations has declined since fiscal year
1993, with the Company having generated cash flow from operations of $41.8
million, $33.7 million and $67.2 million for fiscal years 1995, 1994 and 1993,
respectively. For the six months ended June 30, 1996, the Company's operating
activities used (rather than generated) net cash of $12.2 million. There can be
no assurance that the Company's operations will not continue to use (rather than
generate) cash. To the extent that the Company's operations continue to use
(rather than generate) cash, the Company will be dependent upon outside sources
of financing to meet its cash requirements. There can be no assurance that the
Company will have access to such financing. The Company's failure to secure such
financing if and when required could have a material adverse effect on the
Company's business, financial condition or results of operations. See "The
Distribution -- Background and Reasons for the Distribution" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
As discussed in the Note 2 to the Combined Financial Statements of CFCD
included elsewhere herein, CFCD provides for uninsured workers' compensation
claims in its financial statements. Estimated costs of uninsured workers'
compensation claims are included in operating expenses. The amounts provided are
estimated based on historical claims and unfiled claims through the date of the
financial statements in accordance with generally accepted accounting
principles. The management of the Company to be in place after the Distribution
is currently evaluating the estimated accrued claims cost for workers'
compensation and expects to increase the accrual after the Distribution to an
estimate of the claims on a fully developed basis. Accordingly, an increase of
approximately $15 million
14
<PAGE>
to the accrual, which would likely be included in operating expenses, would
likely be recorded in the Company's fourth quarter for the year ending December
31, 1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
NEW STAND-ALONE COMPANY; LACK OF PRIOR INDEPENDENT OPERATING HISTORY
Upon consummation of the Distribution, the Company will be a stand-alone
entity with less capital resources than CFI prior to the Distribution. There can
be no assurance that all of the Company's present customers will continue to do
business with it as a stand-alone entity following the Distribution.
Furthermore, the Company's management team has not operated the Company as a
public company, and the Company will have a new Board of Directors, appointed by
CFI, effective as of the consummation of the Distribution.
After the Distribution, the Company will have a continuing relationship with
CFI under the Transition Services Agreement described in "Relationship between
CFI and the Company after the Distribution" for certain services. The Transition
Services Agreement is intended to ensure that the Company's business will,
during the term thereof, receive the same level of services as a stand-alone
operation as it currently receives as a part of CFI, at prices to be determined
on an arm's length, negotiated basis. There can be no assurance, however, that
CFI will be willing to continue providing such services, or that such services
will be provided at a comparable level and cost, beyond the term of the
Transition Services Agreement. The failure of CFI to provide such services to
the Company after the expiration of the Transition Services Agreement could have
a material adverse effect on the Company if comparable arrangements cannot be
made. Moreover, the Company will not receive any rights to software developed by
CFI's logistics subsidiary, which could have a material adverse effect on the
Company's business, financial condition or results of operations. See "Risk
Factors -- Menlo Logistics." The impact of these and other changes on the
Company's operations cannot be predicted. See "Pro Forma Consolidated Financial
Statements," "Management" and "Relationship between CFI and the Company after
the Distribution."
SUBSTANTIAL CAPITAL REQUIREMENTS; UNAVAILABILITY OF FUTURE FINANCING FROM CFI;
NEED FOR ADDITIONAL CAPITAL
In order to compete effectively, the Company must have access to capital. As
discussed above, the Company's cash flow from operations declined from fiscal
year 1993 to fiscal year 1995 and, for the six months ended June 30, 1996, the
Company had negative cash flow from operations of approximately $12 million. As
a result, during 1995 and the six months ended June 30, 1996, the Company has
relied upon investments and advances from CFI to provide the cash necessary to
fund capital expenditures and meet other cash requirements. For the six months
ended June 30, 1996 and year ended December 31, 1995, such funding amounted to
approximately $49 million and $67 million, respectively. In the future, neither
CFI nor any other former affiliate of the Company will provide the Company with
financing or capital contributions. Accordingly, the Company will need to access
the debt or equity markets or obtain additional funding sources (such as the
anticipated revolving credit facility referred to below) in order to finance its
operations and capital expenditures and, to the extent that the Company's
operations continue to generate negative cash flow, the Company will be
dependent upon outside sources of financing in order to meet its cash flow
requirements. No assurance can be given that the Company will have access to
such financial markets or other funding in the future, or that any such
financing or refinancing will be completed on favorable terms and in a timely
manner, or at all, particularly during a downturn in industry conditions. In
that regard, although the Company anticipates that CFCD will enter into a $225
million secured revolving credit facility prior to the Distribution (see
"Financing"), the availability of borrowings and letters of credit thereunder
will require, among other things, that CFCD remain in compliance with certain
financial covenants. There can be no assurance that it will remain in compliance
with such financial covenants and, as a result, there can be no assurance that
borrowings and letters of credit will be available under such credit facility.
CFCD's failure to remain in compliance with the terms of its anticipated
revolving credit facility or any other circumstances preventing CFCD from making
borrowings or obtaining letters of credit thereunder, or the Company's failure
to obtain financing or to refinance outstanding borrowings as and when required,
could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the Company expects that the
letters of credit described in
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the following paragraph will be issued (or, in the case of letters of credit
already issued, replaced by letters of credit issued) under this anticipated
revolving credit facility and, as a result, that the amount of borrowings
available under such credit facility will be reduced by the aggregate amount of
letters of credit outstanding from time to time. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Although it is anticipated that CFCD will have $15.1 million of long-term
indebtedness immediately following the Distribution, it is likely that CFCD will
be required to incur additional indebtedness from time to time under its
anticipated revolving credit facility in order to meet other cash requirements.
In addition, as of October 1, 1996, CFI obtained on CFCD's behalf a letter of
credit in the face amount of approximately $20 million in connection with
insurance programs relating to certain workers' compensation and public
liability claims arising on and after October 1, 1996. Furthermore, not later
than the Distribution Date, CFCD will replace the aforementioned $20 million
letter of credit with its own letter of credit, and will obtain additional
letters of credit in an aggregate face amount of $30 million to support CFCD's
reimbursement obligations to CFI in connection with certain workers'
compensation and public liability claims arising prior to October 1, 1996. The
Company expects that CFCD's letter of credit and surety bond obligations under
its own insurance program will increase incrementally over a nine-month period
from approximately $20 million to approximately $65 million so that, as of July
1, 1997, it will be required to maintain insurance-related letters of credit and
surety bonds in an aggregate amount of approximately $95 million. There can be
no assurance, however, that the Company's actual letter of credit and surety
bond requirements will not differ, perhaps substantially, from the estimated
amount. See "-- Insurance, Workers' Compensation and Public Liability" and
"Relationship Between CFI and the Company after the Distribution --
Reimbursement and Indemnification Agreement."
The Company anticipates that CFCD's revolving credit agreement will contain
a number of financial and other restrictive covenants, including requirements
that CFCD maintain a minimum level of earnings before interest, taxes,
depreciation and amortization, a minimum level of tangible net worth and a
minimum fixed charge coverage ratio, and that the credit agreement will contain
limitations on liens, capital expenditures and transactions with affiliates. In
addition, it is anticipated that cash borrowings outstanding at any time will be
limited to $100 million and borrowings and letters of credit under the credit
facility will be secured by substantially all of the present and future assets
(excluding real property and certain rolling stock) of CFCD, by the outstanding
capital stock of CFCD and by 65% of the outstanding capital stock of
Consolidated Freightways Limited, the Company's Canadian subsidiary.
The amount of indebtedness and letter of credit and surety bond obligations
which the Company may incur in the future, the restrictive covenants contained
in CFCD's proposed credit facility, and the fact that a substantial majority of
the Company's assets will be pledged as collateral under such credit facility
could have important consequences. For example, the foregoing factors will
likely limit the Company's ability to obtain additional financing and make the
terms of any financing which may be obtained less favorable to the Company. In
addition, the Company will be required to use cash to pay debt service and
related fees, thereby reducing funds available for operations and other
purposes. Likewise, the anticipated financial and other covenants in CFCD's
revolving credit facility could significantly limit the operating and financial
flexibility of the Company. In addition, if an event of default under CFCD's
credit facility were to occur (whether because of a breach of financial
covenants or otherwise), the lenders thereunder would be entitled to declare all
amounts owed to them due and payable and to proceed against their collateral,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The LTL trucking industry is highly competitive, and the Company will
compete in certain markets against other regional, interregional, and long-haul
motor carriers, including CFI's subsidiaries, many of which have greater
financial and other resources than the Company. Competition in the industry is
based primarily on freight rates, quality of service, reliability, transit times
and scope of operations. In addition, certain non-union competitors of the
Company may have advantages over unionized carriers such as the Company,
including lower wages and benefit costs and greater work
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rule flexibility. Intense competition, coupled with persistent industry
over-capacity, has resulted in aggressive price discounting and narrow margins
and in a significant number of business failures in the industry.
Deregulation in the trucking industry has resulted in ease of entry and
increased competition. New entrants (some of which have grown rapidly in
regional markets) include non-union carriers that have lower labor costs than
CFCD.
To succeed in this competitive industry, the Company must continue to
improve its flexibility and responsiveness to customers. In addition, it must
also continue to reduce costs, which are currently in excess of average costs
for major regional and inter-regional trucking companies. There can be no
assurance that the Company will be successful in its attempts to meet the
competitive demands of the industry and reduce its costs, and the failure to do
so would have a material adverse effect on its business, financial condition or
results of operations.
POTENTIAL EFFECT OF UNION ACTIVITIES
Approximately 85% and 58% of the employees of CFCD and LJSC, respectively,
are represented by various labor unions, primarily the IBT and the Office and
Professional Employees International Union. In 1994, CFCD experienced a 24-day
work stoppage (the "1994 Strike") upon the expiration of the National Master
Freight Agreement (the "NMFA"). The work stoppage had an adverse impact on the
Company's results of operations. CFCD and the IBT are currently parties to the
NMFA which expires on March 31, 1998. Although the Company believes that CFCD
will be able to successfully negotiate a new contract with the IBT, there can be
no assurance that it will be able to do so or that work stoppages will not
occur, or that the terms of any such new contract will not be substantially less
favorable than those of the existing contract, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
The historical combined financial statements of the Company, as well as the
summary and selected financial information, included elsewhere in this
Information Statement, reflect the results of operations and the financial
condition of the Company's business during periods when it was operated as a
part of CFI. Likewise, the pro forma consolidated financial statements and other
pro forma data included herein are based upon such historical financial
statements. A number of significant changes, however, will occur in the funding,
operations and capital structure of the Company in connection with the
Distribution. In particular, such financial statements do not reflect any
allocation to the Company of CFI's consolidated borrowings or interest expense
(other than borrowings incurred directly by CFCD and interest expense thereon)
during those periods or costs of obtaining letters of credit and surety bonds
necessary in connection with certain insurance programs. These changes will have
a substantial impact on the future financial position and results of operations
of the Company. In addition, the historical financial statements include, as
selling and administrative expenses, an allocation of corporate overhead costs
incurred by CFI using both incremental and proportional methods on a revenue and
capital basis. Although management believes that the allocation methods used
provided the Company with a reasonable share of such expenses, there can be no
assurance that these costs will not increase, perhaps substantially, after the
Distribution. As a result, the historical combined and pro forma unaudited
financial statements and information included in this Information Statement do
not purport to reflect the financial position and results of operations of the
Company in the future or what the financial position and results of operations
of the Company would have been had the Company operated as a stand-alone entity
during the periods presented, particularly in light of the fact that the Company
will be required to incur costs of obtaining letters of credit and surety bonds
as described above and will likely be required to incur indebtedness to fund its
cash requirements. See "Pro Forma Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CERTAIN TAX CONSIDERATIONS
CFI has received a private letter ruling from the IRS to the effect that,
among other things, the Distribution will generally qualify as a tax-free
distribution for Federal income tax purposes. Such
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<PAGE>
ruling is based on the accuracy of certain factual representations and certain
assumptions of CFI. Although CFI is not aware of any facts or circumstances that
would cause such representations or assumptions to be false, no assurance can be
given in this regard.
If the Distribution were not to qualify as a tax-free distribution for
Federal income tax purposes, (i) CFI would be subject to tax on the difference
between (x) the fair market value of the Common Stock and (y) the adjusted tax
basis of the Company's assets at the time of the Distribution and (ii) each
holder of CFI Common Stock who received shares of the Common Stock in the
Distribution would generally be treated as having received a taxable dividend
includible in income in an amount equal to the fair market value of such Common
Stock received at the time of the Distribution, plus the amount of cash, if any,
received in lieu of fractional shares.
The Company, as party to a Tax Sharing Agreement to be entered into between
the Company and CFI, has the obligation to pay for its allocable share of any
tax liabilities that arise as a result of IRS, state or foreign tax audits
related to periods prior to the Distribution. The IRS has examined the
consolidated tax returns of CFI and subsidiaries for the years ended 1984
through 1990. These returns included the Company. While the IRS examinations
have not been finalized, based on the current status of the examinations, it is
probable that the Company will have exposure resulting in an additional
liability for taxes and interest. The adjustments that have been proposed by the
IRS would result primarily in deductible items in future periods, resulting in
deferred tax assets which would not have an immediate impact on operating
results, although such adjustments would require cash payments by the Company.
As of June 30, 1996, CFI's estimate of the Company's minimum probable tax
liability is $15 million. There can be no assurance, however, that the amounts
which may eventually be payable by the Company as a result of this examination
will not exceed, perhaps substantially, this amount.
In order to provide further assurances that the Distribution will qualify as
a tax-free transaction for Federal income tax purposes, the Distribution
Agreement (as defined below) restricts the ability of the Company to make a
material disposition of its assets, engage in certain repurchases or issuances
of the Company's capital stock or cease the active conduct of its businesses
independently, with its own employees and without material change, prior to
three years from the Distribution Date, unless it obtains an opinion of counsel
reasonably satisfactory to CFI or an IRS private letter ruling. Under the Tax
Sharing Agreement, the Company will generally indemnify CFI with respect to any
taxes incurred by CFI in connection with the Distribution if the Distribution
fails to qualify as a tax-free transaction for Federal income tax purposes as a
result of a violation of any of the foregoing restrictions by the Company or as
a result of certain misrepresentations or omissions by the Company to the IRS or
to counsel of CFI. See "Relationship between CFI and the Company after the
Distribution -- Distribution Agreement."
NO CURRENT PUBLIC MARKET FOR THE COMMON STOCK; POSSIBILITY OF SIGNIFICANT PRICE
FLUCTUATIONS
Although the Company expects that a "when-issued" trading market will
develop on or about the Record Date, there is not currently a public market for
the Common Stock. In addition, the trading price of the Common Stock will be
influenced by a variety of factors, including the Company's operating results,
the depth and liquidity of the market for the Common Stock, investor perception
of the Company and the industries in which it participates and general economic
and market conditions. Such prices may also be affected by certain provisions of
the Company's Restated Certificate of Incorporation and Bylaws, as each will be
in effect following the Distribution, which may have antitakeover effects.
Accordingly, there can be no assurance as to the prices at which trading in the
Common Stock will occur on a "when-issued" basis or after the Distribution.
Although the Common Stock has been approved for listing, subject to official
notice of issuance, on the Nasdaq National Market, there can be no assurance
that an active public market will develop for the Common Stock. The prices at
which trading in the Common Stock occurs may fluctuate significantly,
particularly until the Common Stock issued in the Distribution is fully
distributed. See "The Distribution -- Listing and Trading of the Common Stock."
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DIVIDEND POLICY
The Company's dividend policy will be established by the Company Board from
time to time based on the results of operations and financial condition of the
Company and such other business considerations as the Company Board considers
relevant. The Company presently expects that it will not pay a dividend in 1996
or 1997, and that 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.
HOLDING COMPANY STRUCTURE
The Company is a holding company and does not have any material assets other
than the common stock of its subsidiaries. Accordingly, the Company's ability to
pay dividends, if any, on the Common Stock, to service its indebtedness and meet
its other cash needs are substantially dependent upon the results of operations
of its subsidiaries and the cash flow, if any, generated by such subsidiaries to
the Company. The desirability of repatriating cash from foreign subsidiaries of
the Company may be affected by foreign and domestic tax considerations,
including the availability of foreign tax credits.
POSSIBLE EFFECT OF ECONOMIC DEVELOPMENTS AND MARKET CONDITIONS
Interest rate fluctuations, increases in fuel prices, economic recession and
changes in customers' business cycles and industry capacity are factors over
which the Company has little or no control, but which may adversely affect its
business, financial condition or results of operations.
FRAUDULENT TRANSFER AND RELATED CONSIDERATIONS
Prior to the Distribution, CFCD and LJSC will transfer certain assets and
liabilities to CFI with a net book value of approximately $58 million. Any such
transfer as well as the Distribution itself may be subject to review under state
or federal fraudulent transfer laws in the event of the bankruptcy or other
financial difficulty of either the Company or CFI.
Under those laws, if a court in a lawsuit by an unpaid creditor or
representative of creditors of the Company, such as a trustee in bankruptcy or
the Company as debtor in possession in a case under chapter 11 of the United
States Bankruptcy Code, were to find that at the time of such transfer of assets
and liabilities, the Company either (i) was insolvent, (ii) was rendered
insolvent, (iii) was engaged in a business or transaction for which its
remaining unencumbered assets constituted unreasonably small capital, or (iv)
intended to incur or believed that it would incur debts beyond its ability to
pay as such debts matured, the court could avoid such transfer.
Similarly, if a court in a lawsuit by an unpaid creditor or representative
of creditors of CFI, such as a trustee in bankruptcy or CFI as debtor in
possession, were to find that at the time of the Distribution, one of the
factors identified in clauses (i)-(iv) above applied to CFI, such court could
avoid the Distribution and direct the return of all shares of Common Stock
distributed thereunder to CFI or to an entity to hold for the benefit of CFI's
creditors.
Moreover, regardless of the factors identified in clauses (i) through (iv),
the court could avoid such transfer of assets and liabilities or the
Distribution if, in either case, it found that such transfer or the Distribution
resulted from actual intent to hinder, delay, or defraud creditors of the
Company or CFI, respectively.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
In addition, under applicable corporate law, a corporation generally may
make distributions to its shareholders only out of its surplus (i.e., its net
assets minus capital) and not out of capital. Accordingly, a court could avoid
(i) such transfer of assets and liabilities if it found that the assets and
liabilities so transferred did not constitute surplus of the Company and (ii)
the Distribution, and direct the return of Common Stock to CFI, if it found that
the shares distributed in the Distribution did not constitute surplus of CFI.
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<PAGE>
CERTAIN PROVISIONS RELATING TO CHANGES IN CONTROL; CERTAIN ANTITAKEOVER EFFECTS
The Company's Restated Certificate of Incorporation and Bylaws contain
certain provisions which may have the effect of delaying, deferring or
preventing a change of control of the Company after the Distribution. Such
provisions include, for example, provisions authorizing the Board of Directors
to issue preferred stock in series, with the terms of each series to be fixed by
the Board of Directors, and the provision of an advance notice procedure for
shareholder nominations and proposals. See "Purposes and Antitakeover Effects of
Certain Provisions of the Company's Charter and Bylaws."
If the Distribution is consummated, the Restated Certificate of
Incorporation and Bylaws of the Company will each contain several provisions
that may make the acquisition of control by third parties more difficult or
expensive.
GOVERNMENTAL REGULATIONS
TRANSPORTATION. The business of the Company is subject to regulation by
various Federal and state agencies, including the Department of Transportation
("DOT"). The trucking industry is subject to regulatory and legislative changes
(including limits on vehicle weights and size) that can affect the economics of
the industry by requiring changes in operating practices or influencing the
costs of providing services to shippers.
ENVIRONMENTAL. The trucking industry is subject to stringent environmental
laws and regulations, including laws and regulations dealing with underground
fuel storage tanks and the transportation of hazardous materials. Laws
protecting the environment have become more stringent. Management of the Company
believes that the Company is in material compliance with all laws applicable to
its operations and is not aware of any situation or condition that it believes
is likely to have a material adverse effect on its financial position or results
of operations. There can be no assurance, however, 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 condition or results of operations. See
"Business -- Environmental Regulations."
PARTICIPATION IN MULTI-EMPLOYER PENSION PLANS
CFCD, as a signatory to the NMFA, is required to make contributions to
various multi-employer pension plans maintained for the benefit of its IBT
represented employees. The benefit levels of such plans are established by the
trustees thereof, who are selected by various management organizations and the
IBT. CFCD has no control over the funding or solvency of such plans. Under
ERISA, as amended by the Multiemployer Pension Plan Amendments Act of 1980, an
employer who makes contributions to a multi-employer pension plan and the
members of such employer's controlled group are jointly and severally liable for
their proportionate share of the plan's unfunded liabilities in the event the
employer ceases to have an obligation to contribute to the plan or substantially
reduces its contributions to the plan (in the event of the plan termination or
withdrawal by the employer from the multi-employer plans). Based on historical
information, with respect to CFCD's potential liability under ERISA in the event
it wholly or partially ceases to have an obligation to contribute or
substantially reduces its contributions to the multi-employer plans to which it
currently contributes, management is unable to quantify reliably such liability
but believes that it would be material. CFCD does not anticipate eliminating or
substantially reducing its contribution to such multi-employer plans.
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.
AVAILABILITY OF DRIVERS
The long-haul motor carriage industry has also experienced problems in
hiring qualified, experienced drivers. The availability of drivers is an
important factor in the Company's ability to serve its
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customers. The commercial driver license and drug testing requirements have
contributed to a nationwide driver shortage. Competition for drivers is intense.
The Company has periodically experienced driver shortages in certain
geographical areas. The Company may not be able to employ a sufficient number of
drivers from time to time to meet customer shipment demands, resulting in loss
of revenue that might otherwise be available to the Company. There can be no
assurance that in the future a shortage of qualified drivers would not have an
adverse effect on the Company's business, financial condition or results of
operations.
INSURANCE, WORKERS' COMPENSATION AND PUBLIC LIABILITY
CFI administers an insurance program for workers' compensation and public
liability claims for its corporate entities. Under the insurance program, CFI
has administered claims made against CFCD and, where required by law or
contract, has provided the necessary indemnities, insurance guarantees, letters
of credit or surety bonds for the performance of CFCD's obligations. CFI has
indemnified certain states, insurance companies and sureties against the failure
of CFCD to pay workers' compensation and public liability claims. In some cases,
these indemnities are supported by letters of credit under which CFI is liable
to the issuing bank and by bonds issued by surety companies. After the
Distribution Date, CFI will continue to provide indemnification and letters of
credit and surety bonds with respect to claims that are pending as of September
30, 1996. As of October 1, 1996, CFCD will provide, or obtain on its behalf,
indemnification, letters of credit and surety bonds for claims incurred on or
after such date. While it is not practicable to segregate the letter of credit
requirements for CFCD's participation in CFI's insurance program, CFCD's
liabilities represented approximately 58% of the total CFI liabilities of
approximately $317 million that were supported by $133.4 million of letters of
credit as of December 31, 1995.
Because it is not feasible for CFI to be released from contingent liability
under its indemnification obligations to the states in which CFCD operates with
respect to workers' compensation and public liability claims incurred on behalf
of CFCD prior to October 1, 1996, CFI will continue to administer these claims.
CFCD will, as of the Distribution Date, enter into a Reimbursement and
Indemnification Agreement confirming its obligation to reimburse and indemnify
CFI against liability with respect to these claims, and the Company anticipates
that CFCD will provide letters of credit and certain other collateral to CFI, in
an original amount of approximately $80 million (consisting of $30 million in
letters of credit and approximately $50 million of real property (subject to
adjustment)), to secure CFCD's obligations under such Agreement. As of October
1, 1996, CFCD established a similar insurance program for workers' compensation
and public liability claims by providing similar insurance guaranties or
collateral to the relevant states or to an insurance intermediary. In order to
do so, CFCD is required to secure its obligations through letters of credit and
surety bonds. As of October 1, 1996, CFI obtained on CFCD's behalf a letter of
credit in the amount of approximately $20 million in connection with insurance
programs relating to certain workers' compensation and public liability claims
arising on and after October 1, 1996. Furthermore, not later than the
Distribution Date, CFCD will replace the aforementioned $20 million letter of
credit with its own letter of credit, and will obtain additional letters of
credit in an aggregate face amount of $30 million to support CFCD's
reimbursement obligations to CFI in connection with certain workers'
compensation and public liability claims arising prior to October 1, 1996. The
Company expects that CFCD's letter of credit and surety bond obligations under
its own insurance program will increase incrementally over a nine-month period
from approximately $20 million to approximately $65 million so that, as of July
1, 1997, it will be required to maintain insurance-related letters of credit and
surety bonds in an aggregate amount of approximately $95 million. There can be
no assurance, however, that the Company's actual letter of credit and surety
bond requirements will not differ, perhaps substantially, from the estimated
amount. As a result, the Company anticipates that, as of October 1, 1996 and
thereafter, there will be a substantial increase in CFCD's financial guaranty
and indemnification requirements and a related increase in its expenses incurred
in maintaining related letters of credit and surety bonds. In addition, failure
by CFCD to remain in compliance with the financial covenants and other terms in
its anticipated revolving credit facility would likely prevent CFCD from
maintaining the letters of credit and surety bonds necessary to maintain the
insurance arrangements, which could have a material adverse effect on the
Company's business, results of operations or financial condition.
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MENLO LOGISTICS
The Company will, as of the Distribution Date, operate at arm's length from
Menlo Logistics, Inc. ("Menlo"), a wholly owned subsidiary of CFI. Menlo is one
of CFCD's largest customers. Since CFCD has no agreement with Menlo to maintain
its current business, there can be no assurance that CFCD will retain that
business or, if it is able to retain such business, that it will be able to
maintain its current pricing structure. Moreover, Menlo may have an incentive to
transfer business to Con-Way Transportation Services, Inc., also a wholly owned
subsidiary of CFI. Any significant loss of Menlo business or reduction in the
price paid by Menlo for CFCD's transportation services could have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company will not, in connection with the Distribution or
otherwise, receive any rights in or to software developed or used by Menlo in
the operation of Menlo's logistics business, which will inhibit the Company's
ability to develop its own logistic company, and logistic solutions for
customers of CFCD. The inability of the Company to utilize the Menlo software
could also have a material adverse affect on the Company's business, financial
condition or results of operations.
TRANSITION SERVICES AGREEMENT
Following the Distribution, CFI will provide various services to the
Company. See "Relationship between CFI and the Company after the Distribution --
Transition Services Agreement." The Company has no assurance that it will be
provided commercially reasonable services nor that it will be given equal
priority with CFI subsidiaries. The Company's sole remedy if CFI fails to
perform its obligations under the Transition Services Agreement is to terminate
such Agreement without any right to damages which may be suffered as a result of
such failure to perform. Failure of CFI to perform its obligations under the
Transition Services Agreement could have a material adverse effect on the
Company's business, financial condition or result of operations.
RELATIONSHIP BETWEEN CFI AND
THE COMPANY AFTER THE DISTRIBUTION
For the purpose of governing certain aspects of the ongoing relationship
between CFI and the Company after the Distribution and to provide mechanisms for
an orderly transition following the Distribution, CFI, CFCD and the Company will
enter into various agreements (collectively, the "Transition Agreements"). Forms
of the Transition Agreements are included as exhibits to the Registration
Statement of which this Information Statement is a part, and the following
summaries are qualified by reference to the Transition Agreements as filed.
Except as described and except for contractual relationships in the ordinary
course of business, all contractual relationships among CFI, CFCD and LJSC
existing prior to the Distribution will be terminated on the Distribution Date.
DISTRIBUTION AGREEMENT
The Distribution Agreement provides for, among other things, the principal
corporate transactions required to effect the Distribution and for the
allocation of certain assets and liabilities between CFI and the Company.
Subject to certain exceptions, the Distribution Agreement provides for
assumptions and cross-indemnities designed to place, effective as of the
Distribution Date, financial responsibility for the liabilities of CFCD and LJSC
with the Company and the financial responsibility for the liabilities of the
Emery, Con-Way and Menlo Businesses and certain general corporate liabilities
with CFI. See "-- Employee Benefit Matters Agreement" and "-- Tax Sharing
Agreement."
The Distribution Agreement provides that CFI will indemnify the Company
against certain liabilities, costs and expenses arising out of CFI's
pre-Distribution business (other than as relates to the Company's business) and
the Company will indemnify CFI against certain liabilities, costs and expenses
of the Company or arising out of its pre-Distribution business and each will
have sole responsibility for claims arising out of its respective activities
after the Distribution; provided, however, that certain pre-Distribution
liabilities of LJSC will be shared on the basis described in the
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Distribution Agreement (reflecting that all CFI businesses will have benefited
from services performed by LJSC prior to the Distribution). CFI will pay all
out-of-pocket costs and expenses necessary to effect the Distribution and
incurred prior to the Distribution, unless otherwise provided in the
Distribution Agreement.
The Distribution Agreement provides that, for a period of three years after
the Distribution Date, neither CFI nor the Company will directly solicit the
employment of any employee of the other company or its affiliates without the
prior written consent of such other company; provided, however, that if the
Company shall cease to receive services provided by CNF Service Company, Inc.
("Servco") (which is now, and shall remain after Distribution, a wholly owned
subsidiary of CFI) after the Distribution Date, it may solicit employees from
the groups that had been providing such services. See "-- Transition Services
Agreement."
The Distribution Agreement provides that on the Distribution Date the
Company's Restated Certificate of Incorporation and Bylaws will be in the forms
filed as exhibits to the Registration Statement of which this Information
Statement forms a part, and that the Company and CFI will take all actions which
may be required to elect or otherwise appoint, as directors of the Company, the
nine persons named below. See "Management -- Directors and Executive Officers."
In order to avoid adversely affecting the intended tax consequences of the
Distribution and related transactions, the Distribution Agreement restricts the
ability of the Company to make a material disposition of its assets, engage in
certain repurchases or issuances of the Company's capital stock or cease the
active conduct of its businesses independently, with its own employees and
without material change, prior to three years from the Distribution Date, unless
it obtains an opinion of counsel or an IRS private letter ruling reasonably
satisfactory to CFI. The Company does not expect these limitations to
significantly inhibit any potential acquisition activities or its ability to
respond to unanticipated developments. See "Risk Factors -- Certain Tax
Considerations."
The Distribution Agreement provides that certain real estate owned by CFCD
and/or LJSC shall be transferred to CF Properties, Inc. (which is now, and shall
remain after the Distribution, a wholly owned subsidiary of CFI) prior to
consummation of the Distribution. Thereafter, the Company may lease an
insignificant portion of such real estate from CF Properties, Inc. on a
short-term basis.
The Distribution Agreement provides for certain transfers and licenses of
intellectual property, including without limitation trademarks and proprietary
software, from CFI to the Company. Each of CFI and the Company shall have rights
in the "Consolidated Freightways" name and related trademarks for up to nine
months following the Distribution Date; thereafter, the Company shall have
exclusive rights thereto. CFI will propose amending its Certificate of
Incorporation to change its name to "CNF Transportation, Inc." at its next
annual meeting of shareholders and to recommend that its shareholders approve
the proposal. The Distribution Agreement also provides that CFI will be
responsible for all costs of duplicating and transferring proprietary software
of CFI to the Company, which software is required by CFCD in its business
operations and for all costs incurred in obtaining consents from CFI's software
vendors to assign rights to use software now used by CFCD in its business
operations. The Company will not receive any rights to software developed by
Menlo, which could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Risk Factors -- Menlo
Logistics."
The Distribution Agreement provides that each party will indemnify the other
in the event of certain liabilities arising under the Exchange Act.
TRANSITION SERVICES AGREEMENT
CFI and the Company currently share certain administrative and other
services provided by LJSC. Prior to the Distribution, CFI will (i) transfer
certain LJSC assets, liabilities and administrative service departments to
Servco to enable Servco to provide the Company (and CFI) with certain of the
services formerly provided by LJSC and (ii) contribute all of the capital stock
of LJSC to the Company. Under the Transition Services Agreement, Servco will
provide the Company with certain information systems, data processing, payroll,
computer and communications, and other administrative services specified in the
Transition Services Agreement, and will administer the Company's retirement and
benefits plans. The Transition Services Agreement will have a three-year term,
although (i) the
23
<PAGE>
Company will be able to terminate any or all such services, at any time, on six
months' notice and (ii) Servco will be able to terminate any or all such
services, other than telecommunications and data processing services, at any
time after the first anniversary of the Transition Services Agreement, on six
months' notice, provided that in no event shall the giving of notice cause an
extension of the term. Services performed by Servco under the Transition
Services Agreement shall be paid for by the Company on an arm's-length
negotiated basis.
ALTERNATIVE DISPUTE RESOLUTION AGREEMENT
The Alternative Dispute Resolution Agreement establishes procedures for
resolving disputes between the parties which may arise after the Distribution
out of certain of the agreements described herein that cannot be settled through
ordinary business negotiations. The alternative dispute resolution procedure
used is mediation, which if terminated would be followed by binding arbitration.
These procedures would be the exclusive methods for resolution of most disputes
arising prior to or out of the Distribution.
EMPLOYEE BENEFIT MATTERS AGREEMENT
The Company's employees and retirees are currently covered by employee
benefit plans sponsored by CFI, including health, disability and life insurance
plans, a retirement plan, a 401(k) plan with a related employee stock ownership
plan (ESOP), and a frozen plan invested in CFI Common Stock. The obligations and
assets of these plans will be allocated between CFI and the Company under the
Employee Benefit Matters Agreement in the following manner. The Company will
assume the obligations for its employees and retirees as of the Distribution
Date under CFI's employee benefit plans, including the unfunded obligation to
provide such retirees with medical benefits. CFI will cause the trustee of the
CFI retirement plan to transfer to the trustee of a newly established Company
retirement plan, CFI retirement plan assets with a value equal to the
accumulated benefit obligation of the Company for employees and retirees. CFI
will cause the trustee of the CFI 401(k) plan, ESOP, and frozen common stock
plan to transfer an amount equal to the fair market value of the accounts of the
current Company employees under such plan into new 401(k) and frozen common
stock plans to be established by the Company.
Certain Company employees participate in an elective deferred compensation
plan and a supplemental retirement plan sponsored by CFI. Assets have been
placed in a trust providing security for all or part of the benefits owed under
these plans. The Employee Benefit Matters Agreement provides that CFI will
retain the obligation to provide elective deferred compensation benefits and
supplemental retirement benefits that accrued before the Distribution Date to
Company employees and retirees, and assets relating to that obligation will
remain in the trust established by CFI. Certain Company directors are covered by
CFI's equity incentive plan for non-employee directors. The Company will not
assume any obligations under such plan, but will instead establish its own plan
to compensate its directors. See "Management -- Compensation of Directors."
The Employee Benefit Matters Agreement also provides for the treatment of
options held by CFI and Company employees as of the Distribution Date. The
outstanding options held by CFI and Company employees as of the Distribution
Date will be adjusted (with respect to both the number of shares subject to such
options and the exercise price per share) so that (i) the ratio of exercise
price to stock price remains constant and (ii) the aggregate "spread" (i.e., the
excess of the fair market value of the shares of CFI Common Stock subject to
such options over the aggregate per share exercise price) inherent in such
options after giving effect to the Distribution, is equal to the aggregate
"spread" inherent in such options prior to giving effect to the Distribution.
Each outstanding option held by Company employees ("CFI-CFC Option")
provides generally that following a termination of employment from CFI or any of
its affiliates, an optionee will have 90 days to exercise his or her options
before they expire. Prior to the Distribution Date, the stock option agreements
under the Consolidated Freightways, Inc. Stock Option Plan of 1988 (the "CFI
Stock Plan") that are held by Company employees will be amended to provide that
all of their options granted in July of 1996, which otherwise would vest one
year from the grant date, will become fully vested and exercisable 30 days prior
to the Distribution. Accordingly, effective as of the Distribution Date,
generally each Company employee who will be considered a terminated employee
under the CFI Stock Plan will have 90 days after such termination of employment
(the "90 Day Period") to exercise
24
<PAGE>
his or her CFI-CFC Options to purchase CFI Common Stock. After the 90 Day Period
such options will expire. The following is the number of options that will
become fully vested and exercisable 30 days prior to the Distribution: Mr.
Curry, 30,000 options; Mr. Blake, 8,000 options; Mr. Richards, 5,000 options;
Mr. Seeley, 8,000 options; Mr. Wrightson, 8,000 options; all current executive
officers as a group, 66,500 options; and all employees, including all current
officers who are not executive officers, as a group, 107,000 options.
The Employee Benefit Matters Agreement also provides that the employment by
the Company or any of its subsidiaries or Servco, in connection with the
Distribution, of individuals who were employees of CFI or any of its
subsidiaries immediately prior to the Distribution Date will not be deemed a
severance of employment from CFI or such subsidiary for purposes of any policy,
plan, program or agreement that provides for the payment of severance, salary
continuation or similar benefits. If any person loses employment with LJSC on
the Distribution Date as a direct result of the Distribution and is not employed
by Servco or another CFI entity, CFI is responsible for any severance, salary
continuation or similar benefits payable with respect to such loss of
employment.
TAX SHARING AGREEMENT
CFI and the Company will, on or prior to the Distribution Date, enter into a
Tax Sharing Agreement to determine their responsibilities for taxes attributable
to periods ending before and after the Distribution. Under the terms of the Tax
Sharing Agreement, CFI is generally responsible for filing all tax returns of
the CFI consolidated group (including the Company and its subsidiaries) for
periods ending on or before the Distribution Date. The Company will continue to
be responsible for its allocable share of such tax liability for periods ending
on or prior to the Distribution Date and the Company will make payments to CFI
in respect of such liability, including any liability that may arise as a result
of an audit of the tax returns for such periods. See "Risk Factors -- Certain
Tax Considerations." The Company will generally be entitled to its allocable
share of any refunds attributable to the reduction of its tax liabilities for
such periods. The Company's allocable share of tax liability (and refunds) for
these purposes will generally be determined based on the proportion that its tax
liability, computed as if the Company filed a separate tax return, bears to the
total tax liability of all members of the CFI's consolidated group computed in a
similar fashion.
The Company will generally indemnify CFI with respect to any taxes incurred
by CFI in connection with the Distribution if the Distribution fails to qualify
as a tax-free transaction for Federal income tax purposes as a result of certain
transactions by the Company or as a result of certain misrepresentations or
omissions by the Company to the IRS or to counsel to CFI. See "Risk Factors --
Certain Tax Considerations."
After the Distribution Date, CFI and the Company will each be separately
responsible for filing all tax returns for their respective affiliated groups of
companies and paying the appropriate amounts of all related taxes. CFI will,
however, retain full responsibility for and discretion in amending all tax
returns of the consolidated group and handling any tax controversy, audit or
other dispute resolution process with respect to periods ending on or prior to
the Distribution Date, unless CFI approves of a specific request by the Company
to handle such a situation that would directly affect the Company.
REIMBURSEMENT AND INDEMNIFICATION AGREEMENT
CFI currently indemnifies certain states, insurance companies and sureties
against the failure of CFCD to pay workers' compensation and public liability
claims. In some cases, these indemnities are supported by letters of credit
under which CFI is liable to the issuing bank. After the Distribution Date, CFI
will continue to provide indemnification and letters of credit and surety bonds
with respect to claims that are incurred prior to October 1, 1996. These
potential liabilities required to be indemnified by CFI should be reduced over
time as pending claims are resolved. Historically, CFCD has not provided
security to CFI to support CFI's undertakings to the states, insurance
companies, sureties and issuing banks. The Reimbursement and Indemnification
Agreement provides that CFCD will reimburse and indemnify CFI for all amounts
paid and losses incurred by CFI on behalf of CFCD with respect to CFI's
insurance program for workers' compensation and public liability claims. It also
25
<PAGE>
provides that CFCD will provide CFI with security for the performance of its
obligations in an original amount of approximately $80 million (consisting of
$30 million in letters of credit and approximately $50 million in real
property), subject to periodic adjustment.
FINANCING
Prior to the Distribution, the Company expects that CFCD will enter into a
$225 million revolving credit agreement provided by a group of lenders. The
Company expects that the credit agreement will be secured by substantially all
of the present and future assets (excluding real property and certain rolling
stock) of CFCD (including accounts receivable, inventory, machinery, equipment,
intangibles and intellectual property), all of the outstanding capital stock of
CFCD and 65% of the outstanding capital stock of Canadian Freightways Limited,
the Company's Canadian subsidiary.
The Company anticipates that the credit agreement will mature in 2000, will
permit borrowings to support working capital needs and capital expenditures, and
will allow for the issuance of letters of credit to support insurance programs
and other needs. It is anticipated that the sum of borrowings and letters of
credit outstanding under the credit agreement from time to time will be limited
to a borrowing base equal to the sum of (i) 80% to 85% of eligible receivables
and (ii) the lesser of $75 million and 75% of the liquidation value of eligible
rolling stock; provided that the percentage of rolling stock included in the
borrowing base will decline 10% per annum until it reaches 55%. It is also
anticipated that cash borrowings outstanding at any time will be limited to $100
million. Borrowings outstanding under the credit agreement will bear interest at
a fluctuating rate per annum. CFCD will also be required to pay customary letter
of credit, commitment and other fees.
The Company anticipates that such credit agreement will contain a number of
financial and other restrictive covenants, including requirements that CFCD
maintain a minimum level of earnings before interest, taxes, depreciation and
amortization, a minimum level of tangible net worth and a minimum fixed charge
converge ratio, and that the credit agreement will contain limitations on liens,
capital expenditures and transactions with affiliates.
Such agreement will contain customary events of default, including the
failure of the Company to comply with financial covenants. Upon occurrence of an
event of default, it will permit the lending banks to discontinue further
borrowings and issuances of letters of credit, and to demand immediate repayment
of all borrowings and to proceed against the collateral. See "Risk Factors --
Substantial Capital Requirements; Unavailability of Future Financing from CFI;
Need for Additional Capital."
REGULATORY APPROVALS
The Company does not believe that any material federal or state regulatory
approvals will be necessary in connection with the Distribution.
DIVIDEND POLICY
The Company's dividend policy will be established by the Company Board from
time to time based on the results of operations and financial condition of the
Company and such other business considerations as the Company Board considers
relevant. The Company presently expects that it will not pay a dividend in 1996
or 1997, and that the Company's dividend policy thereafter will be dependent on
the circumstances then in existence. However, there can be no assurance that the
Company will pay any cash dividends on the Common Stock.
26
<PAGE>
PRO FORMA CAPITALIZATION
The following unaudited table sets forth the short-term debt and the
capitalization of the Company as of June 30, 1996, and on a pro forma basis for
the Company after giving effect to the Distribution and the related
transactions. This table should be read in conjunction with the Pro Forma
Consolidated Financial Statements and the Notes thereto, the Combined Financial
Statements and the Notes thereto, and the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Information Statement. The pro forma capitalization table has been derived from
the historical combined financial statements and reflects certain pro forma
adjustments as if the Distribution had been consummated as of June 30, 1996. The
pro forma information does not purport to reflect the capitalization of the
Company in the future or as it would have been had the Company been an
independent company as of and prior to June 30, 1996.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------------------
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt (including current portion of long-term debt)......... $ -- $ -- $ --
---------- ---------- ---------
---------- ---------- ---------
LONG-TERM DEBT (e)
Industrial Development Revenue Bonds................................ $ 15,100 $ -- $ 15,100
---------- ---------- ---------
TOTAL LONG-TERM DEBT.................................................. 15,100 -- 15,100
---------- ---------- ---------
Shareholders' equity
CFI investment and advances......................................... 279,465 (19,236)(a)
(39,199)(b)
(221,030)(c) --
Preferred Stock, 5,000,000 authorized pro forma shares; none
issued............................................................. -- -- --
Common stock, $.01 par value, authorized 50,000,000 shares; issued
and outstanding 22,006,500 pro forma shares (d).................... 220(c) 220
Additional paid-in capital.......................................... -- 220,810(c) 220,810
---------- ---------- ---------
Total Shareholders' equity........................................ 279,465 (58,435) 221,030
---------- ---------- ---------
TOTAL CAPITALIZATION.................................................. $ 294,565 $ (58,435) $ 236,130
---------- ---------- ---------
---------- ---------- ---------
Long-term debt as % of total capitalization (e)....................... 5% 6%
</TABLE>
- ------------------------------
(a) Represents the transfers of certain assets (including real properties) and
liabilities from LJSC to a subsidiary of CFI in connection with the transfer
of certain administrative service departments from LJSC to a subsidiary of
CFI.
(b) Represents the transfer of certain real properties from CFCD to a subsidiary
of CFI, some of which may be leased back to CFCD under short-term operating
leases.
(c) Represents the Company's Common Stock outstanding, $.01 par value per share,
with the remaining equity interest recognized as paid-in capital. The number
of outstanding shares was based on an assumed distribution of 100% of Common
Stock using a ratio of one share of Common Stock for every two shares of CFI
Common Stock as of June 30, 1996.
(d) Excludes 3,300,975 shares of Common Stock which immediately following the
Distribution will be reserved for issuance pursuant to employee stock option
and other benefit plans.
(e) The Company anticipates that it will incur additional indebtedness following
the Distribution. See "Risk Factors -- Substantial Capital Requirements;
Unavailability of Future Financing from CFI; Need for Additional Capital."
27
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth pro forma consolidated financial data for the
Company. The pro forma statements of consolidated operations assume the
Distribution was completed on January 1, 1996 or January 1, 1995, as applicable.
The pro forma consolidated condensed balance sheet assumes the Distribution was
completed on June 30, 1996. The pro forma adjustments are based upon available
information and upon certain assumptions that the Company and CFI believe are
reasonable which are described in the Notes to the Pro Forma Consolidated
Financial Statements. The pro forma consolidated financial data is presented for
informational purposes only and does not purport to be indicative of financial
position or the results of operations that would have occurred had the
Distribution occurred on those respective dates, or which may be attained in the
future.
28
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
PRO FORMA
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents........................................... $ 37,757 $ (102)(a) $ 37,655
Receivables, net of allowances...................................... 293,599 (332)(a) 293,267
Operating supplies, at lower of average cost or market.............. 17,569 (5,502)(a) 12,067
Prepaid expenses.................................................... 38,748 (1,335)(a) 37,413
Deferred income taxes............................................... 59,873 (288)(a) 59,585
---------- ----------- ---------
Total current assets............................................ 447,546 (7,559) 439,987
---------- ----------- ---------
Property, plant and equipment, net.................................... 493,764 (20,907)(a) 432,168
(40,689)(b)
Other assets.......................................................... 8,993 (4,023)(a) 4,970
---------- ----------- ---------
TOTAL ASSETS.......................................................... $ 950,303 $(73,178) $ 877,125
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
29
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
PRO FORMA
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current liabilities
Accounts payable.................................................... $ 93,901 $ (3,854)(a) $ 90,047
Accrued liabilities................................................. 207,382 (9,125)(a) 198,257
Accrued claims costs................................................ 88,146 (82)(a) 88,064
---------- ----------- ---------
Total current liabilities....................................... 389,429 (13,061) 376,368
Long-term liabilities
Long-term debt...................................................... 15,100 -- 15,100
Accrued claims costs................................................ 101,417 -- 101,417
Deferred income taxes............................................... 27,400 (1,490)(b) 25,910
Employee benefits and other liabilities............................. 137,492 (192)(a) 137,300
---------- ----------- ---------
Total liabilities............................................... 670,838 (14,743) 656,095
---------- ----------- ---------
Shareholders' equity
CFI investment and advances......................................... 279,465 (19,236)(a) --
(39,199)(b)
(221,030)(c)
Common stock and paid-in capital.................................... -- 221,030(c) 221,030
---------- ----------- ---------
Total shareholders' equity...................................... 279,465 (58,435) 221,030
---------- ----------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 950,303 $(73,178) $ 877,125
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
30
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
PRO FORMA
STATEMENT OF CONSOLIDATED OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNT)
<S> <C> <C> <C>
REVENUES.............................................................. $1,032,541 $-- $1,032,541
COSTS AND EXPENSES
Operating expenses.................................................. 926,572 921(e) 927,493
Selling and administrative expenses................................. 112,974(d) -- 112,974
Depreciation........................................................ 31,219 (677)(e) 30,542
---------- ----------- ----------
1,070,765 244 1,071,009
---------- ----------- ----------
OPERATING LOSS........................................................ (38,224) (244) (38,468)
OTHER INCOME (EXPENSE)
Investment income................................................... 171 -- 171
Interest expense (h)................................................ (435) -- (435)
Miscellaneous, net.................................................. (2,352) (844)(f) (368)
2,828(g)
---------- ----------- ----------
(2,616) 1,984 (632)
---------- ----------- ----------
Loss before income tax benefits....................................... (40,840) 1,740 (39,100)
Income tax benefits................................................... (12,772) 679(i) (12,093)
---------- ----------- ----------
NET LOSS.............................................................. $ (28,068) $1,061 $ (27,007)
---------- ----------- ----------
---------- ----------- ----------
Loss per share (assuming 22,006,500 shares outstanding as of June
30, 1996).......................................................... $ (1.23)
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
31
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
PRO FORMA
STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNT)
<S> <C> <C> <C>
REVENUES.............................................................. $2,106,529 $-- $2,106,529
COSTS AND EXPENSES
Operating expenses.................................................. 1,871,224 1,842(e) 1,873,066
Selling and administrative expenses................................. 214,535(d) -- 214,535
Depreciation........................................................ 63,556 (1,354)(e) 62,202
---------- ----------- ----------
2,149,315 488 2,149,803
---------- ----------- ----------
OPERATING LOSS........................................................ (42,786) (488) (43,274)
OTHER INCOME (EXPENSE)
Investment income................................................... 756 -- 756
Interest expense (h)................................................ (918) -- (918)
Miscellaneous, net.................................................. (850) (1,688)(f) (809)
1,729(g)
---------- ----------- ----------
(1,012) 41 (971)
---------- ----------- ----------
Loss before income tax benefits....................................... (43,798) (447) (44,245)
Income tax benefits................................................... (13,889) (174)(i) (14,063)
---------- ----------- ----------
NET LOSS.............................................................. $ (29,909) $ (273) $ (30,182)
---------- ----------- ----------
---------- ----------- ----------
Loss per share (assuming 22,006,500 shares outstanding as of June
30, 1996).......................................................... $ (1.37)
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
32
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(a) Represents the transfer of certain assets (including real properties) and
liabilities from LJSC to a subsidiary of CFI in connection with the transfer
of various administrative service departments from LJSC to a subsidiary of
CFI.
(b) Represents the transfer of certain real properties from CFCD to a subsidiary
of CFI, some of which may be leased back to CFCD under short-term operating
leases.
(c) Represents the distribution of CFI's remaining investment in CFCD and LJSC
to shareholders of CFI pursuant to the Distribution.
(d) The historical financial statements include an allocation of corporate
overhead costs incurred by CFI using both incremental and proportional
methods on a revenue and capital basis. These charges are included in
Selling and Administrative Expenses. Although management believes the
allocation methods used provided CFCD with a reasonable share of such
expenses, there can be no assurance that these costs will not increase after
the Distribution.
(e) To adjust for the effects on depreciation expense, and sub-lease rental
income from third parties, resulting from the pro forma transfers of certain
real properties.
(f) To adjust for the pro forma allocation of letter of credit and surety bond
fees from CFI relating to uninsured costs of primarily workers' compensation
claims and other lesser uninsured claims that CFCD participates in with CFI.
Also includes estimated unused commitment fee and letter of credit fees on
CFCD's anticipated revolving credit facility. The Company anticipates that
its letter of credit and surety bond requirements, for programs similar to
the CFI programs CFCD participated in, will substantially increase. See
"Risk Factors -- Insurance, Workers' Compensation and Public Liability." As
a result, the Company anticipates a substantial increase in related letter
of credit and surety bond expenses.
(g) To eliminate the intercompany interest expense, net, charged on balances
payable to CFI.
(h) The historical financial statements do not include any allocation of
interest expense for CFI's consolidated borrowings (except to the extent of
interest expense on borrowings incurred directly by CFCD). Except for
borrowings incurred directly by CFCD, no portion of CFI's consolidated
borrowings were allocated to the Company in accordance with CFI's
centralized cash management policy, as all cash requirements not satisfied
by operating cash flows are met by CFI and recorded net in CFI Investment
and Advances on the balance sheet. See "Risk Factors -- Operating Losses;"
and "-- Substantial Capital Requirements; Unavailability of Future Financing
from CFI; Need for Additional Capital."
(i) To adjust for the effects of the pro forma adjustments on income tax expense
using an estimated marginal income tax rate of 39%.
33
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth summary historical combined financial data
for the Company. The summary historical combined statement of operations data
for the three years ended December 31, 1995 and the summary historical combined
balance sheet data as of December 31, 1995 and 1994 have been derived from and
should be read in conjunction with the audited combined financial statements of
the Company contained elsewhere in this Information Statement. The summary
historical statement of operations data for the six months ended June 30, 1996
and 1995 and the years ended December 31, 1992 and 1991 and the summary
historical balance sheet data as of June 30, 1996 and 1995 and as of December
31, 1992 and 1991 have been derived from unaudited historical combined financial
statements of the Company which in the opinion of management include all normal
recurring adjustments necessary to present fairly the information required to be
set forth therein. The historical data set forth below and the historical
combined financial statements of the Company contained elsewhere in this
Information Statement are presented as if the Company were a stand-alone entity
for all periods presented, except that the Company has not been allocated any
portion of CFI's consolidated borrowings (other than borrowings incurred
directly by CFCD and interest expense thereon) or costs of maintaining letters
of credit and surety bonds in connection with certain insurance programs. In
addition, the historical financial statements include in selling and
administrative expenses an allocation of corporate overhead costs incurred by
CFI using both incremental and proportional methods on a revenue and capital
basis. Although management believes that the allocation methods used provide the
Company with a reasonable share of such expenses, there can be no assurance that
these costs will not increase, perhaps substantially, after the Distribution.
The historical combined financial information presented below does not purport
to be indicative of the results of operations or financial position that would
have been attained if the Company had been a stand-alone independent company
during the periods shown or of the Company's future performance as an
independent company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements of
the Company and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------------------------
1996 1995 1995 1994 (A) 1993 1992 1991
--------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (DOLLARS IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue................................. $ 1,033 $ 1,082 $ 2,107 $ 1,936 $ 2,074 $ 2,155 $ 2,132
Costs and expenses...................... 1,071 1,075 2,150 1,984 2,045 2,131 2,082
Operating income (loss)................. (38) 7 (43) (48) 29 24(b) 50
Net income (loss)....................... (28) 5 (30) (32)(c) 20 (9)(d) 24
BALANCE SHEET DATA
(AS OF END OF PERIOD):
Current assets.......................... $ 448 $ 419 $ 399 $ 391 $ 345 $ 311 $ 368
Total assets............................ 950 939 910 853 879 885 947
Long-term debt.......................... 15 15 15 15 15 15 112
Equity.................................. 279 274 259 214 267 271 258
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT REVENUE PER HUNDRED WEIGHT)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA (UNAUDITED):
EBITDA (e).............................. $ (8,949) $39,386 $21,022 $29,845 $120,951 $120,313 $138,827
Cash Flows Provided (Used) by Operating
Activities............................. (12,193) 44,270 41,772 33,739 67,186 117,282 28,171
Cash Flows Used by Investing
Activities............................. (26,046) (74,095) (105,433) (27,178) (43,516) (88,699) (57,719)
Cash Flows Provided (Used) by Financing
Activities............................. 49,438 47,009 67,103 5,791 (20,193) (89,649) 26,315
Tons of freight (in thousands).......... 3,585 3,862 7,458 7,007 7,439 7,673 7,619
Revenue per hundred weight (f).......... $15.430 $14.723 $14.712 $15.034 $ 15.130 $ 15.181 $ 15.128
Intercity miles (in thousands).......... 291,627 309,995 630,020 582,380 611,886 643,034 638,967
Shipments............................... 6,519,922 6,789,012 13,357,967 11,958,314 13,127,911 13,972,754 13,799,383
Average weight per shipment (in pounds)
(f).................................... 1,100 1,111 1,103 1,150 1,120 1,087 1,092
Average length of haul (in miles) (f)... 1,281 1,330 1,319 1,348 1,369 1,383 1,391
Number of employees..................... 21,000 21,300 20,200 22,000 22,100 23,200 23,200
</TABLE>
34
<PAGE>
- ------------------------------
(a) The 1994 results were affected by losses related to a strike by the
International Brotherhood of Teamsters against CFCD from April 6, 1994 until
April 29, 1994 (the "1994 Strike").
(b) Includes special charges of $17.3 million related to operation changes at
CFCD and the write-off of certain Canadian operating rights.
(c) Includes $1.9 million extraordinary charge, net of related tax benefits, for
the write-off of certain intrastate operating rights.
(d) Includes $30.2 million cumulative effect of change in method of accounting
for post-retirement benefits and $4.7 million extraordinary charge from
early retirement of debt, net of related tax benefits.
(e) "EBITDA" means pretax income plus depreciation, amortization and interest.
EBITDA should not be considered in isolation from, or as a substitute for,
operating income, net income or cash flow and other consolidated operations
or cash flow statement data computed in accordance with generally accepted
accounting principles or as a measure of a company's results of operations
or liquidity. Although this measure of performance is not calculated in
accordance with generally accepted accounting principles, it is widely used
as a measure of a company's operating performance because it assists in
comparing performance on a consistent basis across companies without regard
to depreciation and amortization, which can vary significantly depending on
accounting methods (particularly where acquisitions are involved) or
non-operating factors such as historical cost bases and capital structure.
(f) Excluding Canada.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has been formed to facilitate the Distribution. The Company's
financial information presented herein reflects the accounts of CFCD and LJSC.
CFI is the direct owner of 100% of the outstanding shares of the above two
companies.
The following discussion and analysis should be read in conjunction with the
combined financial statements of the Company and the notes thereto. In addition,
as described under "Pro Forma Consolidated Financial Statements," significant
changes will occur in the funding and operations of the Company following the
Distribution including a substantial increase in financial guarantee
requirements, which will have a significant impact on its financial position and
future results of operations. See "Risk Factors -- Insurance, Workers'
Compensation and Public Liability." As a result, the historical combined
financial statements do not purport to be indicative of the financial position
and the results of operations that the Company would have attained if it had
been an independent stand-alone company during the periods shown or which may
occur in the future. The Company may also incur significant additional costs in
the future related to its new stand-alone basis. In particular, the historical
financial statements include in selling and administrative expenses an
allocation of corporate overhead costs incurred by CFI using both incremental
and proportional methods on a revenue and capital basis. Although management
believes that the allocation methods used provided the Company with a reasonable
share of such expenses, there can be no assurance that these costs will not
increase, perhaps substantially, after the Distribution. In addition, the
Company's financial statements do not reflect any allocation of CFI's
consolidated borrowings or interest expense thereon (other than borrowings
incurred directly by CFCD and interest expense thereon) or costs of maintaining
letters of credit and surety bonds in connection with insurance programs. See
"Risk Factors -- Substantial Capital Requirements; Unavailability of Future
Financing from CFI; Need for Additional Capital."
In October 1995, CFCD obtained approval pursuant to the NMFA to implement an
operational re-engineering plan named the Business Accelerator System ("BAS").
BAS dismantled the Company's traditional hub and spoke system in favor of one
that moves freight directionally from point-to-point and streamlines the freight
network. This is intended to reduce miles and handling, thereby reducing costs
and average transit times. These changes were implemented beginning October 16,
1995. BAS is designed to reduce transit times while enhancing consistency of
service. Although implementation of BAS ultimately improved on-time performance
and reduced transit times, as discussed herein, system utilization during the
first half of 1996 (the later part of the implementation period) was below
expected levels. Also, the period for recovering revenues lost as a result of
interrupted service early in the implementation was longer than anticipated. As
a result, the relative costs of improving service levels exceeded revenues
during implementation causing the reported losses.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
REVENUES were $1,032.5 million for the six months ended June 30, 1996, a
decrease of $49.6 million, or 4.6% from $1,082.1 million for the six months
ended June 30, 1995. The decrease is primarily the result of declines in total
and LTL tonnage of 7.2% and 4.4%, respectively, as the Company worked to restore
volumes lost during implementation of BAS in the fourth quarter of 1995.
OPERATING EXPENSES were $926.6 million for the six months ended June 30,
1996, a decrease of $2.0 million, or 0.2% from $928.6 million for the six months
ended June 30, 1995. Operating expenses in the first half decreased only
slightly compared with the decline in revenues. The implementation of BAS began
in October 1995 and initially resulted in higher operating costs compared with
revenue levels in the first half of 1996 because of costs associated with
completing operation refinements and improving service levels in the new system.
The costs per hundred weight of dock and city pickup and delivery during the
first half of 1996 were 6.2% higher than during the same period last year. Costs
associated with linehaul expenses were up 1.2% over the first half of last year
due entirely to a 17.6% increase in fuel costs. Compared to the first half of
1995, service levels improved and the average transit time was reduced by about
one-half a day. Also contributing to all the cost category increases discussed
above was a 3.5% contractual labor wage and benefit increase beginning April 1,
1996.
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<PAGE>
SELLING AND ADMINISTRATIVE EXPENSES were $113.0 million for the six months
ended June 30, 1996, a decrease of $2.1 million, or 1.8% from $115.1 million for
the six months ended June 30, 1995. The decrease is consistent with the reduced
revenue levels.
DEPRECIATION was $31.2 million for the six months ended June 30, 1996 and
1995. The amount reflects a more consistent use of lease financing for equipment
requirements and an increase in capital expenditures in the prior period offset
in part by an aging of the fleet.
OPERATING LOSS was $38.2 million for the six months ended June 30, 1996, a
change of $45.5 million from $7.3 million of operating income for the six months
ended June 30, 1995, a difference which is attributable to the factors discussed
above.
INVESTMENT INCOME was $0.2 million for the six months ended June 30, 1996, a
decrease of $0.1 million, or 33.3% from $0.3 million for the six months ended
June 30, 1995. The lower income level in 1996 reflects less interest income from
lower levels of cash equivalent balances held by the Company.
INTEREST EXPENSE was $0.4 million for the six months ended June 30, 1996, a
decrease of $0.1 million from $0.5 million for the six months ended June 30,
1995.
MISCELLANEOUS EXPENSE, NET was $2.4 million for the six months ended June
30, 1996, a change of $2.9 million from $0.5 million of miscellaneous income,
net for the six months ended June 30, 1995. The change is primarily attributable
to an increase in interest expense on amounts due to CFI, which were used for
capital expenditure and working capital needs.
LOSS BEFORE INCOME TAX BENEFITS was $40.8 million for the six months ended
June 30, 1996, a change of $48.3 million from income before income taxes of $7.5
million for the six months ended June 30, 1995. The increased loss was primarily
attributable to the factors described above.
INCOME TAX BENEFITS were $12.8 million for the six months ended June 30,
1996, a change of $15.2 million from $2.4 million of income tax expense for the
six months ended June 30, 1995. The reduction in tax expense reflects the tax
benefits from losses described above.
NET LOSS was $28.1 million for the six months ended June 30, 1996, a change
of $33.2 million from the $5.1 million of net income for the six months ended
June 30, 1995, a difference which is attributable to the factors discussed
above.
THE YEAR ENDED 1995 COMPARED TO THE YEAR ENDED 1994
REVENUES were $2,106.5 million for 1995, an increase of $170.1 million or
8.8% from $1,936.4 million for 1994. This increase in revenues is primarily
attributable to the reduction in 1994 revenues caused by the 1994 Strike, offset
in part by a decline in revenues during the implementation of BAS in the fourth
quarter of 1995. Total tonnage increased 6.4% and LTL tonnage increased 10.6% as
a result of these same factors.
OPERATING EXPENSES were $1,871.2 million for 1995, an increase of $160.6
million or 9.4% from $1,710.6 million for 1994. This increase in operating
expenses is primarily attributable to costs associated with implementing BAS and
the absence in 1994 of certain operating expenses during the 1994 Strike.
SELLING AND ADMINISTRATIVE EXPENSES were $214.5 million for 1995, an
increase of $11.2 million or 5.5% from $203.3 million for 1994. This increase in
selling and administrative expenses is consistent with the increased revenue
levels.
DEPRECIATION was $63.6 million for 1995, a decrease of $6.6 million or 9.4%
from $70.2 million for 1994. This decrease in depreciation is primarily
attributable to aging of the fleet and an increase in the leasing of equipment.
OPERATING LOSS was $42.8 million for 1995, a decrease in loss of $4.9
million or 10.3% from a loss of $47.7 million for 1994, a difference which is
attributable to the factors discussed above.
INVESTMENT INCOME was $0.8 million for 1995 and $0.5 million for 1994.
INTEREST EXPENSE was $0.9 million for each of 1995 and 1994.
37
<PAGE>
MISCELLANEOUS EXPENSE, NET was $0.9 million for 1995, a change of $4.5
million from $3.6 million of miscellaneous income, net for 1994. This decrease
is primarily attributable to an increase in interest expense corresponding to an
increase in cash advances from CFI, which advances were primarily used for
capital expenditure and working capital needs.
LOSS BEFORE INCOME TAX BENEFITS AND EXTRAORDINARY CHARGE was $43.8 million
for 1995, a decrease in loss of $0.7 million or 1.6% from a $44.5 million loss
for 1994.
INCOME TAX BENEFITS were $13.9 million for 1995, a decrease in benefits of
$0.4 million or 2.8% from income tax benefits of $14.3 million for 1994.
LOSS BEFORE EXTRAORDINARY CHARGE was $29.9 million for 1995, a decrease in
loss of $0.3 million or 1.0% from a $30.2 million loss for 1994, a difference
which is attributable to the factors discussed above.
EXTRAORDINARY CHARGE FROM WRITE-OFF OF INTRASTATE OPERATING RIGHTS was $1.9
millon for 1994, net of related income tax benefits of $1.2 million. The 1994
charge resulted from the passage in 1994 of the Federal Aviation Administration
Authorization Act (the "FAAAA"), which preempted certain intrastate regulation
by the states and thus eliminated the value of the Company's intrastate
operating rights.
NET LOSS was $29.9 million for 1995, a decrease of $2.2 million or 6.9% from
a net loss of $32.1 million for 1994, a difference which is attributable to the
factors discussed above.
THE YEAR ENDED 1994 COMPARED TO THE YEAR ENDED 1993
REVENUES were $1,936.4 million for 1994, a decrease of $137.9 million or
6.6% from $2,074.3 million for 1993. This decrease in revenues is primarily
attributable to the 1994 Strike, with a decline in total tonnage of 5.8% and a
decline in LTL tonnage of 5.4% compared to 1993.
OPERATING EXPENSES were $1,710.6 million for 1994, a decrease of $38.6
million or 2.2% from $1,749.2 million for 1993. This decrease in operating
expenses is primarily attributable to the 1994 Strike.
SELLING AND ADMINISTRATIVE EXPENSES were $203.3 million for 1994, a decrease
of $10.8 million or 5.0% from $214.1 million for 1993. This decrease in selling
and administrative expenses is primarily attributable to the 1994 Strike.
DEPRECIATION was $70.2 million for 1994, a decrease of $11.4 million or
14.0% from $81.6 million for 1993. This decrease in depreciation is primarily
attributable to a decrease in capital expenditures and aging of the fleet.
OPERATING LOSS was $47.7 million for 1994, a change of $77.1 million from
operating income of $29.4 million for 1993, a difference which is attributable
to the factors discussed above.
INVESTMENT INCOME was $0.5 million for each of 1994 and 1993.
INTEREST EXPENSE was $0.9 million for 1994, an increase of $0.5 million from
$0.4 million for 1993.
MISCELLANEOUS INCOME, NET was $3.6 million for 1994, a decrease of $3.8
million or 51.4% from $7.4 million for 1993. This decrease in miscellaneous
income is primarily attributable to an increase in interest expense relating to
an increase in cash advances from CFI, which advances were necessitated by the
operating loss for 1994 discussed above.
LOSS BEFORE INCOME TAX BENEFITS AND EXTRAORDINARY CHARGE was $44.5 million
for 1994, a change of $81.3 million from income of $36.8 million for 1993. This
change is primarily attributable to the 1994 Strike.
INCOME TAX BENEFITS were $14.3 million for 1994, a change of $30.9 million
from income taxes of $16.6 million for 1993. This increase in benefits is
primarily attributable to losses incurred in connection with the 1994 Strike.
LOSS BEFORE EXTRAORDINARY CHARGE was $30.2 million for 1994, a change of
$50.3 million from income of $20.1 million for 1993, a difference which is
attributable to the factors discussed above.
38
<PAGE>
EXTRAORDINARY CHARGE FROM WRITE-OFF OF INTRASTATE OPERATING RIGHTS was $1.9
million for 1994, net of related income tax benefits of $1.2 million.
NET LOSS was $32.1 million for 1994, a change of $52.2 million from net
income of $20.1 million for 1993, a difference which is attributable to the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Distribution, the Company participated in CFI's centralized
cash management system and, consequently, its operating and capital expenditure
needs were met by CFI. During the six months ended June 30, 1996 and 1995, CFI
provided funds to the Company of $49.4 million and $47.0 million, respectively.
During the years ended December 31, 1995, 1994, and 1993, CFI provided funds to
the Company of $67.1 million, $5.8 million, and $9.1 million, respectively. Upon
consummation of the Distribution, the Company will not have any such financial
arrangements with CFI and will rely on internally generated funds (if any),
borrowings under CFCD's anticipated revolving credit facility and its ability to
obtain funds from the equity and debt markets. For the six months ended June 30,
1996, the Company's operations used net cash of $12.2 million and, to the extent
that the Company's operations continue to generate negative cash flow, the
Company will be dependent upon outside sources of financing to meet its cash
needs. See "Risk Factors -- Operating Losses" and "-- Substantial Capital
Requirements; Unavailability of Future Financing from CFI; Need for Additional
Capital."
The Company anticipates that CFCD will enter into a $225 million revolving
credit facility to provide letters of credit with respect to its insurance
program and to fund working capital requirements and capital expenditures. It is
also anticipated that cash borrowings outstanding at any time will be limited to
$100 million. The Company expects that borrowings under this credit facility
will be secured by substantially all present and future assets of CFCD (other
than real property and certain rolling stock), by all of the capital stock of
CFCD and by 65% of the capital stock of Consolidated Freightways Limited, the
Company's Canadian subsidiary. The continued availability of borrowings under
this credit facility will require that CFCD remain in compliance with financial
and other covenants. CFCD's failure to remain in compliance with the terms of
such credit facility or any other circumstances preventing the Company from
making borrowings thereunder could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
to the extent that CFCD obtains letters of credit under this revolving credit
facility (such as the letters of credit described below), the amount of
borrowings available under the credit facility will be reduced by the principal
amount of these letters of credit. Moreover, the existence of CFCD's anticipated
revolving credit facility will likely limit the Company's ability to obtain
additional financing and make the terms of any additional financing which may be
obtained less favorable to the Company. See "Risk Factors -- Substantial Capital
Requirements; Unavailability of Future Financing from CFI; Need for Additional
Capital" and "Financing."
In the second half of 1996, the Company expects to expend approximately $20
million for capital expenditures to replace tractors and trailers and upgrade
its terminal facilities. For the six months ended June 30, 1996, the Company had
$29.4 million of capital expenditures. Historically, the Company has entered
into certain leasing arrangements to fund part of its capital expenditure needs,
and may do so again in the future. The Company will seek to fund capital
expenditures after the Distribution Date with cash flow from operations and, to
the extent that cash flow from operations is insufficient for that purpose, from
borrowings under its secured revolving credit facility. Capital expenditures for
the years ended December 31, 1995, 1994, and 1993 were $112.0 million, $32.1
million, and $49.4 million, respectively. The difference in historical capital
expenditures is primarily attributable to increased use of equipment leasing in
1994 and also is attributable to increased capital expenditures in 1995 relating
to equipment needed to implement BAS.
CFCD has agreed to provide letters of credit in the amount of $30 million
and a pledge of real property in the amount of approximately $50 million to CFI
to guarantee any losses CFI may incur in the event CFCD defaults on payment of
its insurance obligation for workers' compensation and public liability incurred
prior to October 1, 1996. CFI has posted and will continue to post letters of
credit and surety bonds to insurance companies and various state and other
jurisdictions so that CFCD remains
39
<PAGE>
qualified to self-insure in various states for claims incurred prior to October
1, 1996. See "Risk Factors -- Insurance, Workers' Compensation and Public
Liability" and "Relationship Between CFI and the Company After the Distribution
- -- Employee Benefits Matters" and "-- Reimbursement and Indemnification
Agreement."
As of October 1, 1996, CFI obtained on CFCD's behalf a letter of credit in a
face amount of approximately $20 million in connection with its obligations
under insurance programs arising on and after October 1, 1996. Furthermore, not
later than the Distribution Date, CFCD will be required to replace the
aforementioned $20 million letter of credit with its own letter of credit, and
will obtain additional letters of credit in an aggregate face amount of $30
million to support CFCD's reimbursement obligations to CFI in connection with
certain workers' compensation and public liability claims arising prior to
October 1, 1996. The Company expects that CFCD's letter of credit and surety
bond obligations under its own insurance program will increase incrementally
over a nine-month period from approximately $20 million to approximately $65
million so that, as of July 1, 1997, it will be required to maintain
insurance-related letters of credit and surety bonds in an aggregate amount of
approximately $95 million. There can be no assurance, however, that the
Company's actual letter of credit and surety bond requirements will not differ,
perhaps substantially, from the estimated amount. The Company expects that such
letters of credit will be issued under its anticipated revolving credit facility
referred to above. Any failure by CFCD to maintain such letters of credit and
surety bonds could have a material adverse effect on the Company's business,
results of operations or financial condition.
As discussed in the Note 2 to the Combined Financial Statements of CFCD
included elsewhere herein, CFCD provides for uninsured workers' compensation
claims in its financial statements. Estimated costs of uninsured workers'
compensation claims are included in operating expenses on CFCD's financial
statements. The amounts provided are estimated based on historical claims and
unfiled claims through the date of the financial statements in accordance with
generally accepted accounting principles. The management of the Company to be in
place after the Distribution is currently evaluating the estimated accrued
claims cost for workers' compensation and expects to increase the accrual after
the Distribution to an estimate of the claims on a fully developed basis.
Accordingly, an increase of approximately $15 million to the accrual, which
would likely be included in operating expenses, would likely be recorded in the
Company's fourth quarter for the year ending December 31, 1996.
At December 31, 1995 and 1994, the Company's ratio of long-term debt to
total capital (including long-term debt) was 6% and 7%, respectively. The
current ratio at December 31, 1995 and 1994 was 1.1 to 1. The Company believes
it can successfully maintain this current ratio by maintaining a high turnover
of receivables, although there can be no assurance in this regard.
CASH FLOWS
The Company's operations for the six months ended June 30, 1996 and 1995
used $12.2 million of cash and provided $44.3 million of cash, respectively. Net
cash flow used in operations during the first six months of 1996 was primarily
the result of losses and an increase in accounts receivable, offset in part by
depreciation.
The Company's cash flows from operations declined from $67.2 million in 1993
to $33.7 million in 1994 but increased to $41.8 million for 1995. The cash flow
in 1995 is primarily attributable to depreciation and amortization, and the
decrease in cash flow in 1994 is primarily attributable to the 1994 Strike. In
the six months ended June 30, 1996, the Company's operating activities used net
cash of $12.2 million. To the extent that the Company's operations use (rather
than generate) cash, the Company will be dependent upon outside sources of
financing to meet its cash requirements.
The Company's cash used by investing activities in the six months ended June
30, 1996 and 1995 was $26.0 million and $74.1 million, respectively, and was
$105.4 million, $27.2 million and $43.5 million for the years ended December 31,
1995, 1994 and 1993, respectively. The differences in cash flow are primarily
attributable to the different capital expenditure levels discussed above.
40
<PAGE>
Cash provided by financing activities for the six months ended June 30, 1996
was $49.4 million compared with $47.0 million provided in the six months ended
June 30, 1995. The amounts are attributable to cash advances from CFI. The
Company's cash flows from financing activities provided $67.1 million and $5.8
million, and used cash of $20.2 million for the years ended December 31, 1995,
1994 and 1993, respectively. This increase in 1995 cash flow is primarily
attributable to increases in cash advances from CFI, while the increase in 1994
cash flow is attributable primarily to the fact that the Company paid a dividend
of $29.3 million to CFI in 1993.
INFLATION
Significant increases in fuel prices, to the extent not offset by increases
in rates, would have a material adverse effect on the profitability of the
Company. Historically, the Company has responded to periods of sharply higher
fuel prices by implementing fuel surcharge programs or base rate increases, or
both, to recover additional costs, but there can be no assurance that the
Company will be able to successfully implement such surcharges or increases in
response to increased fuel costs in the future. In that regard, the Company's
results of operations for the first six months of 1996 have been adversely
affected by increased fuel prices.
ENVIRONMENTAL
The Company's operations necessitate the storage of fuel in underground
tanks as well as the disposal of substances regulated by various federal and
state laws. The Company adheres to a stringent site-by-site tank testing and
maintenance program performed by qualified independent parties to protect the
environment and comply with regulations. Where clean-up is necessary, the
Company takes appropriate action.
41
<PAGE>
BUSINESS
The Company, incorporated in 1996, is a newly formed holding company which
will operate the businesses conducted by CFCD, CFCD was incorporated in 1958 as
successor to the original trucking company organized in 1929. CFCD is a
full-service trucking company competing primarily in the North American
less-than-truckload ("LTL") segment of the general freight industry. It operates
a network of 373 service centers in all 50 states, eight provinces of Canada and
Puerto Rico with a fleet of approximately 40,800 trucks, tractors and trailers
and approximately 21,000 employees as of June 30, 1996. Comprehensive service in
Mexico is currently provided through sales and service personnel on both sides
of the United States/Mexico border and through Mexican carrier partners. In
addition to extensive coverage of Canada and Mexico, CFCD provides one-stop
international freight services between the United States and over 70 countries
worldwide through operating agreements with ocean carriers and a network of
international partners. General freight typically consists of shipments of
manufactured or non-perishable products requiring consistent service, compared
to bulk raw materials characteristically transported by railroads, pipelines and
water carriers. The primary business of CFCD is transporting freight in
shipments weighing less than ten thousand pounds. Based on 1995 revenues of
approximately $2.1 billion, CFCD is one of the nation's largest LTL motor
carriers.
During the last five years, CFCD's annual revenue has been approximately
$2.1 billion, with the exception of 1994 when revenues were reduced to
approximately $1.9 billion, primarily as a result of the 1994 Strike. During the
last five years, CFCD reduced the number of full-time employees by more than 10%
and the number of terminals by more than 45%. It also improved efficiency and
service to customers through the application of technology. In late 1995, CFCD
launched a comprehensive shipment and service re-engineering to further enhance
customer service, reduce costs and improve efficiency. The highly competitive
environment and most recent re-engineering efforts of CFCD to improve service
and to better compete in the trucking industry are described in more detail
below.
INDUSTRY BACKGROUND
Historically, shipping rates and the ability to enter the trucking industry
were highly regulated, with interstate operations regulated by the now disbanded
Interstate Commerce Commission (the "ICC") and intrastate business regulated by
state authorities. Trucking companies constructed routes by obtaining
certificates of public convenience and necessity ("operating authorities") from
the ICC and/or state authorities permitting carriage over fixed routes, or by
acquiring companies with such rights. To reduce linehaul transportation costs of
LTL shipments, long-haul trucking companies typically established "hub and
spoke" systems for moving shipments. The hub and spoke method of freight
movement required trucking companies to pick up LTL shipments from a group of
customers on a trailer and bring such shipments to a hub for rehandling and
assembly with other shipments destined for a common geographic area. At a second
hub the shipments were deconsolidated and reloaded for distribution to the final
delivering terminal.
The nationwide trucking business is highly unionized, with the IBT the
principal union. Many of the companies engaged in nationwide trucking, including
CFCD, are signatories to the NMFA, a national multi-employer agreement
negotiated with the IBT that establishes wage rates, health and welfare
benefits, job descriptions and work rules for the signing parties.
Two trends have fundamentally changed the trucking industry. First, the
Motor Carrier Act of 1980 substantially deregulated the interstate trucking
business, the FAAAA substantially deregulated the intrastate trucking business
and the Interstate Commerce Commission Termination Act of 1995 disbanded the ICC
while transferring any remaining Federal regulatory authority relating to the
trucking industry to the DOT. Trucking companies no longer must obtain operating
authorities or follow prescribed routes. As a result, local and regional
trucking companies are now free to expand the territory in which they provide
delivery services and new competitors can enter the interstate and intrastate
LTL market relatively easily. In addition, the absence of regulation allows
increased competition for LTL freight from non-traditional competitors in the
rail and parcel business. Second, a
42
<PAGE>
substantial number of shippers in U.S. industry have adopted "just-in-time"
scheduling of inventory requiring faster and more consistent service. In
response, there has been strong growth in the regional trucking business
offering more consistent "point-to-point" service in the under-1,500 mile lanes.
The majority of the Company's shipments travel between 500 and 1,500 miles.
Regional trucking companies, by contrast, do not have the hub system needed
for consolidation of shipments. Most of the regional trucking companies are not
unionized, and their work rules and job descriptions are not governed by a
collective bargaining agreement. For example, in a regional trucking operation,
the truck driver picks up the freight from the shipper and either drives it
directly to its destination or to a service center where the freight is unloaded
onto a truck to take it to the recipient. In the case of a national carrier,
operating under the national contract with the IBT, freight handling is a
separate job description from driving, meaning that a truck driver who picks up
freight from a shipper and delivers it to a terminal must wait for a freight
handler to unload the truck.
COMPETITION
The LTL business is highly competitive. High levels of competition and
persistent industry overcapacity continue to result in aggressive discounting
and narrow margins. CFCD's primary competitors in the national LTL market are
Yellow Freight System, Inc., Roadway Express, Inc., Arkansas Best Corporation
and Overnite Transportation Co. 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.
Deregulation in the trucking industry has resulted in ease of entry and
increased competition. New entrants (some of which have grown rapidly in
regional markets) include non-union carriers that have lower labor costs than
CFCD. To counter these competitive threats, CFCD works directly with customers
on an account-by-account basis to find ways to improve efficiencies and contain
costs and improve service.
STRATEGY
In October of 1995, in an effort to meet the demand for faster service and
to better compete in the highly competitive trucking industry, CFCD launched one
of the most comprehensive shipment and service reengineerings in its history. It
dismantled its traditional hub and spoke freight flow system and established
BAS, which utilizes directional loading to destination, scheduled departures and
a stronger focus on customer service. In so doing, CFCD created a more flexible
and efficient freight transportation system compared to the traditional hub and
spoke system. As a result, customer service has been improved by reducing
transit time, lowering the risk of damaged or lost freight and improving the
reliability of on-time delivery. BAS was designed to reduce costs by eliminating
unnecessary travel miles, reducing freight handling and more efficiently using
system capacity. CFCD will seek to continue to improve service and reduce costs
by refining BAS.
Following the Distribution, the Company will continue to pursue its primary
strategic objective of being a leading single source freight transportation
company for LTL freight movements to customers originating or terminating
shipments in North America. Consistent with this objective, the Company will
emphasize improvement of operating efficiencies and reduction of costs.
The Company will seek to achieve its objectives through the following key
strategies:
- Improve customer service by decreasing freight transit times, increasing
the reliability of on-time delivery and reducing damage and loss of
customer freight through refinements in the BAS.
- Grow revenues by increasing freight volumes with current and new
customers, offering additional value-added services and expanding service
internationally, where economically feasible.
- Implement compensation programs, including equity-based incentives that
tie employee performance to cost reduction and customer service goals.
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- Reduce freight transportation costs by reducing freight handling costs and
eliminating circuitous transit miles through further implementation of its
point-to-point freight transportation system.
- Eliminate unnecessary corporate overhead and utilize advanced technologies
to maximize operating efficiencies and improve customer service.
- Implement programs designed to reduce workers' compensation expense.
OPERATIONS -- BAS
CFCD's original hub and spoke network of over 700 terminals was designed to
enable it to provide freight movement nationwide. The hub and spoke method of
freight movement required CFCD to pick up LTL shipments from a group of
customers on a trailer and bring such shipments to a hub for rehandling and
assembly with other shipments destined for a common geographic area. At a second
hub the shipments were deconsolidated and reloaded for distribution to the final
delivering terminal.
CFCD realized that while the network of over 700 terminals allowed it to be
geographically close to most of its customers, it also resulted in overhandling
of freight because of the relatively small volume of shipments most terminals
were processing on a daily basis. As a result, in the last few years CFCD began
an effort to gradually reduce the number of terminals it operated, opting
instead for larger facilities serving a broader geographic area. That effort was
largely completed by the fall of 1995. CFCD now operates from a network of 373
U.S. and Canadian freight terminals. To complement the reduction in the number
of terminals and to further reduce handling costs and transit time, CFCD
reorganized its linehaul system in the fourth quarter of 1995. With these
changes, CFCD launched BAS.
The implementation of BAS by CFCD was intended to reduce freight handling
and miles traveled by emphasizing directional loading, and flexible load
planning on scheduled departures. During its initial period of operation, BAS
adversely affected results of operations due to disruptions in CFCD's
operations. Dismantling of the hub and spoke system, however, allowed CFCD to
reduce the number of terminals required to provide the necessary freight
handling capability and to close other terminals to improve operating
efficiencies. Management believes that operating margins will improve to reflect
the intended benefits of the reorganization and the implementation of BAS,
although there can be no assurance in this regard.
DIRECTIONAL LOADING. CFCD now emphasizes directional loading to reduce
costs and time of delivery. In an extreme example, in the past a shipment moving
from Elmira, New York, to Daytona Beach, Florida, would have moved via Buffalo,
New York, through Akron, Ohio, Charlotte, North Carolina, and Orlando, Florida.
This move would have taken four-and-a-half days and the shipment would have
traveled approximately 1,450 miles under the hub and spoke system. Utilizing
BAS, CFCD's Elmira, New York, terminal would route this shipment through
Carlisle, Pennsylvania, and Jacksonville, Florida, to Daytona Beach, where it
would normally arrive in little more than two days having traveled approximately
only 1,050 miles, a 27% reduction in miles traveled. Under BAS, shipments are
either loaded direct to the destination terminals or to an intermediate handling
center that is in the geographic direction of the destination terminal. In the
hub and spoke system, all freight is moved to the hub even if the hub is in the
opposite direction from the ultimate destination. This frequently resulted in
extra miles being travelled.
DYNAMIC LOAD PLANNING. BAS dynamic load planning is a sophisticated
computer system that enables CFCD to efficiently plan each day's linehaul
operation while simultaneously giving each terminal the ability to vary their
load plan to take advantage of efficient routing of the actual freight picked up
each day. This results in both time and cost savings by avoiding unnecessary
intermediate handling. Historically, load plans were static, based upon average
daily volume.
SCHEDULED DEPARTURES. Before CFCD implemented BAS, terminals and hubs would
dispatch trucks to their next destination as soon as they were loaded. While
this method moved freight rapidly, it caused equipment imbalances and other
operational inefficiencies that resulted in additional costs.
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Additionally, immediate dispatch limited CFCD's ability to set a firm delivery
time for customers. This was a competitive disadvantage in selling to customers
who had implemented "just-in-time" delivery systems, since the accurate
scheduling of deliveries is crucial to maintaining "just-in-time" production
schedules while minimizing inventory. CFCD now has the ability to more closely
meet a customer's shipping and delivery time needs which CFCD believes is a
competitive advantage when competing for new business.
Under BAS, terminal operations are "managed by the clock." This system
establishes deadlines for moving freight through the system, and allows CFCD to
make explicit tradeoffs between service and expense (i.e., load factor)
considerations. A time-specific operation allows CFCD to make more economical
decisions, and helps avoid equipment imbalances, empty miles and other
operational inefficiencies.
MARKETING
Although CFCD is capable of handling most customer shipping requests
regardless of shipment size or length of haul, its marketing efforts are
primarily directed toward domestic and international LTL shipments. In
addressing the marketplace, CFCD presents itself as a flexible, solutions-based
organization that not only provides basic transportation services, but also
delivers customized value added logistics services in conjunction with
transportation. CFCD believes information technology and access to immediate
information regarding shipments is an important source of value to customers.
Because of the unique requirements of each customer, CFCD employs a direct
sales force of transportation professionals to interface with its customers.
This includes several hundred sales representatives based in CFCD's service
centers with defined geographic territories. A smaller group of national account
sales representatives focus on larger, geographically dispersed corporations. To
augment this sales organization, CFCD has customer service staff in most of its
service centers. In addition, CFCD has a centralized customer support center in
the Dallas, Texas area that provides specialized services to customers. This
customer support center also houses a telemarketing department which maintains
contact with a select group of customers that do not receive regular contact
from a sales representative.
CFCD's marketing and sales program have several objectives:
- To increase the tonnage volume in the under-1,500 mile length of haul
markets. Under BAS, CFCD has re-engineered its terminal and linehaul
system to provide faster, more consistent service. CFCD will seek to
capitalize on this service initiative, coupled with its nationwide
coverage and complete range of value added services to capture greater
market share in this market segment.
- To achieve a better mix of freight by increasing the percentage of heavy,
dense, palletized freight across the length of haul spectrum. If
successful, this will allow CFCD to achieve greater linehaul load factor,
higher productivity and lower unit costs.
- To use information technology and other customer support initiatives to
enhance the value of services to its customer base and create an
opportunity to leverage these services into a higher margin, value
oriented relationship.
- To expand and grow tonnage in international markets, both in over-the road
markets in North America and in ocean freight markets globally through
CFCD's non-vessel operated common carrier service.
CFCD believes that there is considerably more tonnage available in both the
under-1,500 mile domestic LTL market and the international market than in the
over-1,500 mile domestic LTL market. CFCD also believes that both of these
market segments are growing more rapidly as a result of the increased corporate
focus on reduced inventory, "just in time" manufacturing and globalization of
markets.
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Market demands and the need to improve customer service has made timely
information about shipping transactions more critical. To meet the market
requirements, CFCD offers a broad, sophisticated package of computer-based
information services designed to provide accurate and timely information
regarding a customer's freight. CFCD has established itself as an industry
leader in the area of utilizing information technology. Through its Logistics
Manager software, CFCD offers a comprehensive set of information based tools to
the shipping public including the ability to generate necessary shipping
documents, electronically track shipments, file claims, and request "proof of
delivery" images. CFCD has been an industry leader for years in the
implementation of electronic data interchange transactions with customers. CFCD
supports over 20 different transaction sets in both ANSI and UN/EDIFACT formats.
The Company believes that the image processing system utilized by CFCD has set
the industry standard for leading edge invoicing and proof of delivery
information.
CFCD has enhanced its shipment control systems to provide greater value and
more sophisticated transportation solutions for its customers. For example,
under its "LINK UP" service, customers now have the flexibility to merge
shipments picked up at different locations while they are in transit. This
allows customers to accelerate their speed to market with finished goods, reduce
inventory and eliminate warehouse space requirements.
FLEET
As a large carrier of LTL general freight, CFCD has pick-up and delivery
fleets in each area served, and a fleet of intercity tractors and trailers. It
has a network of 373 U.S. and Canadian service centers. The metro centers reduce
freight handling by allowing more direct city-to-city service, thereby improving
productivity. CFCD's operations are supported by a data processing system for
the management of shipments and customer information.
Subsidiaries of the Company 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 use a
fleet of over 1,100 trucks, tractors and trailers.
As of June 30, 1996, the Company owned or leased a total of 7,808 trucks and
tractors and 33,044 trailers, described in the following table:
<TABLE>
<CAPTION>
P&D (LOCAL PICKUP AND
DELIVERY)
------------------------
INTERCITY INTERCITY TRUCKS AND
MODEL YEAR TRACTORS TRAILERS TRACTORS TRAILERS
- --------------------------------------------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
1996............................................... 1 1,974 4 34
1995............................................... 977 3,386 737 909
1994............................................... 80 1,117 218 9
1993............................................... 154 1,078 41 100
1992............................................... 613 1,663 195 84
1991............................................... 13 2,416 440 7
1990 and earlier................................... 701 18,965 3,634 1,302
----- --------- ----- -----
Total............................................ 2,539 30,599 5,269 2,445
</TABLE>
CUSTOMERS
In the first six months of 1996 and for the year 1995, no single customer
accounted for more than 5% of total revenues, and the ten largest customers
accounted for approximately 15% of total revenues.
EMPLOYEES
CFCD believes that it has a core of loyal, dedicated and experienced
employees which are among the best in the trucking industry.
As of June 30, 1996, CFCD had approximately 21,000 employees, including
approximately 20,000 in the United States. As of the Distribution Date, CFCD
expects to have approximately 21,600 employees. Labor costs, including fringe
benefits, averaged approximately 67% of revenues for the six
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months ended June 30, 1996. Approximately 85% of CFCD's domestic employees are
represented by various labor unions, primarily the IBT. CFCD experienced the
1994 Strike following the expiration of the NMFA. CFCD and the IBT are parties
to the current NMFA, which expires on March 31, 1998. CFCD believes that its
current relations with the IBT are satisfactory.
The Company believes that a major challenge with respect to its long-term
growth and profitability will be changing its relationships with CFCD's
unionized work force. CFCD and the IBT have accomplished some changes in the
current NMFA necessary to implement BAS. Further changes are required for CFCD
to be competitive with non-unionized carriers.
FUEL
Fuel prices steadily declined during the last three fiscal years, but
increased in 1996. CFCD's average annual diesel fuel cost per gallon (without
tax) declined from $0.621 in 1993 to $0.578 in 1994 and to $0.573 in 1995. Fuel
prices spiked in April 1996 to $0.710 per gallon, costing CFCD approximately $5
million in additional fuel costs in the first six months of 1996. As of June 30,
1996, however, fuel prices decreased to $0.668 per gallon. As a result of the
increase in fuel costs, monthly operating costs increased in the first six
months of 1996 by approximately $800,000 compared to the first six months of
1995.
CANADIAN REGULATIONS
The provinces in Canada have regulatory authority over intra-provincial
operations of motor carriers. Federal legislation to phase in deregulation of
the inter-provincial motor carrier industry took effect January 1, 1988. The new
legislation relaxed economic regulation of inter-provincial trucking by easing
market entry regulations, and implemented safety regulations of trucking
services under Federal jurisdiction. CFCD wrote off substantially all of its
unamortized cost of the Canadian operating authority in 1992.
ENVIRONMENTAL REGULATIONS
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
350 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 condition. However, there can be no assurance 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 condition 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 1996
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 Response Compensation and Liability Act
("CERCLA") or other Federal and state environmental statutes at several
hazardous waste sites. Under CERCLA, PRPs are jointly and severally liable for
all site remediation and expenses. After investigating the Company's or its
subsidiaries' involvement in waste disposal or waste generation at such sites,
the Company has either agreed to de minimis settlements or, based upon cost
studies performed by independent third parties, believes its obligations with
respect to such sites would not have a material adverse effect on the Company's
financial position or results of operations.
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GOVERNMENTAL REGULATIONS
CFCD's operations are regulated by the DOT and various Federal and state
agencies. CFCD, like other interstate motor carriers, is also subject to certain
safety requirements governing interstate operations prescribed by the DOT. In
addition, vehicle weight and dimensions remain subject to both Federal and state
regulation. Changes in regulations relating to vehicle weight and size, or on
trailer length or configuration, could adversely affect the Company's business,
financial condition or results of operations.
CYCLICALITY
The trucking industry, including CFCD, is affected directly by the state of
the overall economy, but no single segment of the economy (e.g., general retail
merchandise, automotive, chemical) accounted for more than 10% of the Company's
revenues for fiscal year 1995 or the six months ended June 30, 1996. Seasonal
fluctuations affect tonnage, revenues and operating results. The months of
September, October and November of each year usually have the highest business
levels while the first quarter has the lowest. Shipment levels, operating costs,
and operating results can also be adversely affected by inclement weather.
PROPERTIES
As of June 30, 1996, CFCD owned or operated a total of 373 terminals and
freight service centers with an aggregate of approximately 12,200 loading doors.
These terminals and service centers were located throughout the United States
and ranged in size from approximately 20,000 to 281,000 square feet. Of these
terminals and service centers, three, representing a total of approximately
245,400 square feet, are financed partially or wholly through the issuance of
industrial development revenue bonds, the principal amount of which is secured
by the property.
LEGAL PROCEEDINGS
The Company is a party to and expects to be in the future a party to
lawsuits arising in the ordinary course of business. While the outcome of such
lawsuits or other proceedings against the Company cannot be predicted with
certainty, the Company does not expect that these matters will have a material
adverse effect on the Company's financial condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information about the directors and executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---------------------------- --- --------------------------------------------------------------
<S> <C> <C>
W. Roger Curry 58 President, Chief Executive Officer and Director (3)
Patrick H. Blake 47 Executive Vice President -- Operations
David F. Morrison 43 Executive Vice President and Chief Financial Officer
Stephen D. Richards 53 Senior Vice President and General Counsel
Phillip W. Seeley 49 Executive Vice President -- Sales and Marketing
Robert E. Wrightson 57 Senior Vice President, Controller and Treasurer
William D. Walsh (1) 66 Director (4) and Chairman of the Board
G. Robert Evans (1) 65 Director (3)
Paul B. Guenther (1) 56 Director (4)
Robert W. Hatch (2) 57 Director (5)
J. Frank Leach (2) 75 Director (4)
John M. Lillie (1) 59 Director (5)
James B. Malloy (2) 69 Director (3)
Raymond F. O'Brien (2) 74 Director (5)
</TABLE>
- ------------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Initial term expires at 1997 annual stockholders' meeting.
(4) Initial term expires at 1998 annual stockholders' meeting.
(5) Initial term expires at 1999 annual stockholders' meeting.
The following sets forth certain information for the past five years of each
person who will be a director or executive officer of the Company following the
Distribution.
W. ROGER CURRY -- PRESIDENT, CHIEF EXECUTIVE OFFICER AND A DIRECTOR. Mr.
Curry has served as President and Chief Executive Officer of CFCD since July
1994 and Senior Vice President of CFI since 1986. Mr. Curry joined CFCD in 1969
as a Systems Analyst and became Coordinator, On-Line Systems of CFI in 1970. In
1972, he was named Director of Terminal Properties for CFCD. He became President
of CF AirFreight, Inc. in 1975 and Chief Executive Officer in 1984. Mr. Curry
relinquished both offices with CF AirFreight, Inc. in 1986 when he was elected
Senior Vice President -- Marketing of CFI. In 1991, he was elected President of
Emery Air Freight Corporation, relinquishing the position in 1994 to become
President of CFCD.
PATRICK H. BLAKE -- EXECUTIVE VICE PRESIDENT -- OPERATIONS. Mr. Blake has
served as Executive Vice President -- Operations of CFCD since July 1994. He was
Vice President Eastern Region from 1992-1994, a Division Manager from 1985-1992,
and a Terminal Manager from 1983-1985. Mr. Blake began his career with CFCD in
1969 as a dock man.
DAVID F. MORRISON -- EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER. Mr. Morrison has been Vice President and Treasurer for CFI since
October 1991. From 1987 to October 1991, Mr. Morrison was Treasurer of McKesson
Corporation. From 1982-1987, he worked for the CFI organization as director of
strategic planning, and as managing director of CFI's international
transportation services subsidiary. From 1978 to 1982, Mr. Morrison worked for
Tiger International and its subsidiary Hall's Motor Transit in a series of
planning, marketing and financial positions.
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<PAGE>
STEPHEN D. RICHARDS -- SENIOR VICE PRESIDENT AND GENERAL COUNSEL. Mr.
Richards has been Vice President and General Counsel of CFCD since September
1995. He was Deputy General Counsel of CFI for the preceding four years. Prior
to joining CFI in August 1991, Mr. Richards was engaged in business for eight
years as the president of a software/medical services company financed with
venture capital, the president of a computer distribution business and later as
a real estate advisor. From 1968-1974, he was an associate and from 1974-1983, a
partner with the law firm Morrison & Foerster LLP during which he represented
CFI from time to time on various legal matters.
PHILLIP W. SEELEY -- EXECUTIVE VICE PRESIDENT -- SALES & MARKETING. Mr.
Seeley has served as Executive Vice President -- Sales and Marketing of CFCD
since July 1994. He was Vice President -- Administration and Technology for CFI
from 1991 to 1994, and Vice President of MIS for CFI from 1983 to 1991. Mr.
Seeley was Director of MIS for CFCD from 1978 to 1983. He was director of
Management Accounting from 1974 to 1978, a Financial Analyst in 1973-1974 and a
Systems Analyst from 1970 to 1973. He joined CFCD as part of its Management
Training Program in 1968.
ROBERT E. WRIGHTSON -- SENIOR VICE PRESIDENT AND CONTROLLER. Mr. Wrightson
has served as Senior Vice President and Controller of CFCD since July 1994. He
joined CFI in 1962 as an accountant, and later became a budget analyst for CFCD.
In 1980, he was promoted to Vice President and Controller of CFCD, and later
rejoined CFI in 1986 as Vice President -- Accounting. He assumed the position of
Vice President and Controller for CFI in 1989.
WILLIAM D. WALSH -- DIRECTOR AND CHAIRMAN OF THE BOARD. Mr. Walsh will have
served as a director of CFI from September 24, 1994 until the Distribution Date,
when he will resign from the CFI Board to become a director of the Company. Mr.
Walsh has been a general partner with Sequoia Associates since the company was
founded in 1982. The firm has major investments in established operating
companies. From 1967 to 1982, Mr. Walsh served as Senior Vice President and
Chief Administrative Officer for the Arcata Corporation of Menlo Park,
California. Prior to that, Mr. Walsh was a consultant for McKinsey & Co. for six
years, managing projects involving acquisitions, organization structure and
strategic planning for major U.S. companies. From 1955 to 1961, Mr. Walsh served
as Assistant U.S. Attorney for the Southern District of New York and as Counsel
to the New York State Commission of Investigation. Mr. Walsh is currently a
director of National Education Corporation, URS Corp., Crown Vantage, Inc.,
Champion Road Machinery, Ltd., Newcourt Credit Corp., Newell Manufacturing
Corp., Newell Industrial Corp., Clayton Group, Inc. and Basic Vegetable
Products, Inc.
G. ROBERT EVANS -- DIRECTOR. Mr. Evans will have served as a director of
CFI from September 24, 1990 until the Distribution Date, when he will resign
from the CFI Board to become a director of the Company. Mr. Evans has been
Chairman of the Board and Chief Executive Officer of Material Sciences
Corporation since 1991. His prior business career includes 15 years with United
States Gypsum Company and 13 years with Arcata Corporation, where he served as
President and Chief Executive Officer. Mr. Evans was President and Chief
Executive Officer of Southwall Technologies, Inc. in 1983 and 1984; of Allsteel
Inc. from 1984 to 1987; of Bemrose Group USA from 1987 to 1990; and of Corporate
Finance Associates Illinois, Inc., from 1990 to 1991. Mr. Evans is currently a
director of Swift Energy Company and Fibreboard Corporation.
PAUL B. GUENTHER -- DIRECTOR. Mr. Guenther was President of PaineWebber
Group Inc., the parent company of PaineWebber Incorporated, a full-service
securities firm until his retirement in May 1995. He was a member of the
PaineWebber Executive Committee and Boards of both PaineWebber Group Inc. and
PaineWebber Incorporated. Mr. Guenther is currently an investor in Walden
Capital Partners L.P., a Small Business Investment Company, and a member of its
advisory committee. In 1981, Mr. Guenther was named director of the
Administration division and elected to the Board of Directors of Paine, Webber,
Jackson & Curtis. In 1984, Mr. Guenther became chief administrative officer
responsible for Administrative Services, Operations and Systems. He assumed
responsibility for the firm's retail sales business in 1987 and for investment
banking activities in June 1988. In December 1988, he was named President of
PaineWebber Incorporated and in 1994 President of
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PaineWebber Group Inc. Mr. Guenther is also chairman of the New York
Philharmonic, Vice Chairman of the Fordham Univeristy Board of Trustees and a
member of the Board of Overseers, Columbia University Graduate School of
Business.
ROBERT W. HATCH -- DIRECTOR. Mr. Hatch has been Chairman and Chief
Executive Officer of Cereal Ingredients, a specialty ingredient manufacturer and
laboratory, providing fat-free and high fiber products, from 1991 to the
present. From 1992 to 1993, he was Chairman of Chromcraft Revington, a
diversified furniture manufacturer. From 1989 to 1992, he was Chairman,
President and Chief Executive Officer of Mohasco, a manufacturer of upholstered
and case goods furniture. From 1984 to 1989, he was President and Chief
Executive Officer of Interstate Bakeries Corporation, a wholesale baker. From
1963 to 1984, he served in several capacities at General Mills, Inc., becoming
Vice President and Assistant to Vice Chairman in 1983. Mr. Hatch is currently a
director of Superior Grain, Inc., The Healthy Back Store, Inc., Maverick Paper
Company, SH Productions, Inc., The Foundation for International Community
Assistance and SOTA-TEC Fund. He is also a Regent of St. Olaf College.
J. FRANK LEACH -- DIRECTOR. Mr. Leach served as a director of CFI from June
30, 1975 until April 23, 1993, and was Vice Chairman of the Board of CFI from
April 29, 1991 until April 26, 1993. Also from 1990 to 1991, he served CFI as
interim President and Chief Operating Officer. He has been a partner of Sequoia
Associates since 1982 and Chairman of the Board of Acme Fixture and Casework,
Inc., since 1985. From June 1972 to July 1982, Mr. Leach was President and Chief
Executive Officer of Arcata Corporation and Chairman of the Board from July 1983
to July 1986. He is currently a director of Clayton Group, Inc., Material
Sciences Corporation, Basic American Foods, Inc., Newell Industrial Corp.,
Newell Stamping Corp., Champion Road Machinery, Ltd. and Acme Fixture and
Casework, Inc.
JOHN M. LILLIE -- DIRECTOR. Mr. Lillie served as President and Chief
Operating Officer of American President Companies from 1990 to 1992, and as
Chairman, President and Chief Executive Officer from 1992 to 1995. From 1989 to
1990, Mr. Lillie was a general partner of Sequoia Associates. From 1985 to 1986,
Mr. Lillie served as President and Chief Executive Officer, and from 1986 to
1989 served as Chairman and Chief Executive Officer, of Lucky Stores, Inc. Mr.
Lillie currently serves as a director of Vons, Inc., The Gap, Inc., TeleSensory
Corp. and Walker Interactive Corp.
JAMES B. MALLOY -- DIRECTOR. Mr. Malloy served as Chairman and Chief
Executive Officer of Smurfit Packaging Corporation from February 1, 1994 to
February 1, 1996 and is currently Chairman. Prior to his retirement, he was
President and Chief Executive Officer of Jefferson Smurfit Corporation and its
affiliate, Container Corporation of America. Before joining Jefferson Smurfit
Corporation in 1979, Mr. Malloy spent 26 years with International Paper Company,
New York, NY, culminating his service as Vice President and Group Executive,
Industrial Packaging Group.
RAYMOND F. O'BRIEN -- DIRECTOR. Mr. O'Brien served as a director of CFI
from December 5, 1966 until his normal retirement on April 29, 1995, and was
Chairman of the CFI Board from April 24, 1978 until April 29, 1995. From 1977 to
1988, he was the Chief Executive Officer of CFI and was reelected to that
position from 1990 to 1991. In 1975, he was elected President of CFI, a post he
held until 1980 and resumed from 1981 to 1986. From 1973 to 1975, he also served
as President and Chief Executive Officer of CFCD. He began his career with CFCD
in 1958 as a Controller, advancing to Vice President and Treasurer in 1963, Vice
President -- Finance in 1967, and Executive Vice President in 1969. Mr. O'Brien
currently serves as a director of Watkins-Johnson Co.
COMMITTEES OF THE BOARD
The Board of Directors of the Company has established an Audit Committee and
a Compensation Committee. Descriptions of these committees follow:
AUDIT COMMITTEE. The Audit Committee recommends independent public
accountants for appointment by the shareholders to perform the audit of the
Company's accounting records and authorizes the performance of services by the
accountants so appointed. The Committee reviews the annual
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<PAGE>
audit of the Company by the independent public accountants, and, in addition,
annually reviews the results of the examinations of accounting procedures and
controls performed by the Company's internal auditors.
COMPENSATION COMMITTEE. The Compensation Committee recommends to the Board
the salaries of the executive officers of the Company. The Committee also
oversees the administration of the Company's short-term and long-term incentive
compensation plans, grants of stock options under the Company's Stock Incentive
Plan, the Retirement Plan and the general benefit plans of the Company. The
Committee is also responsible for recommending compensation of non-employee
directors.
COMPENSATION OF DIRECTORS
Directors who are also officers of the Company will receive no additional
compensation for their services as directors. Directors who are not officers
will receive an attendance fee of $1,000 for each meeting of the Board of
Directors and $500 for each meeting of a committee of the Board of Directors.
Directors will also be reimbursed for travel expenses and other out-of-pocket
costs incurred in connection with attendance at meetings. In addition, each
director who is not an officer of the Company will receive a grant of 20,000
shares of restricted Common Stock in connection with Distribution. The Chairman
of the Board will also receive a grant of 125,000 such shares. See "Consolidated
Freightways Corporation 1996 Stock Incentive Plan."
52
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
The Board of Directors is currently considering the possibility of
incentivizing management and key employees of the Company through future grants
of stock options and/or restricted stock.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation paid to the Company's Chief
Executive Officer and the four next most highly compensated executive officers
for the three years ended December 31, 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION (3)
----------------------------
AWARDS
-----------
ANNUAL COMPENSATION SECURITIES
----------------------------------------- UNDERLYING ALL OTHER
OTHER ANNUAL OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($)(1) COMPENSATION ($) SARS (#) ($)(4)
- ----------------------------------------- --------- --------- ----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
W.R. CURRY 1995 412,048 -- 71,958(2) 30,000/0 5,667
President, Chief Executive 1994 363,944 419,740 83,648(2) 105,375/0 9,455
Officer and a Director 1993 317,148 380,578 48,273(2) 32,500/0 8,306
P.H. BLAKE 1995 231,764 -- -- 8,000/0 2,856
Executive Vice President -- 1994 193,022 -- 27,711(2) 32,050/0 2,432
Operations 1993 163,945 -- 83,609(2) 7,100/0 3,783
S.D. RICHARDS 1995 181,372 5,136 -- -- 2,987
Senior Vice President and 1994 164,872 52,308 -- -- 3,717
General Counsel 1993 167,162 41,056 -- -- 5,013
P.W. SEELEY 1995 250,692 -- 50,551(2) 8,000/0 2,956
Executive Vice President -- 1994 230,940 125,246 -- 35,000/0 2,874
Sales and Marketing 1993 223,311 127,910 -- 11,000/0 4,888
R.E. WRIGHTSON 1995 234,884 -- -- 8,000/0 3,933
Senior Vice President, 1994 216,395 117,358 -- 33,800/0 4,281
Controller and Treasurer 1993 212,924 127,910 28,672(2) 8,800/0 6,659
</TABLE>
- ------------------------------
(1) The amounts shown in this column reflect payments under short-term incentive
compensation plans in which all regular, full-time, non-contractual
employees were eligible to participate.
(2) Includes: (a) relocation expense of $27,346 and $83,609 in 1994 and 1993,
respectively, for Mr. Blake; relocation expense of $49,900 in 1995 for Mr.
Seeley and relocation expense of $17,798 in 1993 for Mr. Wrightson; (b)
interest earned and deferred under a long-term incentive plan equal to
$71,958, $56,121 and $42,433 for Mr. Curry in 1995, 1994 and 1993,
respectively; $197, $153, and $116 for Mr. Seeley in 1995, 1994 and 1993,
respectively; and $18,443, $14,383 and $10,874 for Mr. Wrightson in 1995,
1994 and 1993, respectively; (c) above-market deferred compensation interest
equal to $27,527 and $5,840 for Mr. Curry in 1994 and 1993, respectively;
$1,134 and $365 for Mr. Blake in 1995 and 1994, respectively; and $454 for
Mr. Seeley in 1995.
(3) There were no restricted stock awards and no long-term incentive payouts in
1995, 1994 or 1993.
(4) Amounts shown for 1995 in this column include: (a) payments for taxable
group life insurance on behalf of Messrs. Curry, Blake, Richards, Seeley and
Wrightson, equal to $3,417; $606; $737; $706 and $1,683 and (b) employer
contribution to the 401(k) plan equal to $2,250 for each of Messrs. Curry,
Blake, Richards, Seeley and Wrightson.
53
<PAGE>
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth, as to the executive officers named in the
Summary Compensation Table above, (i) the number of shares of CFI Common Stock
subject to options granted to each executive officer during fiscal year 1995,
(ii) the percentage each such grant represents of the total number of options
granted to all CFI employees during fiscal 1995, and (iii) the expiration dates
of such options. All such options were granted under the CFI Stock Option Plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
- -----------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
GRANTED (#)(2) FISCAL YEAR ($/SHARE) DATE VALUE ($)(3)
-------------- ----------------- ----------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
W.R. Curry......................... 30,000/0 4.86% 23.25 07/24/05 243,000
P.H. Blake......................... 8,000/0 1.30% 23.25 07/24/05 64,800
S.D. Richards...................... 0 0.00% -- 0 0
P.W. Seeley........................ 8,000/0 1.30% 23.25 07/24/05 64,800
R.E. Wrightson..................... 8,000/0 1.30% 23.25 07/24/05 64,800
</TABLE>
- ------------------------------
(1) No Stock Appreciation Rights (SARs) were issued in 1995.
(2) All options reflected in the above table are fully currently vested and
exercisable. See "Relationship Between CFI and the Company After the
Distribution -- Employee Benefit Matters Agreement."
(3) Present value based on modified Black-Scholes option pricing model which
includes assumptions for the following variables: (i) option exercise prices
equal the fair market values on the dates of grant; (ii) option term equals
6.5 years, based on actual option exercises for exercisable options granted
since January 1990; (iii) volatility equals 0.331; (iv) risk-free interest
rate equals 6.30%; (v) estimated future average dividend yield equals 2.0%.
The dividend assumption presented here is for the purposes of estimating
option values and does not imply any pending change in CFI's current
dividend policy. The use of this model should not be construed as an
endorsement of its accuracy in valuing options. CFI's executive stock
options are not transferable so the "present value" shown cannot be realized
by the executive. Future compensation resulting from option grants will
ultimately depend on the amount (if any) by which the market price of the
stock exceeds the exercise price on the date of exercise.
54
<PAGE>
OPTION/SAR EXERCISES AND FISCAL YEAR-END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth the value of exercisable and unexercisable
options held by each of the executive officers named in the Summary Compensation
Table above as of December 31, 1995. All information refers to options granted
under the CFI Stock Option Plan.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS AT
SHARES OPTIONS/SARS AT FISCAL YEAR-END
ACQUIRED VALUE FISCAL YEAR-END (#)(2) ($)(2)(3)(4)(5)
NAME ON EXERCISE(#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------------- -------------- ----------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
W.R. Curry....................... 12,075(1) 20,125 325,001/30,000 2,728,791/97,500
P.H. Blake....................... 7,100 58,169 32,050/8,000 116,181/26,000
S.D. Richards.................... 0 0 0/0 0/0
P.W. Seeley...................... 1,725(1) 2,444 91,012/8,000 682,322/26,000
R.E. Wrightson................... 14,300 121,750 67,116/8,000 467,206/26,000
</TABLE>
- ------------------------------
(1) Expiration date for these options was December 31, 1995.
(2) As of December 31, 1995 Mr. Curry has 300,582 exercisable options valued at
$2,474,416; 30,000 unexercisable options valued at $97,500; and 24,419
exercisable SARs valued at $254,375. Mr. Blake has 32,050 exercisable
options valued at $116,181 and 8,000 unexercisable options valued at
$26,000. Mr. Richards has no stock options or SARs. Mr. Seeley has 89,600
exercisable options valued at $673,600; 8,000 unexercisable options valued
at $26,000 and 1,412 exercisable SARs valued at $8,722. Mr. Wrightson has
62,013 exercisable options valued at $399,431; 8,000 unexercisable options
valued at $26,000 and exercisable 5,103 SARs valued at $67,775. All options
reflected in the above table are currently fully vested and exercisable. See
"Relationship Between CFI and the Company After the Distribution -- Employee
Benefit Matters Agreement."
(3) Based on the closing stock price of $26.50 on December 29, 1995.
(4) Numbers shown reflect the value of options granted at various times over a
ten-year period.
(5) CFI's Incentive Compensation Stock Appreciation Rights Plan ("SAR Plan") was
terminated on March 31, 1990. Under the SAR Plan, selected key employees
were afforded the opportunity to convert cash awards under CFI's short-term
incentive compensation plans into SARs corresponding in value to CFI's
shares of Common Stock. The SARs fluctuated in value as the price of the
Common Stock increased or decreased and earned amounts equal to dividends
declared on the Common Stock. When the SAR Plan was terminated, the value of
all outstanding SARs was fixed as of that date. Interest equivalents have
been paid on outstanding balances credited to participants since April 1,
1990. Payouts are made in cash and commence upon a participant's prior
election or termination of employment with CFI.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Members of the Compensation Committee are all independent directors of the
Company and have no other relationships with the Company and its subsidiaries.
Mr. O'Brien served as an officer of CFCD in various capacities from 1958 to
1975.
55
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
1996 STOCK INCENTIVE PLAN
On August 26, 1996, the board of directors of the Company (the "Board")
adopted, and the shareholders then approved, the Consolidated Freightways
Corporation 1996 Stock Option and Incentive Plan (the "1996 Stock Plan"), which
provides for the grant of various types of stock-based compensation to selected
employees, consultants and non-employee directors of the Company and its
subsidiaries. The 1996 Stock Plan provides for the issuance of a maximum of 15%
of all outstanding shares of Common Stock as of the Distribution Date pursuant
to awards under the 1996 Stock Plan.
The purposes of the 1996 Stock Plan are to promote the success of the
Company's business by providing incentives to those selected employees,
consultants and directors who are or will be responsible for such success; to
facilitate the ownership of Common Stock by such individuals, thereby increasing
their proprietary interests in the Company's business and to assist the Company
in attracting and retaining employees, consultants and directors with experience
and ability.
The Summary that follows is qualified by reference to the provisions of the
1996 Stock Plan.
The 1996 Stock Plan provides for the granting of stock options ("Options"),
including incentive stock options ("ISOs") and non-qualified stock options
("NSOs"). Options granted under the 1996 Stock Plan may be accompanied by stock
appreciation rights ("SARs") or limited stock appreciation rights ("LSARs"), or
both ("Rights"). Rights may also be granted independently of Options. The Plan
also provides for the granting of restricted stock and restricted stock units
("Restricted Awards"), dividend equivalents and other stock- and cash-based
awards. The 1996 Stock Plan also permits the plan's administrator to make loans
to participants in connection with the grant of awards, on terms and conditions
determined solely by the plan administrator. All awards will be evidenced by an
agreement (an "Award Agreement") setting forth the terms and conditions
applicable thereto. The 1996 Stock Plan is designed to comply with the
requirements under Section 162(m) of the Code and Rule 16b-3 of the Exchange
Act.
PLAN ADMINISTRATION
The 1996 Stock Plan is administered by a committee of the Board, the
composition of which will at all times satisfy the provisions of Rule 16b-3
(such committee sometimes referred to herein as the "Plan Administrator").
Members of the committee are not entitled to receive remuneration for
administering the 1996 Stock Plan. The 1996 Stock Plan provides that no member
of the Board or the committee will be liable for any action or determination
taken or made in good faith with respect to the 1996 Stock Plan or any Option,
Right, Restricted Award or other award granted thereunder.
Subject to the terms of the 1996 Stock Plan, the Plan Administrator has the
right to grant awards to eligible recipients and to determine the terms and
conditions of Award Agreements, including the vesting schedule and exercise
price of such awards, and the effect, if any, of a change in control of the
Company on such awards.
SHARES SUBJECT TO THE 1996 STOCK PLAN
The 15% of all outstanding shares of Common Stock as of the Distribution
Date reserved for issuance under the 1996 Stock Plan may be authorized but
unissued shares of Common Stock or shares which have or may be reacquired by the
Company in the open market, in private transactions or otherwise. Generally
speaking, shares subject to an award that is forfeited, cancelled, exchanged,
surrendered or terminated, without distribution of the shares subject thereto,
will again be available for issuance under the 1996 Stock Plan.
The 1996 Stock Plan provides that, in the event of changes in the Common
Stock by reason of a merger, reorganization, recapitalization, common stock
dividend, stock split or similar change, the Plan Administrator will make
appropriate adjustments in the aggregate number of shares available for issuance
under the 1996 Stock Plan, the purchase price to be paid or the number of shares
issuable upon the exercise thereafter of any Option previously granted and in
the purchase price to be paid or
56
<PAGE>
the number of shares issuable pursuant to other awards. The Plan Administrator
will have the discretion to make other appropriate adjustments to awards to
prevent dilution of shares or other devaluations of such awards.
ELIGIBILITY
Discretionary grants of Options, Rights, Restricted Awards and dividend
equivalents, and loans in connection therewith may be made to any director,
employee or any consultant of the Company or its direct and indirect
subsidiaries who is determined by the Plan Administrator to be eligible for
participation in the 1996 Stock Plan, consistent with the purposes of the Plan.
EXERCISE OF OPTIONS
Options will vest and become exercisable over the exercise period, at such
times and upon such conditions as the Plan Administrator determines and sets
forth in the Award Agreement. The Plan Administrator may accelerate the
exercisability of any outstanding Option at such time and under such
circumstances as it deems appropriate. Options that are not exercised within ten
years from the date of grant, however, will expire without value. Options are
exercisable during the optionee's lifetime only by the optionee. The Award
Agreements will contain provisions regarding the exercise of Options following
termination of employment with or service to the Company, including terminations
due to the death, disability or retirement of an award recipient, or upon a
change in control of the Company. In addition to the terms and conditions
governing NSOs, ISOs awarded under the 1996 Stock Plan must comply with the
requirements set forth in Section 422 of the Code.
The purchase price of Common Stock subject to the exercise of an Option will
be as determined by the Plan Administrator and may be adjusted in accordance
with the antidilution provisions described in "--Shares Subject to the 1996
Stock Plan," above. Upon the exercise of any Option, the purchase price may be
fully paid in cash, by delivery of Common Stock previously owned by the optionee
equal in value to the exercise price, by means of a loan from the Company, or by
having shares of Common Stock with a fair market value (on the date of
exercise), equal to the exercise price withheld by the Company or sold by a
broker-dealer under qualifying circumstances (or in any combination of the
foregoing).
STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS
Unless the Plan Administrator determines otherwise, a SAR or LSAR (1)
granted in tandem with an NSO may be granted at the time of grant of the related
NSO or at any time thereafter or (2) granted in tandem with an ISO may only be
granted at the time of grant of the related ISO. A SAR will be exercisable only
to the extent the underlying Option is exercisable.
Upon exercise of a SAR the grantee will receive, with respect to each share
subject thereto, an amount equal in value to the excess of (1) the fair market
value of one share of Common Stock on the date of exercise over (2) the grant
price of the SAR (which in the case of a SAR granted in tandem with an Option
will be the exercise price of the underlying Option, and which in the case of
any other SAR will be the price determined by the Plan Administrator).
Upon exercise of a LSAR, the grantee will receive, with respect to each
share subject thereto, automatically upon the occurrence of a change in control
of the Company, an amount equal in value to the excess of (1) the change in
control price (which in the case of a LSAR granted in tandem with an ISO will be
the fair market value) of one share of Common Stock on the date of such change
in control over (2) the grant price of the LSAR (which in the case of a LSAR
granted in tandem with an Option will be the exercise price of the underlying
Option, and which in the case of any other LSAR will be the price determined by
the Plan Administrator).
With respect to SARs and LSARs that are granted in tandem with Options, each
such SAR and LSAR will terminate upon the termination or exercise of the
pertinent portion of the related Option, and the pertinent portion of the
related Option will terminate upon the exercise of any such SAR or LSAR.
57
<PAGE>
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
A Restricted Stock award is an award of Common Stock subject to such
restrictions on transferability and other restrictions as the Plan Administrator
may impose at the date of grant or thereafter. Restrictions on shares may lapse
at such times, under such circumstances or otherwise, as determined by the Board
or the committee. Such restrictions may include factors relating to the increase
in the value of the stock or individual or Company performance such as the
attainment of certain specified individual, divisional or Company-wide
performance levels, sales volume increases, or Company-wide earnings per share.
The Committee may also impose additional restrictions pursuant to which a
grantee may elect to defer the receipt (or constructive receipt) of a Restricted
Stock grant beyond the date the basic restrictions may lapse. Unless an Award
Agreement provides otherwise, a Restricted Stock recipient will have all of the
rights of a shareholder during the restriction period including the right to
vote Restricted Stock and the right to receive dividends.
If the recipient of an award of Restricted Stock terminates employment with
or service to the Company during the applicable restriction period, Restricted
Stock and any accrued but unpaid dividends or dividend equivalents that are at
that time still subject to restrictions will be forfeited (unless the applicable
Award Agreement or the Plan Administrator provide otherwise).
Recipients of Restricted Stock Units will receive cash or shares of Common
Stock, as determined by the Plan Administrator, upon expiration of the deferral
period specified for such Restricted Stock Units in the related Award Agreement.
Restricted Stock Units may also be subject to such restrictions as the Plan
Administrator imposes at the time of grant or thereafter, which restrictions may
lapse at the expiration of the deferral period (or at an earlier or later time
in the Plan Administrator's discretion).
Upon termination of employment with or service to the Company during any
applicable deferral period to which forfeiture conditions apply, or upon failure
to satisfy any other conditions precedent to the delivery of cash or Common
Stock pursuant to a Restricted Stock Unit award, all such units that are subject
to deferral or restriction will be forfeited (unless the applicable Award
Agreement or the Plan Administrator provides otherwise).
DIVIDEND EQUIVALENTS
Dividend equivalents may be granted, which relate to Options, Rights or
other awards under the 1996 Stock Plan, or may be granted as freestanding
awards. The Plan Administrator may provide, at the grant date or thereafter,
that dividend equivalents will be paid or distributed to an awardee when accrued
with respect to Options, Rights or other awards under the 1996 Stock Plan, or
will be deemed to have been reinvested in additional shares of Common Stock (or
such other investment vehicles as the Plan Administrator may specify). Dividend
equivalents which are not freestanding will be subject to all conditions and
restrictions applicable to the underlying awards to which they relate.
OTHER STOCK- OR CASH-BASED AWARDS
The Plan Administrator may grant Common Stock as a bonus, or in lieu of
Company commitments to pay cash under other plans or compensatory arrangements
of the Company. The Board and the committee may also grant other stock- or
cash-based awards as an element of or supplement to any other award under the
1996 Stock Plan. Such awards may be granted with value and payment contingent
upon the attainment of specified individual or Company (or subsidiary) financial
goals, or upon any other factors designated by the Plan Administrator. The Plan
Administrator may determine the terms and conditions of such awards at the date
of grant or thereafter.
AMENDMENT; TERMINATION
The 1996 Stock Plan will terminate five years after its effective date (the
"Termination Date"). The Board may terminate or amend the 1996 Stock Plan at any
time prior to the Termination Date, except that shareholder approval is required
for any amendment which (i) increases the maximum number of shares of Common
Stock which may be issued under the 1996 Stock Plan (except for adjustments made
to prevent share dilutions and award devaluations), (ii) changes the class of
58
<PAGE>
individuals eligible to participate in the 1996 Stock Plan, or (iii) extends the
term of the 1996 Stock Plan or the period during which any Option, Right,
Restricted Award or other award may be granted or any Option or Right may be
exercised; but such approval is needed only to the extent required by Rule 16b-3
with respect to the material amendment of any employee benefit plan maintained
by the Company. Termination or amendment of the 1996 Stock Plan will not affect
previously granted Options, Rights, Restricted Awards or other grants, which
will continue in effect in accordance with their terms.
PAYMENT OF TAXES
The Company is authorized to withhold from any award granted, any payment
relating to an award under the Plan (including from a distribution of Common
Stock), or any other payment to a grantee, amounts of withholding and other
taxes due in connection with the award, and to take such other action as the
Plan Administrator may deem advisable to enable the Company and grantees to
satisfy obligations for the payment of withholding taxes and other tax
obligations relating to the award. This authority includes the right to withhold
or receive Common Stock or other property and to make cash payments in respect
thereof in satisfaction of a grantee's tax obligations.
CERTAIN FEDERAL INCOME TAX EFFECTS
The following discussion is for general information only and is based on the
Federal income tax law now in effect, which is subject to change, possibly
retroactively. This summary does not discuss all aspects of Federal income
taxation which may be important to particular holders of the Common Stock in
light of their individual investment circumstances or to certain types of
holders subject to special tax rules, nor does it address specific state, local
or foreign tax consequences. Specifically, this summary does not address the
potential tax consequences relative to the grant of stock options with an
exercise price that is substantially less than the fair market value of the
Common Stock on the date of grant of such options. This summary assumes that the
Common Stock will be held as a "capital asset" (generally, property held for
investment) under the Code. Each grantee is urged to consult his tax advisor
regarding the specific Federal, state, local and foreign income and other tax
consequences of his awards and of acquiring and holding the Common Stock.
NON-QUALIFIED STOCK OPTIONS
A participant will generally not be subject to tax upon the grant of an NSO.
Rather, at the time of exercise of such NSO, the participant will recognize
ordinary income for Federal income tax purposes in an amount equal to the excess
of the fair market value of the shares purchased over the Option exercise price.
The Company will generally be entitled to a tax deduction at such time and in
the same amount that the participant recognizes ordinary income.
If shares acquired upon exercise of a NSO (or upon untimely exercise of an
ISO) are later sold or exchanged, then the difference between the sales price
and the fair market value of such Common Stock on the date that ordinary income
was recognized with respect thereto will generally be subject to tax as
long-term or short-term capital gain or loss (if the Common Stock is a capital
asset of the participant) depending upon whether the Common Stock has been held
for more than one year after such date.
INCENTIVE STOCK OPTIONS
A participant will not be subject to tax upon the grant of an ISO or upon
its timely exercise. Exercise of an ISO will be timely if made during its term
and if the participant remains an employee of the Company or a subsidiary at all
times during the period beginning on the date of grant of the ISO and ending on
the date three months before the date of exercise (or one year before the date
of exercise in the case of a disabled employee). Exercise of an ISO will also be
timely if made by the legal representative of a participant who dies (i) while
in the employ of the Company or a subsidiary or (ii) within three months after
termination of employment (or one year in the case of a disabled employee). The
tax consequences of an untimely exercise of an ISO will be determined in
accordance with the rules applicable to NSOs. (See "Certain Federal Income Tax
Effects -- Non-qualified Stock Options," above.)
59
<PAGE>
If shares acquired pursuant to a timely exercised ISO are later disposed of,
the participant will, except as noted below with respect to a "disqualifying
disposition," recognize long-term capital gain or loss (if the Common Stock is a
capital asset of the employee) equal to the difference between the amount
realized upon such sale and the Option exercise price. The Company, under these
circumstances, will not be entitled to any Federal income tax deduction in
connection with either the exercise of the ISO or the sale of such Common Stock
by the participant.
If, however, a participant disposes of shares acquired pursuant to the
exercise of an ISO prior to the expiration of two years from the date of grant
of the ISO or within one year from the date such stock is transferred to him
upon exercise (a "disqualifying disposition"), generally (i) the participant
will realize ordinary income at the time of the disposition in an amount equal
to the excess, if any, of the fair market value of the shares at the time of
exercise (or, if less, the amount realized on such disqualifying disposition)
over the Option exercise price, and (ii) if the Common Stock is a capital asset
of the participant, any additional gain recognized by the participant will be
subject to tax as short-term or long-term capital gain. In such case, the
Company may claim a Federal income tax deduction at the time of such
disqualifying disposition for the amount taxable to the participant as ordinary
income. Any capital gain recognized by the participant will be long-term capital
gain if the participant's holding period for the shares at the time of
disposition is more than one year; otherwise it will be short-term.
The amount by which the fair market value of the Common Stock on the
exercise date of an ISO exceeds the Option exercise price will be an item of
adjustment for purposes of the "alternative minimum tax" imposed by Section 55
of the Code.
EXERCISE WITH SHARES
According to a published ruling of the IRS, a participant who pays the
Option exercise price upon exercise of a NSO, in whole or in part, by delivering
shares of Common Stock already owned by him will recognize no gain or loss for
Federal income tax purposes on the shares surrendered, but otherwise will be
subject to tax according to the rules described above for NSOs. (See "Certain
Federal Income Tax Effects -- Non-qualified Stock Options," above.) With respect
to shares acquired upon exercise which are equal in number to the shares
surrendered, the basis of such shares will be equal to the basis of the shares
surrendered, and the holding period of the shares acquired will include the
holding period of the shares surrendered. The basis of additional shares
received upon exercise will be equal to the fair market value of such shares on
the date which governs the determination of the participant's ordinary income,
and the holding period for such additional shares will commence on such date.
The Treasury Department has issued proposed regulations that, if adopted in
their current form, would appear to provide for the following rules with respect
to the exercise of an ISO by surrender of previously owned shares of corporation
stock. If the shares surrendered in payment of the exercise price of an ISO are
"statutory option stock" (including stock acquired pursuant to the exercise of
an ISO) and if the surrender constitutes a "disqualifying disposition" (as would
be the case, for example, if, in satisfaction of the Option exercise price, the
Company withholds shares which would otherwise be delivered to the participant),
any gain realized on such transfer will be taxable to the optionee, as discussed
above. Otherwise, when shares of the Company's stock are surrendered upon
exercise of an ISO, in general, (i) no gain or loss will be recognized as a
result of the exchange, (ii) the number of shares received that is equal in
number to the shares surrendered will have a basis equal to the shares
surrendered and (except for purposes of determining whether a disposition will
be a disqualifying disposition) will have a holding period that includes the
holding period of the shares exchanged, and (iii) any additional shares received
will have a zero basis and will have a holding period that begins on the date of
the exchange. If any of the shares received are disposed of within two years of
the date of grant of the ISO or within one year after exercise, the shares with
the lowest basis will be deemed to be disposed of first, and such disposition
will be a disqualifying disposition giving rise to ordinary income as discussed
above.
60
<PAGE>
RIGHTS
A grant of SARs or LSARs has no Federal income tax consequences at the time
of such grant. Upon the exercise of SARs or LSARs (other than a Free Standing
LSAR), the amount of any cash and the fair market value as of the date of
exercise of any shares of Common Stock received is subject to tax to the
participant as ordinary income. With respect to a Free Standing LSAR, however, a
recipient should be required to include as taxable ordinary income on the change
in control date an amount equal to the amount of cash that could be received
upon the exercise of the LSAR, even if the LSAR is not exercised until a date
subsequent to the change in control date. The Company will generally be entitled
to a deduction at the same time and equal to the amount included in the
participant's income. Upon the sale of the shares acquired by the exercise of
SARs or LSARs, participants will recognize capital gain or loss (assuming such
Common Stock was held as a capital asset) in an amount equal to the difference
between the amount realized upon such sale and the fair market value of the
Common Stock on the date that governs the determination of the participant's
ordinary income.
RESTRICTED AWARDS
In the case of a Restricted Award, a participant generally will not be
subject to tax upon the grant of such an award, but, rather, the participant
will recognize ordinary income in an amount equal to (i) the fair market value
of Common Stock at the time the shares become transferable or are otherwise no
longer subject to a substantial risk of forfeiture (as defined in the Code),
minus (ii) the price, if any, paid by the participant to purchase such Common
Stock. The Company will be entitled to a deduction at the time when, and in the
amount that, the participant recognizes ordinary income. However, a participant
may elect (not later than 30 days after acquiring such shares) to recognize
ordinary income at the time the restricted shares are awarded in an amount equal
to their fair market value at that time, notwithstanding the fact that such
shares are subject to restrictions and a substantial risk of forfeiture. If such
an election is made, no additional taxable income will be recognized by the
participant at the time the restrictions lapse. The Company will be entitled to
a tax deduction at the time when, and to the extent that, income is recognized
by the participant. However, if shares in respect of which such election was
made are later forfeited, no tax deduction is allowable to the participant for
the forfeited shares, and the Company will be deemed to recognize ordinary
income equal to the amount of the deduction allowed to the Company at the time
of the election in respect of such forfeited shares.
DIVIDEND EQUIVALENTS
A participant will not be subject to tax upon the grant of a dividend
equivalent, but will instead recognize ordinary income in an amount equal to the
value of the dividend equivalent at the time the dividend equivalent becomes
payable to the participant. The Company will be entitled to a deduction at such
time and in such amount as the participant recognizes ordinary income with
respect to the dividend equivalent.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
CFI will own all of the outstanding shares of the Common Stock until the
Distribution. The following table sets forth the approximate number of shares
and percentage of the Common Stock expected to be received on the Distribution
Date by (i) each person who is expected by the Company to be the beneficial
owners of more than 5% of the outstanding the Common Stock, (ii) each director
of the Company, (iii) each of the named executive officers in the Summary
Compensation Table above, and (iv) all directors and executive officers of the
Company as a group. The information set forth in this table is based on shares
of CFI Common Stock outstanding on June 30, 1996 and unless otherwise indicated
assumes that no shares of Series B Preferred Stock of CFI are converted into CFI
Common Stock by the Record Date. Any such conversion would allow the holder of
CFI Common Stock into
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which such Series B Preferred Stock was converted to participate in the
Distribution. Any conversion after the Record Date would not allow such
participation; rather, such later conversion would allow the former holder of
such Series B Preferred Stock to receive CFI Common Stock only.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (1) CLASS
---------------------------------------- ------------------------- ----------
<S> <C> <C>
FMR Corp. 3,121,610(2) 14.18%(2)
82 Devonshire Street
Boston, MA 02109
J.P. Morgan Investment Management 2,739,791 12.45%
Company
522 Fifth Avenue
New York, NY 10036
T. Rowe Price Associates, Inc. and 1,499,427(3) 6.00%(3)
T. Rowe Price Trust Company
100 East Pratt Street
Baltimore, MD 21202
Goldman Sachs Asset Management 1,448,000 6.58%
One New York Plaza
New York, NY 10004
Crabbe Huson Group, Inc. 1,412,050 6.41%
121 S.W. Morrison, Suite 1400
Portland, OR 97204
Loomis, Sayles & Company, L.P. 1,329,197 6.03%
One Financial Center
Boston, MA 02111
W. Roger Curry 312,154( )(6) 1.42%(4)(5)(6)
Patrick H. Blake 150,630( )(5) * (4)(5)
Stephen D. Richards 125,329( )(5) * (4)(5)
Phillip W. Seeley 127,969( )(7) * (4)(5)(7)
Robert E. Wrightson 50,766( )(5) * (4)(5)
William D. Walsh 20,797(5) * (5)
G. Robert Evans 1,768(5) * (5)
J. Frank Leach 2,000(5) * (5)
Raymond F. O'Brien 117,845( )(8) * (5)(8)
All directors and officers as a group 1,059,643( )(5) 4.66%(4)(5)
(14 persons) (9)
</TABLE>
- ------------------------------
* Represents less than 1%.
(1) The persons and entities named in this table have sole voting and
investment power with respect to all shares shown as beneficially owned by
them, subject to community property laws where applicable and to the
information contained in the footnotes to this table. The amounts of share
ownership have been determined by adjusting the current ownership of CFI
capital stock to reflect the ratio of one share of Common Stock for every
two shares of CFI Common Stock. Unless otherwise indicated, the business
address of each of the beneficial owners listed is 175 Linfield Drive,
Menlo Park, California 94025.
(2) This number includes (adjusted as discussed in footnote 1 above) 3,086,726
shares beneficially owned by Fidelity Management & Research Company, as a
result of serving as investment advisor to various investment companies
registered under Section 8 of the Investment Company Act of 1940 and to
certain other funds which are generally offered to limited groups of
investors; 19,184 shares beneficially owned by Fidelity Management Trust
Company, as a result of its serving as trustee or Managing Agent for
various private investment accounts, primarily employee benefit plans and
as
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investment advisor to certain other funds which are generally offered to
limited groups of investors; and 15,700 shares beneficially owned by
Fidelity International Limited, as a result of its serving as investment
advisor to various non-U.S. investment companies.
(3) Includes shares issuable upon conversion of CFI Series B Preferred Stock
(746,016 shares of CFI Series B Preferred Stock convertible at the holder's
option and under certain conditions into approximately 2,984,064 shares of
CFI Common Stock).
(4) Includes shares issuable upon conversion of CFI Series B Preferred Stock
convertible at the holder's option and under certain conditions into CFI
Common Stock, as follows: Mr. Curry holds approximately 122 shares of CFI
Series B Preferred Stock, convertible into approximately 488 shares of CFI
Common Stock; Mr. Morrison holds approximately 57 shares of CFI Series B
Preferred Stock, convertible into approximately 228 shares of CFI Common
Stock; Mr. Blake holds approximately 76 shares of CFI Series B Preferred
Stock, convertible into approximately 304 shares of CFI Common Stock; Mr.
Richards holds approximately 35 shares of CFI Series B Preferred Stock,
convertible into approximately 140 shares of CFI Common Stock; Mr. Seeley
holds approximately 107 shares of CFI Series B Preferred Stock, convertible
into approximately 428 shares of CFI Common Stock and Mr. Wrightson holds
approximately 110 shares of CFI Series B Preferred Stock, convertible into
approximately 440 shares of CFI Common Stock.
(5) Includes awards of Restricted Stock to be made in connection with the
Distribution pursuant to the 1996 Stock Plan, as follows: 300,000 shares of
Restricted Stock to be granted to Mr. Curry; 150,000 shares of Restricted
Stock to be granted to Mr. Morrison; 150,000 shares of Restricted Stock to
be granted to P.H. Blake; 125,000 shares of Restricted Stock to be granted
to Mr. Seeley; 125,000 shares of Restricted Stock to be granted to S.D.
Richards; approximately 50,000 shares of Restricted Stock to be granted to
R.E. Wrightson; 125,000 shares of Restricted Stock to be granted to Mr.
Walsh and 20,000 shares of Restricted Stock to be granted to each other
director of the Company. A Restricted Stock award is an award of Common
Stock subject to certain restrictions. Recipients of Restricted Stock
awarded on the Distribution Date will have the right to vote such
Restricted Stock. See "Consolidated Freightways Corporation 1996 Stock
Incentive Plan."
(6) In the case of W. Roger Curry, the amount (adjusted as discussed in
footnote 1 above) assumes beneficial ownership of 11,383 shares held by the
Curry Family Revocable Trust, of which W. Roger Curry and Elizabeth A.
Curry are trustees.
(7) In the case of Phillip W. Seeley, the amount (adjusted as discussed in
footnote 1 above) assumes beneficial ownership of 447 shares held by
Phillip W. Seeley's wife, Judy Smith, for which Mr. Seeley claims no
beneficial interest.
(8) In the case of Raymond F. O'Brien, the amount (adjusted as discussed in
footnote 1 above) assumes beneficial ownership of 2,533 shares held by
Raymond F. and Mary Ann O'Brien Revocable Trust and 17,612 shares held by
O'Brien Family Limited Partnership, of which Raymond F. O'Brien and Mary
Ann O'Brien are Trustees. The amount also consists of options to purchase
11,250 shares, 12,700 shares, 72,500 shares and 1,250 shares issuable upon
like numbers of stock options, at exercise prices of $29.9375, $28.00,
$13.50 and $22.375, respectively.
(9) Includes (adjusted as discussed in footnote 1 above) 97,700 shares subject
to outstanding options beneficially owned by officers and directors that
are exercisable within 60 days of December 2, 1996.
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DESCRIPTION OF COMPANY CAPITAL STOCK
The following description of the capital stock of the Company is a summary
and is qualified by reference to the provisions of the forms of Restated
Certificate of Incorporation of the Company (the "Company Charter") and the
Bylaws of the Company (the "Company Bylaws"), copies of which have been filed
with the Securities and Exchange Commission as exhibits to the Registration
Statement on Form 10 of which this Information Statement is a part.
AUTHORIZED CAPITAL STOCK
As of the Distribution Date, the Company's authorized capital stock will
consist of 55,000,000 shares of capital stock, of which 50,000,000 shares will
be the Common Stock and 5,000,000 shares will be preferred stock (the "Preferred
Stock"). CFI currently owns all of the outstanding shares of the Common Stock.
No shares of Preferred Stock have been issued. Immediately following the
Distribution, based on the number of shares of CFI Common Stock outstanding on
June 30, 1996, and assuming no shares of CFI's outstanding Series B Preferred
Stock are converted into shares of CFI Common Stock by the Record Date,
approximately 22 million shares of the Common Stock will be outstanding and no
shares of Preferred Stock will be outstanding.
COMMON STOCK
VOTING RIGHTS. Each holder of Common Stock will be entitled to one vote for
each share registered in his name on the books of the Company on all matters
submitted to a vote of shareholders. Except as otherwise provided by law, the
holders of Common Stock will vote as one class. The shares of Common Stock will
not have cumulative voting rights. As a result, subject to the voting rights, if
any, of the holders of any shares of the Company's Preferred Stock which may at
the time be outstanding, the holders of Common Stock entitled to exercise more
than 50% of the voting rights in an election of directors will be able to elect
100% of the directors to be elected if they choose to do so. In such event, the
holders of the remaining shares of Common Stock voting for the election of
directors will not be able to elect any persons to the Company Board. The
Company Charter will provide that the Company Board shall be classified into
three classes, each serving a three-year term, with one class to be elected in
each of three consecutive years. The Company Charter and Bylaws contain certain
provisions that could have an antitakeover effect. See "Purposes and
Antitakeover Effects of Certain Provisions of the Company's Charter and Bylaws."
DIVIDEND RIGHTS. Subject to the rights of holders of any shares of the
Company's Preferred Stock which may at the time be outstanding and subject to
certain contractual restrictions on the payment of dividends contained in the
Company's debt agreements, holders of the Common Stock will be entitled to such
dividends as the Company Board may declare out of funds legally available
therefor. Because the operations of the Company are conducted through
subsidiaries, the Company's cash flow and consequent ability to pay dividends on
the Common Stock are dependent to a substantial degree upon the results of
operations of such subsidiaries and on dividends and other payments to the
Company therefrom.
LIQUIDATION RIGHTS AND OTHER PROVISIONS. Subject to the prior rights of
creditors and the holders of any Company Preferred Stock which may be
outstanding from time to time, the holders of Common Stock are entitled in the
event of liquidation, dissolution or winding up to share pro rata in the
distribution of all remaining assets.
The Common Stock is not liable for any calls or assessments and is not
convertible into any other securities. The Company Charter will provide that the
private property of the shareholders shall not be subject to the payment of
corporate debts. There are no redemption or sinking fund provisions applicable
to the Common Stock, and the Company Charter does not provide for preemptive
rights.
The transfer agent and registrar for the Common Stock will be The Bank of
New York.
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PREFERRED STOCK
The Board of Directors of the Company is authorized, subject to any
limitations prescribed by law, without further shareholder approval, to issue
Preferred Stock, in one or more series, each of such series to have such voting
powers, full or limited, or no voting power, and such designations, preferences
and relative, participating, optional and other special rights, and such
qualifications, limitations or restrictions thereof, as the Board of Directors
of the Company may determine. As a result, the Board of Directors of the Company
could, without shareholder approval, cause the Company to issue one or more
series of Preferred Stock having voting, dividend and other rights that could
adversely affect the interests of holders of the Common Stock. No shares of
Preferred Stock will be outstanding immediately following the Distribution Date.
See "Purposes and Antitakeover Effects of Certain Provisions of the Company's
Charter and Bylaws -- Preferred Stock and Additional Common Stock."
PURPOSES AND ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS
OF THE COMPANY'S CHARTER AND BYLAWS
GENERAL
The Company Charter and the Company Bylaws contain provisions that may delay
or discourage the acquisition of control of the Company by means of a tender
offer, open market purchases, a proxy contest or otherwise. These provisions are
designed to discourage certain types of transactions that may involve an actual
or threatened change of control of the Company and to encourage any person who
might seek to acquire control of the Company to negotiate with the Company's
Board of Directors. Management of the Company believes that generally the
interests of the Company's shareholders would be served best if any change in
control resulted from negotiations with the Company's Board of the proposed
terms, such as the price to be paid, the form of consideration and the
anticipated tax effects of the transaction.
The provisions described herein are designed to reduce the vulnerability of
the Company to an unsolicited proposal for a takeover of the Company that does
not contemplate the acquisition of all outstanding shares of capital stock at an
adequate price or is otherwise unfair to its shareholders or an unsolicited
proposal for the restructuring or sale of all or part of the Company. Management
of the Company believes that, as a general rule, such proposals might not be in
the best interests of the Company and its shareholders. However, to the extent
that these provisions do discourage takeover attempts, they could make it more
difficult to accomplish transactions that are opposed by the incumbent Board and
could deprive shareholders of opportunities to realize takeover premiums for
their shares or other advantages that large accumulations of stock might
provide.
Set forth below is a description of the relevant provisions of the Company
Charter and the Company Bylaws. The description is intended as a summary only
and is qualified by reference to the Company Charter and the Company Bylaws,
copies of which have been filed with the Securities and Exchange Commission as
exhibits to the Registration Statement on Form 10 of which this Information
Statement forms a part.
CLASSIFIED BOARD OF DIRECTORS
The Company Charter divides the Board of Directors into three classes, each
as nearly equal in number as is reasonably possible. Each class, after a
transition period, will serve for staggered three-year terms, one class being
elected each year so that the directors' initial terms will expire at the
Company's annual meeting of shareholders held in 1997, 1998 and 1999,
respectively. Starting with the 1997 annual meeting of shareholders, one class
of directors will be elected each year for a three-year term. Vacancies may be
filled only by a majority of the Board of Directors then in office even if less
than a quorum or by the sole remaining director. Accordingly, the Board of
Directors could temporarily prevent any shareholder from obtaining majority
representation on the Board of Directors by enlarging the Board of Directors and
filling the new directorships with its own nominees. See "Management --
Directors and Executive Officers."
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The structure of the classified board is intended to promote the continuity
and stability of the Company's Board and the Company's management and policies,
because generally a majority of the directors at any given time will have had
prior experience as directors of the Company. The Company believes that this in
turn will permit the Board to represent more effectively the interests of
shareholders.
The classification of the Board of Directors could have the effect of making
it more difficult for shareholders to change the composition of the Company's
Board in a relatively short period of time. Two annual meetings of shareholders,
instead of one, will generally be required to effect a change in a majority of
the Company's Board.
SHAREHOLDER ACTION
The Company Charter provides that all shareholder action must be taken at a
duly called meeting or a special meeting of the shareholders and prohibits
shareholder action by written consent in lieu of a meeting. The Company Bylaws
also provide that special meetings of the shareholders may be called only by the
Chairman of the Board of Directors, the Chief Executive Officer or a majority of
the entire Board of Directors then in office. Shareholders are not permitted to
call a special meeting or to require that the Board of Directors call a special
meeting of shareholders. Moreover, the business permitted to be conducted at any
special meeting of shareholders is limited to the purpose or purposes specified
in the written notice of such meeting.
The provisions prohibiting shareholder action by written consent may have
the effect of delaying consideration of a shareholder proposal until the next
annual meeting of the shareholders unless a special meeting is called by a
majority of the Board of Directors, the Chairman of the Board of Directors or
the Chief Executive Officer.
SHAREHOLDER PROPOSALS
The Company's Bylaws establish procedures, including advance notice
procedures, for nominations (other than by or at the direction of the Board of
Directors) of candidates for election as directors (the "Nomination Procedure")
and for certain matters to be brought before meetings of shareholders of the
Company (the "Business Procedure").
The Nomination Procedure provides that, subject to any rights of holders of
any series of Preferred Stock, only persons who are nominated by or at the
direction of the Board of Directors or by a shareholder who has given timely
written notice to the Secretary prior to the meeting at which directors are to
be elected, will be eligible for election as directors. The Business Procedure
provides that at an annual or special meeting only such business may be
conducted as has been specified in the notice of meeting, or, with respect to an
annual meeting only, brought before the meeting by or at the direction of the
Board of Directors or by a shareholder who has given timely written notice to
the Secretary of such shareholder's intention to bring such business before the
meeting. Under the Nomination Procedure or the Business Procedure, to be timely,
notice must be received by the Company not less than 60 days nor more than 90
days prior to the first anniversary of the preceding year's annual meeting;
PROVIDED, HOWEVER, that in the event the date of the meeting is changed by more
than 30 days before or after such anniversary date, notice by the shareholder,
to be timely, must be received not later than the close of business on the tenth
day following the earlier of the day on which notice of the date of the annual
meeting was mailed or public disclosure was made.
Under the Nomination Procedure, a shareholder's notice to the Company
proposing to nominate a person for election as a director must contain certain
information (i) about each proposed nominee, including, without limitation, (a)
the name, age, business address and residence address of the nominee, (b) the
principal occupation or employment of the nominee, (c) the class, series and
number of shares of capital stock of the Company which are beneficially owned by
the nominee and (d) any other information relating to the nominee that is
required to be disclosed in solicitations of proxies for election of directors
pursuant to the Rules and Regulations of the Commission under the Exchange Act
(including such person's written consent to being named in the proxy statement
as a nominee and
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to serving as director if elected) and (ii) about the shareholder proposing to
nominate such person, including, without limitation, the name and record address
of the shareholder and the class, series and number of shares of capital stock
of the Company which are beneficially owned by the shareholder and a description
of all arrangements or understandings between such shareholder and each proposed
nominee and any other persons pursuant to which the nominations are to be made
by such shareholder. Under the Business Procedure, a shareholder's notice
relating to the conduct of business other than the nomination of directors at an
annual meeting must contain certain information about such business and about
the proposing shareholder including, without limitation, a brief description of
the business desired to be brought before the meeting and the reasons for
conducting such business at the meeting, the name and record address of the
proposing shareholder, the class, series and number of shares of capital stock
of the Company owned by the proposing shareholder and a description of all
arrangements or understandings between such shareholder and any other person in
connection with the proposal of such business by such shareholder and any
material interest of the shareholder in such business and a representation that
such shareholder or beneficial owner intends to appear in person or by proxy at
the annual meeting to bring such business before the meeting. If the officer
presiding at a meeting determines that a person was not nominated in accordance
with the Nomination Procedure, such person will not be eligible for election as
a director and such nomination shall be disregarded. If such presiding officer
determines that business was not properly brought before such meeting in
accordance with the Business Procedure, such business will not be transacted at
such meeting.
These provisions combined could have the effect of making it more difficult
for a third party to effect a change in the control of the Board of Directors.
In addition, these provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a majority of the outstanding voting stock of the Company.
FAIR PRICE PROVISION
The Company Charter requires the approval of a majority of the outstanding
shares of voting stock of the Company, excluding voting stock held by any
Interested Shareholder (as defined therein generally as the beneficial owner of
more than 10% of the voting stock of the Company), in addition to any class vote
required by law or otherwise, as a condition of certain "Business Combination"
(as defined therein) transactions with or for the benefit of an Interested
Shareholder, except in cases in which either certain price criteria and
procedural standards are satisfied or the transaction is approved by a majority
of the directors of the Company who are not affiliated with an Interested
Shareholder and who either were directors of the Company prior to the time any
Interested Shareholder became an Interested Shareholder or were recommended or
elected by a majority of such directors. The price criteria under the Company
Charter relate to the minimum value to be paid to the holders of Common Stock
and the procedural standards relate to (i) the preservation of the dividend
rate, if any, on the Common Stock, (ii) limitations on an Interested
Shareholder's acquisition of additional shares of capital stock of the Company,
and (iii) disclosure to the Company's shareholders in connection with a proposed
Business Combination transaction.
In addition, under the Delaware General Corporation Law (the "DGCL"),
certain "business combinations" (defined generally to include mergers or
consolidations between the Delaware corporation and an interested shareholder
and transactions with an interested shareholder involving the assets or stock of
the corporation or its majority-owned subsidiaries and transactions which
increase the interested shareholder's percentage ownership of stock) between a
Delaware corporation, whose stock generally is publicly traded or held of record
by more than 2,000 shareholders, and an interested shareholder (defined
generally as those shareholders, who, on or after December 23, 1987, become
beneficial owners of 15% or more of a Delaware corporation's voting stock) are
prohibited for a three-year period following the date that such shareholder
became an interested shareholder, unless (i) the corporation has elected in its
certificate of incorporation not to be so governed, (ii) the business
combination was approved by the board of directors of the corporation before the
other party to the business combination became an interested shareholder, (iii)
upon consummation of the transaction that made it an interested shareholder, the
interested shareholder owned at least 85% of the voting
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stock of the corporation outstanding at the commencement of the transaction
(excluding voting stock owned by officers who are also directors or held in
employee benefit plans in which the employees do not have a confidential right
to tender or vote stock held by the plan), or (iv) the business combination was
approved by the board of directors of the corporation and ratified by two-thirds
of the voting stock which the interested shareholder did not own. The three-year
prohibition also does not apply to certain business combinations proposed by an
interested shareholder following the announcement or notification of certain
extraordinary transactions involving the corporation and a person who had not
been an interested shareholder during the previous three years or who became an
interested shareholder with the approval of a majority of the corporation's
directors.
The Company has not opted out of being governed by the above-discussed DGCL
provisions. Consequently, business combinations between the Company and an
interested shareholder would be subject to its provisions.
SHAREHOLDER VOTES FOR AMENDMENT OF CHARTER AND BYLAWS
The Company Charter requires the affirmative vote of the holders of at least
80% of the voting stock of the Company to amend certain provisions of the
Company Charter (including the provisions discussed above in this section). The
Company Bylaws also require such an 80% vote to amend the Company Bylaws. The
Company Bylaws may also be amended by a majority of the Board of Directors.
These provisions could make it more difficult for shareholders to make changes
in the Company Charter and the Company Bylaws, including changes designed to
facilitate the exercise of control over the Company. In addition, the
requirement for approval by at least 80% of the outstanding shares entitled to
vote could enable the holders of a minority of the Company's capital stock to
prevent holders of less than 80% from amending such provisions of the Company
Charter and the Company Bylaws.
PREFERRED STOCK AND ADDITIONAL COMMON STOCK
The Company Charter authorizes the Board of Directors of the Company,
without shareholder approval, to provide for the issuance of one or more series
of Preferred Stock and to determine, with respect to any series of Preferred
Stock, the terms and rights of such series. See "Description of Company Capital
Stock -- Preferred Stock." The Board may also issue additional shares of
authorized but unissued Common Stock without shareholder approval.
The Company believes that the availability of the Preferred Stock will
provide the Company with flexibility in structuring possible future financings
and acquisitions, and in meeting other corporate needs which might arise. The
authorized shares of Preferred Stock, as well as authorized but unissued shares
of Common Stock, will be available for issuance without the expense and delay of
shareholder action, unless such action is required by applicable law or the
rules of the Nasdaq National Market or any other stock exchange on which the
Company's securities may be listed. The Board of Directors has the power
(subject to applicable law) to approve the issuance of a series of Preferred
Stock, or additional Common Stock with terms that could either impede or
facilitate the completion of a merger, tender offer or other takeover attempt.
The Company's Board of Directors will make any determination to issue such
shares based on its judgment as to the best interests of the Company and its
shareholders at the time of issuance.
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LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS
LIMITATION OF LIABILITY
Section 102(b)(7) of the DGCL permits a corporation's certificate of
incorporation to include a provision eliminating or limiting the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit. As permitted by Section 102(b)(7) of the DGCL, the Company Charter
provides that the Company's directors shall not be liable to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that exculpation from liabilities is not permitted under
the DGCL as in effect at the time such liability is determined.
INDEMNIFICATION AND INSURANCE
The Company Charter and Bylaws provide that the Company shall indemnify its
directors and officers to the full extent permitted by the law of the State of
Delaware. Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he or she is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made by a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of such action or suit if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or such other court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
The Company has obtained an insurance policy that insures its directors and
officers against certain liabilities.
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INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company expects to appoint Arthur Andersen LLP
as the Company's independent accountants to audit the Company's financial
statements as of and for the year ended December 31, 1996. Arthur Andersen LLP
has served as CFI's auditors for many years, including the periods covered by
the financial statements included in this Information Statement.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement with the Commission with
respect to the Common Stock described herein. This Information Statement, which
forms a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the schedules and other
exhibits thereto, and reference is made to the Registration Statement for
further information regarding the Company and the Common Stock. In particular,
copies of certain agreements and other documents referred to in this Information
Statement are included as exhibits to the Registration Statement, and the
descriptions of such agreements and other documents in this Information
Statement are qualified by reference to such agreements and other documents as
filed. When the Registration Statement becomes effective, the Company will be
subject to the reporting requirements of the Exchange Act and, in accordance
therewith, will file reports, proxy statements and other information with the
Commission. The Registration Statement, including the exhibits and schedules
thereto, and the reports, proxy statements and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities of the Commission located at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at its principal office at 450 Fifth Street, N.W.
Washington, D.C. 20549. The Commission also maintains a site on the World Wide
Web at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
The Common Stock has been approved for listing, subject to official notice
of issuance, on the Nasdaq National Market. Certain reports and other
information concerning the Company can be inspected and copied at the office of
the Nasdaq National Market at 1735 K Street, N.W., Washington, D.C. 20006-1506.
70
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION OF DELAWARE
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................. F-3
Combined Balance Sheets as of December 31, 1995 and 1994............................. F-4
Statements of Combined Operations for the Years Ended December 31, 1995, 1994 and
1993................................................................................ F-6
Statements of Combined Cash Flows for the Years Ended December 31, 1995, 1994 and
1993................................................................................ F-7
Statements of Combined Changes in CFI Investment and Advances for the Years Ended
December 31, 1995, 1994 and 1993.................................................... F-8
Notes to Combined Financial Statements............................................... F-9
Combined Balance Sheets (unaudited) as of June 30, 1996 and December 31, 1995........ F-18
Statements of Combined Operations (unaudited) for the Six Months Ended June 30, 1996
and 1995............................................................................ F-20
Statements of Combined Cash Flows (unaudited) for the Six Months Ended June 30, 1996
and 1995............................................................................ F-21
Notes to Combined Financial Statements............................................... F-22
</TABLE>
F-1
<PAGE>
(This page has been left blank intentionally.)
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Consolidated Freightways, Inc.:
We have audited the accompanying combined balance sheets of Consolidated
Freightways Corporation of Delaware, as described in Note 1, as of December 31,
1995 and 1994, and the related statements of combined operations, cash flows and
changes in CFI investment and advances for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referrred to above present fairly,
in all material respects, the combined financial position of Consolidated
Freightways Corporation of Delaware, as described in Note 1, as of December 31,
1995 and 1994, and the combined results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California,
January 26, 1996
F-3
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
COMBINED BALANCE SHEETS
DECEMBER 31,
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 26,558 $ 23,116
Trade accounts receivable, net of allowances (Note 2)............................. 252,105 248,292
Other accounts receivable......................................................... 4,397 3,359
Operating supplies, at lower of average cost or market............................ 19,312 18,527
Prepaid expenses.................................................................. 35,192 31,969
Deferred income taxes (Note 6).................................................... 61,621 65,238
------------- -------------
TOTAL CURRENT ASSETS.......................................................... 399,185 390,501
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land.............................................................................. 103,432 97,104
Buildings and improvements........................................................ 386,920 358,935
Revenue equipment................................................................. 575,528 576,118
Other equipment and leasehold improvements........................................ 145,374 121,639
------------- -------------
1,211,254 1,153,796
Accumulated depreciation and amortization......................................... (709,943) (700,918)
------------- -------------
501,311 452,878
------------- -------------
OTHER ASSETS
Deposits and other assets......................................................... 9,764 9,131
------------- -------------
TOTAL ASSETS........................................................................ $ 910,260 $ 852,510
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
COMBINED BALANCE SHEETS (CONTINUED)
DECEMBER 31,
(DOLLARS IN THOUSANDS)
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable...................................................................... $ 92,584 $ 86,907
Accrued liabilities (Note 3).......................................................... 189,669 191,552
Accrued claims costs (Note 2)......................................................... 81,955 83,711
Federal and other income taxes (Note 6)............................................... 1,349 2,140
----------- -----------
TOTAL CURRENT LIABILITIES......................................................... 365,557 364,310
LONG-TERM LIABILITIES
Long-term debt (Note 4)............................................................... 15,100 15,100
Accrued claims costs (Note 2)......................................................... 103,070 96,503
Employee benefits (Note 7)............................................................ 105,096 118,611
Other liabilities..................................................................... 9,878 7,089
Deferred income taxes (Note 6)........................................................ 52,451 37,318
----------- -----------
TOTAL LIABILITIES................................................................. 651,152 638,931
----------- -----------
EQUITY
CFI investment and advances........................................................... 259,108 213,579
----------- -----------
TOTAL LIABILITIES AND EQUITY............................................................ $ 910,260 $ 852,510
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
STATEMENTS OF COMBINED OPERATIONS
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES............................................................. $ 2,106,529 $ 1,936,412 $ 2,074,323
------------- ------------- -------------
COSTS AND EXPENSES
Operating expenses................................................. 1,871,224 1,710,640 1,749,209
Selling and administrative expenses................................ 214,535 203,338 214,146
Depreciation....................................................... 63,556 70,177 81,565
------------- ------------- -------------
2,149,315 1,984,155 2,044,920
------------- ------------- -------------
OPERATING INCOME (LOSS).............................................. (42,786) (47,743) 29,403
------------- ------------- -------------
OTHER INCOME (EXPENSE)
Investment income.................................................. 756 497 459
Interest expense................................................... (918) (880) (443)
Miscellaneous, net (Note 1)........................................ (850) 3,648 7,350
------------- ------------- -------------
(1,012) 3,265 7,366
------------- ------------- -------------
Income (loss) before income taxes (benefits), and extraordinary
charge.............................................................. (43,798) (44,478) 36,769
Income taxes (benefits) (Note 6) (13,889) (14,274) 16,628
------------- ------------- -------------
Income (loss) before extraordinary charge............................ (29,909) (30,204) 20,141
------------- ------------- -------------
Extraordinary charge from write-off of intrastate operating rights,
net of related income tax benefits of $1,229........................ -- 1,912 --
------------- ------------- -------------
NET INCOME (LOSS).................................................... $ (29,909) $ (32,116) $ 20,141
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
STATEMENTS OF COMBINED CASH FLOWS
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------------ ---------- ----------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. $ 23,116 $ 10,764 $ 7,287
------------ ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before extraordinary charge................................ (29,909) (30,204) 20,141
Adjustments to reconcile income (loss) to net cash provided by operating
activities:
Depreciation and amortization.......................................... 63,902 73,443 83,739
Increase (decrease) in deferred income taxes (Note 6).................. 18,556 (17,734) (10,672)
Gains from property disposals, net..................................... (2,360) (749) (448)
Changes in assets and liabilities:
Receivables.......................................................... (4,851) (21,362) (44,416)
Accounts payable..................................................... 5,677 851 (6,152)
Accrued liabilities.................................................. (1,883) 19,110 28,496
Accrued claims costs................................................. 4,811 1,622 (4,556)
Income taxes......................................................... (791) 185 1,610
Employee benefits.................................................... (13,515) 13,553 1,652
Other................................................................ 2,135 (4,976) (2,208)
------------ ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 41,772 33,739 67,186
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................................................... (111,962) (32,120) (49,395)
Proceeds from sales of property.......................................... 6,529 4,942 5,879
------------ ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES...................................... (105,433) (27,178) (43,516)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
CFI investment and advances, net......................................... 67,103 5,791 9,084
Payment of dividend...................................................... -- -- (29,277)
------------ ---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES........................... 67,103 5,791 (20,193)
------------ ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS...................................... 3,442 12,352 3,477
------------ ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 26,558 $ 23,116 $ 10,764
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
STATEMENTS OF COMBINED CHANGES IN CFI INVESTMENT AND ADVANCES
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD............................................... $ 213,579 $ 267,074 $ 270,802
Net income (loss)........................................................ (29,909) (32,116) 20,141
Net cash infusion........................................................ 67,103 5,791 9,084
Net asset transfers (to) from affiliates (Note 1)........................ 9,283 (2,790) (2,726)
Dividend of equity interest in affiliates................................ -- (23,250) --
Cash dividend (Note 1)................................................... -- -- (29,277)
Foreign currency translation............................................. (948) (1,130) (950)
----------- ----------- -----------
BALANCE, END OF PERIOD..................................................... $ 259,108 $ 213,579 $ 267,074
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND CERTAIN RELATIONSHIPS
COMBINED FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
The accompanying combined financial statements of Consolidated Freightways
Corporation of Delaware (the "Company") include the accounts of Consolidated
Freightways Corporation of Delaware and its wholly owned subsidiaries (CFCD) and
the Leland James Service Corporation (LJSC). Consolidated Freightways, Inc.
(CFI) is the owner of 100% of the outstanding shares of CFCD and LJSC. CFCD
provides general freight services nationwide and in parts of Canada, Mexico, the
Caribbean area, Latin and Central America, Europe and Pacific Rim countries.
LJSC provides administrative services under contract to CFI subsidiaries.
Certain assets and liabilities were transferred to the Company and also from the
Company to CFI. Because the combined financial statements reflect the transfers
of certain assets and liabilities, there are no separate meaningful equity
accounts of the Company. All significant intercompany transactions and accounts
between the combined entities have been eliminated.
Subject to certain approvals and authorizations, CFI intends to undertake a
series of transactions (the "Distribution") to complete a tax-free distribution
to its shareholders of its investment in the Company. Pursuant to the
Distribution, the common stock of the Company will be distributed on a basis of
one share of the Company common stock for every two shares of CFI common stock
to the shareholders of CFI.
The combined financial statements are presented as if the Company had
operated as an independent stand-alone entity except that it has not been
allocated any portion of CFI's consolidated borrowings or interest expense
thereon (other than borrowings incurred directly by CFCD and interest expense
thereon). No portion of CFI's consolidated borrowings were allocated to the
Company (except as aforesaid) in accordance with CFI's centralized cash
management policy discussed below, as all cash requirements not satisfied by
operating cash flows are met by CFI and recorded net in CFI Investment and
Advances on the balance sheet. These historical combined financial statements
include the net assets and results of operations directly related to the
Company's operations for all periods presented. Significant changes could have
occurred in the funding and operations of the Company, were it to operate as an
independent stand-alone entity, including an increase in debt and financial
guarantee requirements which would have a significant impact on its financial
position and results of operations. As a result, the financial information
included herein is not necessarily indicative of the financial position and
results of operations of the Company which may have occurred if it were an
independent stand-alone entity.
The Company will enter into certain purchasing and service agreements with
CFI to facilitate the management and conduct of its business operations. These
agreements will generally be for terms of one to three years.
CASH AND INTERCOMPANY TRANSACTIONS
The Company engaged in certain transactions with CFI that are common to all
of the CFI subsidiaries in the normal course of business. Throughout the period
covered by these combined financial statements, the Company participated in
CFI's centralized cash management system and, consequently, its operating and
capital expenditure needs were met by CFI. The net advances with CFI are
presented in the Combined Balance Sheets as a component of CFI Investment and
Advances and bear interest at varying rates. The related interest income
(expense) included in Miscellaneous, net in the Statements of Combined
Operations was approximately ($1,729,000), $8,731,000, and $11,530,000 in the
years ended December 31, 1995, 1994, and 1993, respectively.
In connection with CFI's subsidiary dividend policy to settle subsidiary
advances receivable from CFI, the Company declared a dividend to CFI of
$29,277,000 on April 30, 1993, as reflected in the
F-9
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND CERTAIN RELATIONSHIPS (CONTINUED)
Statement of Combined Changes in CFI Investment and Advances for the year ended
December 31, 1993. In connection with the Distribution, the Company anticipates
transferring certain real properties to CFI.
SERVICES SHARED WITH AFFILIATES
Certain costs incurred at CFI for providing accounting, finance, legal and
treasury services to all of its subsidiaries have been allocated to the Company
using both incremental and proportional methods on a revenue and capital basis.
The resulting charge to the Company was $11,946,000, $14,749,000, and
$17,091,000 in the years ended December 31, 1995, 1994, and 1993, respectively,
and are included in Selling and Administrative Expenses in the Statements of
Combined Operations. Management believes the allocation methods used provide the
Company with a reasonable share of such expenses.
As described above, LJSC provided various administrative services to CFI and
its subsidiaries under various service contracts at an aggregate charge of
$84,471,000, $71,327,000, and $60,105,000 in 1995, 1994, and 1993, respectively.
At the time of the Distribution, certain administrative service departments that
provided services to CFI and its subsidiaries by LJSC and were included in the
Company will be transferred to a subsidiary of CFI. In connection with the
transfer of these departments approximately $16 million of assets, net of
liabilities will be transferred from LJSC to the CFI subsidiary.
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.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with an original maturity of
three months or less to be cash equivalents.
TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable are net of allowances of $9,349,000 and
$11,034,000 at December 31, 1995 and 1994, 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. The
Company has historically been included in the consolidated federal income tax
return and consolidated unitary state income tax returns of CFI. Income taxes
(benefits) reflected in the accompanying combined financial statements represent
a pro-rata share of CFI's consolidated income tax expense and approximate those
that would be recorded had the Company filed separate tax returns. Income taxes
payable in the
F-10
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
U.S. are settled in the current period through the advance account with CFI.
Current and long-term deferred taxes presented in the accompanying combined
financial statements represent a pro-rata share of CFI's consolidated deferred
income tax accounts and approximate those that would be recorded had the Company
filed separate 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 vehicular claims included in the combined financial statements
are payable to a captive insurance company owned by CFI and totaled $37,750,000
and $41,358,000 as of December 31, 1995 and 1994, respectively. The long-term
portion of accrued claims costs relate primarily to workers' compensation claims
which are payable over several years.
INTEREST EXPENSE
The interest expense presented in the Statements of Combined Operations is
primarily related to industrial development revenue bonds as discussed in Note
4. The interest expense as presented is not necessarily intended to reflect the
expense that would have been incurred had the Company been an independent
stand-alone company.
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
combined financial statements and notes thereto. Actual results could differ
from those estimates.
3. ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accrued holiday and vacation pay.............................................. $ 67,515 $ 62,404
Other accrued liabilities..................................................... 45,425 52,255
Wages and salaries............................................................ 24,150 24,899
Accrued union health and welfare.............................................. 21,667 22,714
Accrued taxes other than income taxes......................................... 19,757 19,068
Estimated revenue adjustments................................................. 11,155 10,212
----------- -----------
Total accrued liabilities................................................... $ 189,669 $ 191,552
----------- -----------
----------- -----------
</TABLE>
4. LONG-TERM DEBT
At December 31, 1995 and 1994, long-term debt consisted of $15.1 million of
industrial development revenue bonds with rates between 7.0% and 7.25% due at
various dates in 2003 and 2004.
The Company is a joint-guarantor of a $300.0 million four-year unsecured
credit facility entered into by CFI to provide for letter of credit and working
capital needs. At December 31, 1995, CFI had $40.0 million of short-term
borrowings and $111.0 million of letters of credit outstanding under this
facility. The facility contains various restrictive covenants which limit the
incurrence of additional
F-11
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
indebtedness and require CFI to maintain minimum amounts of tangible net worth
and fixed charge coverage. It is anticipated that the Company will be released
from its guarantee of this facility in connection with the Distribution.
Cash paid for interest was $1,485,000, $1,084,000 and $784,000 including
$361,000, $249,000 and $693,000 of interest capitalized for the years ended
December 31, 1995, 1994 and 1993, respectively.
Based on interest rates currently available to the Company for debt with
similar terms and maturities, the fair value of long-term debt exceeded book
value at December 31, 1995 and 1994 by 11.3% and 9.0%, 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, 2000.
5. LEASES
The Company is obligated under various non-cancelable leases which expire at
various dates through 2003.
Future minimum lease payments under all leases with initial or remaining
non-cancelable lease terms in excess of one year, at December 31, 1995, are
$33,710,000 in 1996, $23,613,000 in 1997, $4,078,000 in 1998, $2,422,000 in
1999, $1,327,000 in 2000, and $1,001,000 thereafter.
Rental expense for operating leases was comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals...................................................... $ 56,118 $ 49,452 $ 52,494
Less sublease rentals................................................ (5,768) (5,641) (4,484)
--------- --------- ---------
$ 50,350 $ 43,811 $ 48,010
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The components of pretax income (loss) and income taxes (benefits) were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Pretax income (loss)
U.S. corporations............................................... $ (53,674) $ (53,144) $ 30,220
Foreign corporations............................................ 9,876 8,666 6,549
---------- ---------- ----------
Total pretax income (loss)...................................... $ (43,798) $ (44,478) $ 36,769
---------- ---------- ----------
---------- ---------- ----------
Income taxes (benefits)
Current
U.S. Federal.................................................. $ (32,078) $ (2,656) $ 18,774
State and local............................................... (4,630) 1,439 5,432
Foreign....................................................... 4,263 4,677 3,094
---------- ---------- ----------
(32,445) 3,460 27,300
---------- ---------- ----------
Deferred
U.S. Federal.................................................... 16,183 (16,834) (8,555)
State and local................................................. 1,861 (705) (1,722)
Foreign......................................................... 512 (195) (395)
---------- ---------- ----------
18,556 (17,734) (10,672)
---------- ---------- ----------
Total income taxes (benefits)..................................... $ (13,889) $ (14,274) $ 16,628
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of deferred tax assets and liabilities in the Combined
Balance Sheets as of December 31 related to the following:
<TABLE>
<CAPTION>
1995 1994
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Reserves for accrued claims costs............................................ $ 52,481 $ 50,085
Reserves for post retirement health benefits................................. 22,216 21,003
Other reserves not currently deductible...................................... 16,519 20,060
Reserves for employee benefits............................................... 5,073 22,241
Foreign tax and alternative minimum tax credit carryovers.................... 2,744 2,539
--------- -----------
99,033 115,928
--------- -----------
Deferred tax liabilities
Depreciation................................................................. 59,235 53,167
Tax benefits from leasing transactions....................................... 18,047 21,646
Unearned revenue............................................................. 9,987 10,875
Other........................................................................ 2,594 2,320
--------- -----------
89,863 88,008
--------- -----------
Net deferred tax asset....................................................... $ 9,170 $ 27,920
--------- -----------
--------- -----------
</TABLE>
Deferred tax assets and liabilities in the Combined 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.
F-13
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Income taxes (benefits) vary 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:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ----
<S> <C> <C> <C>
U.S. statutory tax rate............................................... (35.0)% (35.0)% 35.0%
State income taxes (benefits) net of federal income tax benefit....... (3.0) 0.4 7.6
Foreign taxes in excess of U.S. statutory rate........................ 3.0 3.3 1.1
Non-deductible operating expenses..................................... 4.1 4.0 3.1
Tax rate change impact on deferred expense............................ -- -- 0.1
Fuel tax credit....................................................... (1.1) (0.6) (0.8)
Foreign tax credit benefits, net...................................... -- (2.8) --
Other, net............................................................ 0.3 (1.4) (0.9)
----- ----- ----
Effective income tax rate........................................... (31.7)% (32.1)% 45.2%
----- ----- ----
----- ----- ----
</TABLE>
The cumulative undistributed earnings of the Company's foreign subsidiaries
(approximately $66 million at December 31, 1995), which if remitted are subject
to withholding tax, have been reinvested indefinitely in the respective foreign
subsidiaries' operations unless it becomes advantageous for tax or foreign
exchange reasons to remit these earnings. Therefore, no withholding or U.S.
taxes have been provided. The amount of withholding tax that would be payable on
remittance of the undistributed earnings would approximate $7 million.
In connection with the Distribution, the Company will enter into a tax
sharing agreement with CFI which will provide, among other things, for the
allocation of Federal, state, local and foreign tax liabilities for all periods
through the date of the Distribution. In general, the agreement will provide
that the Company will be liable for its allocable share of such liabilities,
including any liabilities resulting from the audit or other tax adjustment to
previously filed tax returns which are attributable to the assets or businesses
being transferred to and retained by the Company. The agreement will further
provide that if the Distribution fails to qualify as a tax-free distribution, as
a result of certain subsequent transactions involving the Company or as a result
of certain misrepresentations or omissions by the Company to the IRS or CFI's
special tax counsel, the Company will generally indemnify CFI for all taxes,
including penalties and interest, incurred by CFI as a result of the
Distribution.
7. EMPLOYEE BENEFIT PLANS
The Company's non-contractual employees in the United States participate in
a defined benefit pension plan (the "Pension Plan") of CFI. It is CFI's funding
policy to contribute the minimum required tax-deductible contribution for the
year, however, it may increase its contribution above the minimum if appropriate
to its tax and cash position and the Pension Plan's funded status. Benefits
under the Pension Plan are based on a career average final five-year pay
formula. The Company's annual pension provision is based on an independent
actuarial computation of the CFI Pension Plan. The actuarial present value of
projected and accumulated benefit obligations and the related components of
pension cost for the Company's active and inactive non-contractual employees
were allocated to the Company. Pension Plan assets were allocated in amounts
equal to the accumulated benefit obligation. Approximately 87% of the Pension
Plan assets are invested in publicly traded stocks and bonds. The remainder is
invested in temporary cash investments, real estate funds and investment capital
funds.
F-14
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Following is additional information relating to the Pension Plan at December
31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $180,901
in 1995 and $148,994 in 1994......................................... $(192,450) $(158,268)
Effect of projected future compensation levels........................ (35,060) (37,414)
--------- ---------
Projected benefit obligation.......................................... (227,510) (195,682)
Pension Plan assets at market value................................... 192,450 158,268
--------- ---------
Pension Plan assets less than projected benefit obligation............ (35,060) (37,414)
Unrecognized prior service costs...................................... 13,440 16,796
Unrecognized net gain................................................. (3,370) (24,742)
Unrecognized net asset at transition, being amortized over 18 years... (11,760) (14,922)
--------- ---------
Pension Plan liability............................................ $ (36,750) $ (60,282)
--------- ---------
--------- ---------
Weighted average discount rate........................................ 7.25% 8.5%
Expected long-term rate of return on assets........................... 9.5% 9.0%
Rate of increase in future compensation levels........................ 5.0% 5.5%
</TABLE>
Net pension cost was allocated from the CFI Pension Plan on an actuarially
determined pro-rata basis and included the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cost of benefits earned during the year............................... $ 5,610 $ 8,408 $ 6,097
Interest cost on projected benefit obligation......................... 15,130 9,707 9,629
Actual gain arising from plan assets.................................. (34,490) (1,330) (15,337)
Net amortization and deferral......................................... 20,330 (8,837) 5,048
-------- ------- --------
Net pension cost...................................................... $ 6,580 $ 7,948 $ 5,437
-------- ------- --------
-------- ------- --------
</TABLE>
The Company provides additional benefits for compensation which are excluded
from the basic Pension Plan. The annual provision for these programs is based on
independent actuarial computations using assumptions consistent with the Pension
Plan. In 1995 and 1994, the liability related to these programs was $3,729,000
and $2,382,000, respectively, and the expense was $808,000 in 1995, $578,000 in
1994, and $342,000 in 1993.
Approximately 85% of the Company's employees are covered by union-sponsored,
collectively bargained, multi-employer pension plans. The Company contributed
and charged to expense $104,042,000 in 1995, $89,470,000 in 1994, and
$94,427,000 in 1993 for such plans. Those contributions were made in accordance
with negotiated labor contracts and generally were based on time worked.
The Company's non-contractual employees participate in a retiree health plan
along with other CFI employees. The plan provides benefits to all
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.
F-15
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following information sets forth the total post retirement benefit
amounts allocated from the CFI plan and are included in Employee Benefits and
Other Liabilities in the Combined Balance Sheets at December 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Accumulated post retirement benefit obligation
Retirees and other inactives........................................ $37,828 $20,271
Participants currently eligible to retire........................... 8,115 10,535
Other active participants........................................... 9,681 10,268
------- -------
55,624 41,074
Unrecognized valuation gain......................................... 5,693 14,873
------- -------
Accrued post retirement benefit cost................................ $61,317 $55,947
------- -------
------- -------
Weighted average discount rate...................................... 7.25% 8.5%
Average health care cost trend rate
First year........................................................ 10.0% 11.0%
Declining to (year 1999).......................................... 6.0% 6.0%
</TABLE>
Net periodic post retirement benefit costs allocated from the CFI plan
included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cost of benefits earned during the year.................................. $ 432 $ 894 $ 716
Interest cost on accumulated post retirement obligation.................. 3,768 3,602 3,619
Net amortization and deferral............................................ (526) (246) (154)
--------- --------- ---------
Net periodic post retirement benefit cost................................ $ 3,674 $ 4,250 $ 4,181
--------- --------- ---------
--------- --------- ---------
</TABLE>
The increase in the accumulated post retirement benefit obligation and the
net periodic post retirement benefit cost, given a one percent increase in the
health care cost trend rate assumption, would be 9.2% for the year ended
December 31, 1995 and 9.6% for the years ended December 31, 1994 and 1993.
In 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, "Employer's Accounting for
Post-employment Benefits" ("SFAS 112"). The adoption of SFAS 112 in 1994 had an
immaterial effect on the Company's financial position and results of operations.
The Company's non-contractual employees in the United States are eligible to
participate in CFI's Thrift and Stock Plan. This is a 401(k) plan, which allows
employees to make contributions that CFI matches, in part, with CFI common and
preferred stock. CFI's contribution, which is charged as an expense to the
Company, vests immediately with the employee and totaled $1,990,000 in 1995,
$2,600,000 in 1994 and $2,698,000 in 1993. The Company's officers also
participate in CFI's stock option plans. The proceeds from any exercise of stock
options and related tax benefits are recognized by CFI.
8. CONTINGENCIES
As described in Accrued Claims Costs in Note 2, the Company provides for the
uninsured costs of workers' compensation, medical, casualty and cargo claims
under joint programs with CFI. CFI administers claims made against the Company
and, where required by law or contract, provides the necessary guarantees or
collateral for the performance of the Company's obligations in each state. CFI
F-16
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. CONTINGENCIES (CONTINUED)
currently indemnifies certain states, insurance companies and sureties against
the failure of the Company to pay workers' compensation and public liability
claims. As indicated above, in some cases, these indemnities are supported by
letters of credit and surety bonds under which CFI is liable to the issuing
bank. After the Distribution Date, CFI will continue to provide indemnification,
letters of credit and surety bonds with respect to claims that are incurred as
of the Distribution Date. While it is not practical to segregate the letter of
credit requirements for the Company's participation in the insurance programs,
the Company's liabilities represent approximately 58% of the total CFI
liabilities of approximately $317 million that are supported by $133.4 million
of letters of credit as of December 31, 1995.
The letters of credit requirements for the CFI programs may not be
representative of the future letters of credit the Company may need to qualify
under similar or other programs. Accordingly, the Company's historical credit
needs and related insurance costs may not be indicative of its future credit
needs and related insurance costs.
Because it is not feasible for CFI to be released from contingent liability
under its indemnification obligations to the states in which the Company
operates with respect to workers' compensation and public liability claims
incurred prior to the Distribution Date, CFI will continue to administer these
claims for the Company. The Distribution Agreement provides that the Company
will enter into an indemnification agreement with CFI with respect to claims
incurred prior to the Distribution Date and that the Company will provide
security to CFI for its obligations. The potential liabilities required to be
indemnified by CFI should be reduced over time following the Distribution Date
as the Company's pending claims are resolved.
The Company, as party to the Tax Sharing Agreement, will have the obligation
to pay certain tax liabilities to CFI as if the Company were a stand-alone
entity. Included in that obligation is the responsibility to pay for its
allocable share of the tax liabilities that arise as a result of Internal
Revenue Service (IRS), state or foreign tax audits related to periods prior to
the Distribution Date. The IRS has examined the consolidated tax returns of CFI
and subsidiaries for the years ended 1984 through 1990. These returns included
the Company. While the IRS examinations have not been finalized, it is
reasonably possible that the Company will have exposure resulting in an
additional liability for taxes and interest. The adjustments that have been
proposed by the IRS would result primarily in deductible items in future
periods, resulting in deferred tax assets which would not have an immediate
impact on the Company's operating results. As of December 31, 1995, CFI's
estimate of the reasonably possible tax liability and related deferred tax asset
was $15 million to $20 million. In the opinion of management, the ultimate
settlement of the IRS examinations will not have a material adverse effect on
the Company's financial position or results of operations.
The Company is involved in various lawsuits incidental to its businesses. It
is the opinion of management that the ultimate outcome of these actions will not
have a material adverse impact on the Company's financial position or results of
operations.
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 Response Compensation and Liability Act
("CERCLA") or other Federal and state environmental statutes at several
hazardous waste sites. Under CERCLA, PRPs are jointly and severally liable for
all site remediation and expenses. After investigating the Company's or its
subsidiaries involvement in waste disposal or waste generation at such sites,
the Company has either agreed to de minimis settlements or, based upon cost
studies performed by indepedent third parties, believes its obligations with
respect to such sites would not have a material adverse effect on the Company's
financial position or results of operations.
F-17
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 37,757 $ 26,558
Trade accounts receivable, net of allowances...................................... 289,260 252,105
Other accounts receivable......................................................... 4,339 4,397
Operating supplies, at lower of average cost or market............................ 17,569 19,312
Prepaid expenses.................................................................. 38,748 35,192
Deferred income taxes............................................................. 59,873 61,621
------------- -------------
TOTAL CURRENT ASSETS.......................................................... 447,546 399,185
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land.............................................................................. 104,586 103,432
Buildings and improvements........................................................ 390,163 386,920
Revenue equipment................................................................. 562,321 575,528
Other equipment and leasehold improvements........................................ 151,349 145,374
------------- -------------
1,208,419 1,211,254
Accumulated depreciation and amortization......................................... (714,655) (709,943)
------------- -------------
493,764 501,311
------------- -------------
OTHER ASSETS
Deposits and other assets......................................................... 8,993 9,764
------------- -------------
TOTAL ASSETS........................................................................ $ 950,303 $ 910,260
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
COMBINED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable.................................................................... $ 93,901 $ 92,584
Accrued liabilities................................................................. 207,382 189,669
Accrued claims costs................................................................ 88,146 81,955
Federal and other income taxes...................................................... -- 1,349
----------- ------------
TOTAL CURRENT LIABILITIES....................................................... 389,429 365,557
LONG-TERM LIABILITIES
Long-term debt...................................................................... 15,100 15,100
Accrued claims costs................................................................ 101,417 103,070
Employee benefits................................................................... 108,690 105,096
Other liabilities (Note 2).......................................................... 28,802 9,878
Deferred income taxes (Note 2)...................................................... 27,400 52,451
----------- ------------
TOTAL LIABILITIES............................................................... 670,838 651,152
----------- ------------
EQUITY
CFI investment and advances......................................................... 279,465 259,108
----------- ------------
TOTAL LIABILITIES AND EQUITY.......................................................... $ 950,303 $ 910,260
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
STATEMENTS OF COMBINED OPERATIONS
SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
REVENUES............................................................................ $ 1,032,541 $ 1,082,135
------------- -------------
COSTS AND EXPENSES
Operating expenses................................................................ 926,572 928,564
Selling and administrative expenses............................................... 112,974 115,111
Depreciation...................................................................... 31,219 31,175
------------- -------------
1,070,765 1,074,850
------------- -------------
OPERATING INCOME (LOSS)............................................................. (38,224) 7,285
------------- -------------
OTHER INCOME (EXPENSE)
Investment income................................................................. 171 255
Interest expense.................................................................. (435) (481)
Miscellaneous, net................................................................ (2,352) 453
------------- -------------
(2,616) 227
------------- -------------
Income (loss) before income taxes (benefits)........................................ (40,840) 7,512
Income taxes (benefits)............................................................. (12,772) 2,404
------------- -------------
NET INCOME (LOSS)................................................................... $ (28,068) $ 5,108
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
STATEMENTS OF COMBINED CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................... $ 26,558 $ 23,116
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................................................... (28,068) 5,108
Adjustments to reconcile net income (loss) to net cash provided (used) by operating
activities:
Depreciation and amortization........................................................ 31,456 31,393
Increase (decrease) in deferred income taxes......................................... (23,303) 17,438
Gains from property disposals, net................................................... (1,404) (431)
Changes in assets and liabilities:
Receivables........................................................................ (37,097) (3,535)
Accounts payable................................................................... 1,317 7,270
Accrued liabilities................................................................ 17,713 16,073
Accrued claims costs............................................................... 4,538 (1,005)
Income taxes....................................................................... (1,349) (659)
Employee benefits.................................................................. 3,594 (16,904)
Other.............................................................................. 20,410 (10,478)
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES......................................... (12,193) 44,270
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................................................... (29,409) (75,936)
Proceeds from sales of property........................................................ 3,363 1,841
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES.................................................... (26,046) (74,095)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
CFI investment and advances, net....................................................... 49,438 47,009
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................................................ 49,438 47,009
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS.................................................... 11,199 17,184
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................. $ 37,757 $ 40,300
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) The accompanying combined financial statements of the Company as of June 30,
1996 and December 31, 1995 and for the six months ended June 30, 1996 and
1995 have been prepared from the books and records without audit by
independent public accountants, pursuant to the rules and regulations of the
Securities and Exchange Commission. The combined financial statements
include the accounts of CFCD and LJSC. In the opinion of management, the
combined financial statements include all normal recurring adjustments
necessary to present fairly the information required to be set forth
therein. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from these statements
pursuant to such rules and regulations and, accordingly, should be read in
conjunction with the combined financial statements for the year ended
December 31, 1995 included on pages F-3 to F-17.
(2) As discussed in Note 8 to the combined financial statements on page F-17,
the Internal Revenue Service (IRS) has examined the consolidated tax returns
of CFI and subsidiaries for the years ended 1984 through 1990. These returns
included the Company. Based on the current status of the IRS examinations
the Company has recorded in the accompanying combined financial statements
as of June 30, 1996, a deferred tax asset and corresponding liability of $15
million. This amount represents CFI's current estimate of the Company's
minimum probable tax payable and related deferred tax asset that will result
upon the resolution of the IRS examinations.
F-22
<PAGE>
PART II -- INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Form of Distribution Agreement between Consolidated Freightways, Inc. and Consolidated Freightways
Corporation
*3.1 Form of Amended and Restated Certificate of Incorporation of Consolidated Freightways Corporation
*3.2 Form of Amended and Restated Bylaws of Consolidated Freightways Corporation
*4.1 Form of Common Stock Certificate
*10.1 Form of Transition Services Agreement between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation
*10.2 Form of Alternative Dispute Resolution Agreement between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation
*10.3 Form of Employee Benefit Matters Agreement between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation
*10.4 Form of Tax Sharing Agreement between Consolidated Freightways, Inc. and Consolidated Freightways
Corporation
*10.5 Form of Reimbursement and Indemnification Agreement between Consolidated Freightways, Inc. and
Consolidated Freightways Corporation of Delaware
*10.6 Form of Consolidated Freightways Corporation 1996 Stock Incentive Plan
*21.1 Subsidiaries of the Registrant
*27.1 Financial Data Schedule for December 31, 1994
*27.2 Financial Data Schedule for December 31, 1995
*27.3 Financial Data Schedule for June 30, 1996
</TABLE>
- ------------------------
* Previously filed.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
CONSOLIDATED FREIGHTWAYS CORPORATION
By: ________/s/ W. ROGER CURRY________
W. Roger Curry
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: October 31, 1996____
II-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
2.1 Form of Distribution Agreement between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation.........................................................................
*3.1 Form of Amended and Restated Certificate of Incorporation of Consolidated Freightways
Corporation.....................................................................................
*3.2 Form of Amended and Restated Bylaws of Consolidated Freightways Corporation......................
*4.1 Form of Common Stock Certificate.................................................................
*10.1 Form of Transition Services Agreement between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation.........................................................................
*10.2 Form of Alternative Dispute Resolution Agreement between Consolidated Freightways, Inc. and
Consolidated Freightways Corporation............................................................
*10.3 Form of Employee Benefit Matters Agreement between Consolidated Freightways, Inc. and
Consolidated Freightways Corporation............................................................
*10.4 Form of Tax Sharing Agreement between Consolidated Freightways, Inc. and Consolidated Freightways
Corporation.....................................................................................
*10.5 Form of Reimbursement and Indemnification Agreement between Consolidated Freightways, Inc. and
Consolidated Freightways Corporation of Delaware................................................
*10.6 Form of Consolidated Freightways Corporation 1996 Stock Incentive Plan...........................
*21.1 Subsidiaries of the Registrant...................................................................
*27.1 Financial Data Schedule for December 31, 1994....................................................
*27.2 Financial Data Schedule for December 31, 1995....................................................
*27.3 Financial Data Schedule for June 30, 1996........................................................
</TABLE>
- ------------------------
* Previously filed.
II-3
<PAGE>
FORM OF
DISTRIBUTION AGREEMENT
between
CONSOLIDATED FREIGHTWAYS, INC.
and
CONSOLIDATED FREIGHTWAYS CORPORATION
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS
1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II THE DISTRIBUTION
2.1 Cooperation Prior to the Distribution . . . . . . . . . . . . . . 5
2.2 Conditions to Distribution. . . . . . . . . . . . . . . . . . . . . 5
2.3 The Distribution. . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Sale of Fractional Shares . . . . . . . . . . . . . . . . . . . . 6
2.5 Odd-Lot Program . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE III TRANSACTIONS RELATING TO THE DISTRIBUTION
3.1 The Reorganization. . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 Company Board . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Company Charter and Bylaws. . . . . . . . . . . . . . . . . . . . 10
3.4 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . 10
3.5 Operation in the Ordinary Course of Business. . . . . . . . . . . 10
3.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.7 Collections and Payments after the
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . 11
3.8 Certain Post-Distribution Transactions. . . . . . . . . . . . . . 11
ARTICLE IV INDEMNIFICATION
4.1 Indemnification by CFI. . . . . . . . . . . . . . . . . . . . . . 12
4.2 Indemnification by the Company. . . . . . . . . . . . . . . . . . 12
4.3 Limitations on Indemnification Obligations. . . . . . . . . . . . 13
4.4 Procedures for Indemnification. . . . . . . . . . . . . . . . . . 13
4.5 Releases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.6 Environmental Liabilities . . . . . . . . . . . . . . . . . . . . 16
ARTICLE V ACCESS TO INFORMATION; SERVICES
5.1 Access to Information . . . . . . . . . . . . . . . . . . . . . . 16
5.2 Production of Witnesses . . . . . . . . . . . . . . . . . . . . . 17
5.3 Provision of Services . . . . . . . . . . . . . . . . . . . . . . 17
5.4 Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.5 Retention of Records. . . . . . . . . . . . . . . . . . . . . . . 18
5.6 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.7 Provision of Corporate Records. . . . . . . . . . . . . . . . . . 19
5.8 Privileged Matters. . . . . . . . . . . . . . . . . . . . . . . . 20
i
<PAGE>
ARTICLE VI REPRESENTATIONS, WARRANTIES AND COVENANTS
6.1 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 20
6.2 Form 10 and Information Statement . . . . . . . . . . . . . . . . 20
6.3 Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VII SHARED CLAIMS
7.1 Acknowledgment. . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.2 Notification. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.3 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.4 Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.5 Non-Shared Liabilities . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VIII MISCELLANEOUS
8.1 Complete Agreement; Construction. . . . . . . . . . . . . . . . . 22
8.2 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.3 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.5 Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . . 23
8.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.7 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . 23
8.8 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.9 No Third-Party Beneficiaries. . . . . . . . . . . . . . . . . . . 24
8.10 Titles and Headings . . . . . . . . . . . . . . . . . . . . . . . 24
8.11 Legal Enforceability. . . . . . . . . . . . . . . . . . . . . . . 24
8.12 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . 24
8.13 No Solicitation of Employees. . . . . . . . . . . . . . . . . . . 25
8.14 Dispute Resolution. . . . . . . . . . . . . . . . . . . . . . . . 25
Schedule 3.1(b) LJSC Service Departments
Schedule 3.1(e) LJSC Real Property
Schedule 3.1(g) Administrative and Business
Operations
Schedule 3.1(h) Marks
Schedule 3.6(b) Insurance Policies
Schedule 4.1 CFI Indemnification
Schedule 4.2 Company Indemnification
ANNEX 1 Form of ADR Agreement
ANNEX 2 Form of Agreement on Employee Benefits Matters
ANNEX 3 Form of Reimbursement Agreement
ANNEX 4 Form of Services Agreement
ANNEX 5 Form of Tax Sharing Agreement
ANNEX 6 Form of Restated Certificate of Incorporation
ANNEX 7 Form of Restated Bylaws
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DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (the "Agreement") is made as of this
_____ of __________, 1996 by and between CONSOLIDATED FREIGHTWAYS, INC., a
Delaware corporation (together with its wholly owned subsidiaries, "CFI"),
and CONSOLIDATED FREIGHTWAYS CORPORATION, a Delaware corporation (together
with its wholly owned subsidiaries, the "Company").
RECITALS
WHEREAS, CFI is the holder of all of the issued and outstanding shares
of common stock, $.01 par value per share, of the Company (the "Company Common
Stock");
WHEREAS, the Board of Directors of CFI (the "CFI Board") has
determined that it is advisable to distribute (the "Distribution") all of the
shares of Company Common Stock to the holders of the common stock, $.01 par
value per share, of CFI (the "CFI Common Stock");
WHEREAS, CFI and the Company have determined that it is necessary and
desirable to set forth the principal corporate transactions required to effect
the Distribution and certain other agreements that will govern certain matters
relating to the Distribution and the relationships thereafter between CFI and
the Company;
NOW, THEREFORE, in consideration of the mutual promises hereinafter
set forth and other good and valuable consideration, the parties hereto hereby
agree as follows:
ARTICLE I
DEFINITIONS
1.1 GENERAL. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
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ACTION: any action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
ADR AGREEMENT: the Alternative Dispute Resolution Agreement to be
entered into by CFI and the Company as of the Distribution Date, the form of
which is attached hereto as Annex 1.
AFFILIATE: as defined in Rule 12b-2 under the Exchange Act.
CFI GROUP: At any time following the Distribution, CFI and all
entities which are Affiliates of CFI at such time.
CODE: the Internal Revenue Code of 1986, as amended.
COMMISSION: the Securities and Exchange Commission.
COMPANY GROUP: At any time following the Distribution, the Company
and all entities which are Affiliates of the Company at such time.
DISTRIBUTION AGENT: First Chicago Trust Company of New York.
DISTRIBUTION DATE: the date as determined by the CFI Board or a
committee thereof on which the Distribution takes place by delivery of the
shares of Company Common Stock to the Distribution Agent.
DISTRIBUTION RATIO: the ratio of CFI Common Stock to Company Common
Stock to be distributed in the Distribution.
EMPLOYEE BENEFIT MATTERS AGREEMENT: the Agreement on Employee Benefit
Matters to be entered into by CFI and the Company as of the Distribution Date,
the form of which is attached hereto as Annex 2.
ENVIRONMENTAL LIABILITIES: means any Liabilities arising from, under
or relating to any environmen-
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tal, health or safety law, rule, regulation, Action, threatened Action, order
or consent decree.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
FORM 10: the registration statement on Form 10 filed by the Company
with the Commission to effect the registration of the Company Common Stock under
the Exchange Act.
INFORMATION STATEMENT: the Information Statement on Form 14C filed by
the Company with the Commission and included in the Form 10 at the time of its
effectiveness.
INSURANCE PROCEEDS: those monies (i) received by an insured from an
insurance carrier on an insurance claim or (ii) paid by an insurance carrier on
behalf of an insured on an insurance claim, in either case net of any applicable
deductibles, retentions, or costs paid by such insured, but such term does not
refer to proceeds received from an insurer on an employee benefits group
insurance policy.
IRS: the Internal Revenue Service.
LIABILITIES: any and all debts, liabilities, obligations, absolute or
contingent, asserted or unasserted, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, direct or indirect,
whenever arising, including all costs and expenses relating thereto, and
including, without limitation, those debts, liabilities and obligations arising
under any law, rule, regulation, Action, threatened Action, order or consent
decree of any governmental entity or any award of any arbitrator of any kind,
and those arising under any contract, commitment or undertaking including those
arising under this Agreement.
LJCS: Leland James Service Corporation, a Delaware Corporation.
LOSSES: any and all debts, losses, Liabilities, claims, damages,
obligations, payments or costs and expenses, absolute or contingent, matured or
unma-
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tured, liquidated or unliquidated, accrued or unaccrued, known or unknown,
direct or indirect (including, without limitation, the costs and expenses of
any and all Actions, threatened Actions, demands, assessments, judgments,
settlements and compromises relating thereto and attorneys' fees and any and
all expenses whatsoever reasonably incurred in investigating, preparing or
defending against any such actions or threatened actions).
OTHER AGREEMENTS: the ADR Agreement, the Employee Benefit Matters
Agreement, the Reimbursement Agreement, the Services Agreement and the Tax
Sharing Agreement.
RECORD DATE: the close of business on the date to be determined by
the CFI Board or a committee thereof as the record date for the determination of
stockholders of record of CFI entitled to receive the Distribution.
REIMBURSEMENT AGREEMENT: the Reimbursement and Indemnification
Agreement to be entered into between CFI and Consolidated Freightways
Corporation of Delaware ("CFCD") as of October 1, 1996, the form of which is
attached hereto as Annex 3.
SECURITIES ACT: the Securities Act of 1933, as amended.
SERVICES AGREEMENT: the Transition Services Agreement to be entered
into by CNF Service Company, Inc. and the Company as of the Distribution Date,
the form of which is attached hereto as Annex 4.
SUBSIDIARIES: the term "Subsidiaries" as used herein with respect to
any entity shall, unless otherwise indicated, be deemed to refer to both direct
and indirect subsidiaries of such entity.
TAX SHARING AGREEMENT: the Tax Sharing Agreement to be entered into
by CFI and the Company as of the Distribution Date, the form of which is
attached hereto as Annex 5.
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ARTICLE II
THE DISTRIBUTION
2.1 COOPERATION PRIOR TO THE DISTRIBUTION. Prior to the
Distribution:
(a) CFI and the Company shall prepare, and the Company shall
file with the Commission, the Form 10. CFI and the Company shall prepare, and
CFI shall mail, promptly after the effectiveness of the Form 10, to the holders
of CFI Common Stock, the Information Statement, which shall set forth
appropriate disclosure concerning the Company, the Distribution and other
matters. The Company shall use reasonable efforts to cause the Form 10 to
become effective under the Exchange Act.
(b) CFI and the Company shall cooperate in preparing, filing
with the Commission and causing to become effective any registration statements
or amendments thereto that are appropriate to reflect the establishment of or
amendments to any employee benefit and other plans contemplated by the Employee
Benefit Matters Agreement.
(c) The Company shall prepare, file and pursue an application to
permit listing of the Company Common Stock on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") (and/or such other exchange as the Company
deems appropriate), under the symbol "CFWY" (or such other symbol as the Company
deems appropriate).
2.2 CONDITIONS TO DISTRIBUTION. The CFI Board shall in its
discretion establish the Record Date and the Distribution Date and all
appropriate procedures in connection with the Distribution. The Distribution
shall be subject to satisfaction of each of the following conditions, among
other things: (i) the consummation of certain internal corporate
reorganizations; (ii) the successful renegotiation of certain CFI credit
facilities and debt instruments, including the execution of certain consents,
waivers and amendments thereto by lenders; (iii) the establishment of separate
credit facilities for CFCD; (iv) the receipt of certain third-party consents
relating to certain contracts, licenses and other agreements; (v) the receipt
of rulings from the IRS or an opinion of special tax counsel to CFI to the
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<PAGE>
effect that, among other things, the Distribution will generally qualify as
a tax-free distribution under Section 355 of the Internal Revenue Code of 1986,
as amended; (vi) the receipt of a letter from the staff of the Commission
confirming that it will take no action with respect to certain matters
relating to the Distribution; (vii) the Form 10 having become effective and
no stop order being in effect; (viii) there not being in effect any statute,
rule, regulation or order of any court, governmental or regulatory body that
prohibits or makes illegal the transactions contemplated by the Distribution;
(ix) approval for listing of the Company Common Stock on the Nasdaq National
Market; and (x) declaration of the special dividend by the CFI Board. The CFI
Board reserves the right in its discretion, other than with respect to those
set forth in clauses (i), (v), (vi), (vii) and (x), to waive the satisfaction
of any condition to the Distribution; PROVIDED, HOWEVER, that the CFI Board
may abandon, defer or modify the Distribution and the related transactions at
any time prior to the Distribution Date.
2.3 THE DISTRIBUTION. On the Distribution Date or as soon thereafter
as practicable, subject to the conditions set forth in this Agreement, CFI shall
deliver to the Distribution Agent a certificate or certificates representing the
number of then outstanding shares of Company Common Stock to be distributed in
the Distribution, endorsed in blank, and shall instruct the Distribution Agent
to distribute to each holder of record of CFI Common Stock on the Record Date a
certificate or certificates representing one share of Company Common Stock for
every two shares of CFI Common Stock so held. The Company agrees to provide all
certificates for shares of Company Common Stock that the Distribution Agent
shall require in order to effect the Distribution.
2.4 SALE OF FRACTIONAL SHARES. The Distribution Agent shall not
distribute any fractional shares of Company Common Stock ("Fractional Shares")
to any holder of CFI Common Stock. The Distribution Agent shall be instructed
to aggregate all such Fractional Shares and sell them in an orderly manner after
the Distribution Date in the open market at then-prevailing prices and, after
completion of all such sales, distribute a PRO RATA portion of the proceeds
from such sales to each holder of CFI Common Stock who would otherwise have
received a Fractional Share. CFI will
6
<PAGE>
bear the cost of brokerage commissions incurred in connection with such sales.
2.5 ODD-LOT PROGRAM. In connection with the Distribution, the
Company shall offer to holders of CFI Common Stock who would otherwise receive
fewer than 100 shares of Company Common Stock in the Distribution a program by
which such holders may instruct the Distribution Agent to sell such shares of
Company Common Stock on their behalf. The Company shall cause such program to
be conducted in accordance with the terms and conditions described in the
Information Statement.
ARTICLE III
TRANSACTIONS RELATING TO THE DISTRIBUTION
3.1 THE REORGANIZATION. Prior to the Distribution Date:
(a) CFI shall take all steps necessary to establish CFCD as a
wholly owned subsidiary of the Company.
(b) CFI shall take all steps necessary to establish Leland James
Service Corporation ("LJSC") as a wholly owned subsidiary of the Company;
PROVIDED, HOWEVER, that immediately prior to the Distribution or
simultaneously therewith, the LJSC administrative service departments
identified on Schedule 3.1(b) shall be transferred to CNF Service Company,
Inc., a wholly owned subsidiary of CFI.
(c) CFI shall take all steps necessary to merge Vantage Parts
into CFI.
(d) CFI shall take all steps necessary to establish Milne &
Craighead as a wholly owned, indirect subsidiary of CFCD.
(e) CFI shall take all steps necessary to effect the transfer of
all real property owned by CFCD and set forth on Schedule 3.1(e) to CF
Properties, Inc., a wholly owned subsidiary of CFI ("CF Properties"), and to
effect the transfer of CFI's Gresham terminal and land
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<PAGE>
under CFI's Santa Fe Springs and Hayward Terminals to CFC.
(f) The Company acknowledges that any and all rights in the
proprietary software programs (including without limitation all source and
object code and all documentation therefor, and all versions thereof) and
data developed by, or on behalf of, the Company, CFI or its affiliates prior
to the Distribution Date, and all intellectual property rights therein,
including without limitation all copyrights, patent rights, know-how and
trade secret rights, and including, without limitation, the right to sue for
any past, present or future infringement of any of the foregoing, are vested
in CFI. The Company will execute and deliver any instruments or take such
other actions as CFI may reasonably request in order to confirm such
assignment and to otherwise effectuate the purposes and terms of this
Agreement.
(g) CFI hereby shall grant to the Company, effective as of
the termination of the Services Agreement, a royalty-free, worldwide,
perpetual and non-transferable, license without right of sublicense, to use
and create derivative works of the proprietary software programs (including
without limitation all source and object code and documentation therefor, and
all versions thereof) and data owned by CFI, in the form they exist as of the
termination of the Services Agreement, which the Company uses in its business
as of the Distribution Date as set forth on Schedule 3.1(g) hereto
(collectively, the "Licensed Materials"). CFI shall take such steps
necessary to provide to the Company, at CFI's expense, and with minimal
interruption of the operations of CFI or its affiliates, copies of the
Licensed Materials, together with any third party licenses, and reasonable
instruction as to their installation and use. CFI shall also provide the
Company, at CFI's expense, licenses for third party software programming,
which the Company uses in its business as of the date hereof. Third-party
licenses shall be at least as broad in scope as prior to the Distribution
Date unless commercially unreasonable. Where use of software is limited to a
specified number of users or otherwise restricted, an equitable division shall
be made as set forth on Schedule 3.1(g). To the extent that the purchase of
any third-party licenses is commercially unreasonable, CFI shall have the
right to substitute a comparable program.
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Notwithstanding anything to the contrary set forth herein, the Company
acknowledges and agrees that:
i) The use of the Licensed Materials is to be limited
to the internal business use of the Company, or its affiliates and
their authorized customers who in the ordinary course of business
with the Company request access to the Licensed Materials in
connection with products or services otherwise provided by the
Company.
ii) The Company's, its affiliates' and authorized
customers' right to use the Licensed Materials which require a
third-party license is conditioned upon the Company's, its
affiliates and authorized customers observing the applicable
terms and conditions in any third party licenses relating to the
Licensed Materials and as to affiliates and authorized customers
the obtaining of any necessary consents or separate licenses from
such third party vendors. CFI shall make reasonable efforts to
obtain all consents or separate licenses from third party licensors
necessary for the Company to: have the right to use the Licensed
Materials to the extent contemplated herein and be able to receive
the services contemplated under the Services Agreement.
iii) The Company shall assume all Liabilities relating
to the Company's use, and use by any of the Company's affiliates
or authorized customers, of the Licensed Materials after the
Distribution Date and shall indemnify and hold harmless CFI
against all Liabilities and expenses (including reasonable
attorneys' fees and costs of litigation) which CFI may
incur, which arise out of the use of the Licensed Materials
by the Company, its affiliates or authorized customers after
the Distribution Date.
iv) Notwithstanding the immediately preceding paragraph,
CFI shall assume all liabilities relating to the use of software
requiring a third-party license where CFI has failed to provide the
Company with the applicable third-party licenses, and shall indemnify
and hold harmless the Company against all losses, liabilities and
expenses (including
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<PAGE>
reasonable attorneys' fees and cost of litigation) which the
Company may incur, which arise out of such failure of CFI to obtain
such third-party licenses for the Company.
v) The Licensed Materials constitute confidential
information and shall remain the property of CFI, subject to the
license granted herein. The Company agrees to hold the same in
confidence and not to disclose or distribute the same unless such
information subsequently becomes publicly available through no
fault of the Company.
vi) CFI shall assume all liabilities relating to CFI's
use, and use by CFI's affiliates or authorized customers, of the
Licensed Materials and any materials not licensed to the Company,
and shall indemnify and hold harmless the Company against all
losses, liabilities and expenses (including reasonable attorneys'
fees and cost of litigation) which the Company may occur, which arise
out of the use of the Licensed Materials or any of the materials
not licensed to the Company by CFI, its affiliates or authorized
customers.
vii) The Company may request additional worldwide,
perpetual and non-transferable licenses from CFI which are not
currently used by it in its business. CFI may grant such licenses
in its sole discretion. The licenses requested and granted as of
the date hereof are listed in Schedule 3.1(g) as "Additional
Licenses." The Company shall pay the costs of copying such
software and purchasing any required third-party licenses related
thereto. The Company shall assume all Liabilities relating to the
Company's use thereof and shall indemnify and hold harmless CFI
against all Liabilities and expenses whatsoever (including
reasonable attorneys' fees and costs of litigation) which CFI may
incur, which arise out of, or are in any way related to the use of
such software by the Company, its affiliates or authorized customers.
viii) The Company shall pay its proportional share of
the development costs of the Li-
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censed Materials identified in Schedule 3.1(g) as "Under
Development" as incurred after the Distribution Date. Any cost of
"cloning" a second copy, if any, shall be part of the development
costs. The Company shall not, however, pay a proportional share of
the development costs where such Licensed Materials are part of
the services being provided to the Company under the Services
Agreement.
ix) Because of the extensive number of software
programs used by the parties, the parties expect that some
programs may inadvertently be omitted from Schedule 3.1(g). In
such event, the parties shall determine in good faith whether such
programs should be added as Licensed Materials and related
third-party software used by the Company as of the date hereof as,
"Additional Licenses" or "Under Development."
(h) Prior to the Distribution Date, CFI shall take all steps
necessary to assign to the Company the trademarks, trade names and service
marks set forth on Schedule 3.1(h) (collectively, the "Marks"); PROVIDED,
HOWEVER, that CFI and the Company shall each have the right to use the Marks
for the nine-month period beginning on the Distribution Date. CFI shall
assign the trademarks, trade names and service marks relating to "CF Air" and
"CF Air Freight" (and as stylized) on the third anniversary of the date of this
Agreement.
(i) Prior to the Distribution Date, CFI and the Company shall
take all steps necessary to increase the outstanding shares of Company Common
Stock so that, immediately prior to the Distribution, CFI will hold a number
of shares of Company Common Stock sufficient to enable it to complete the
Distribution based on the Distribution Ratio.
3.2 COMPANY BOARD. CFI and the Company shall take all steps
necessary to elect as directors of the Company, on or prior to the Distribution
Date, the persons named in the Form 10 to constitute the board of directors of
the Company on the Distribution Date.
3.3 COMPANY CHARTER AND BYLAWS. On or prior to the Distribution
Date, (a) CFI shall approve and cause the Amended and Restated Certificate of
Incorporation of
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the Company substantially in the form of Annex 6 hereto to be
filed with the Secretary of State of Delaware and to be in effect on the
Distribution Date and (b) CFI shall adopt the Amended and Restated Bylaws of the
Company substantially in the form of Annex 7 hereto to be in effect on the
Distribution Date.
3.4 OTHER AGREEMENTS. On or prior to the Distribution Date, CFI
and the Company shall enter into, and/or (where applicable) shall cause their
respective Subsidiaries to enter into, the Other Agreements and any other
agreements necessary or appropriate in connection with the transactions
contemplated hereby and thereby. In the event of a conflict between the
terms of this agreement and the terms of any of the Other Agreements or any
such other agreements (including without limitation Section 5.04 of the Tax
Sharing Agreement), the terms of such Other Agreement or other agreement
shall govern.
3.5 OPERATION IN THE ORDINARY COURSE OF BUSINESS. Prior to the
Distribution Date, the Company shall, and shall cause each of its Subsidiaries
to, conduct its business and operations in the ordinary course of business,
consistent with past practice, and shall, and shall cause each of its
Subsidiaries to, continue to ship products, pay accounts payable and invoices,
deposit and accept payments, and make capital expenditures in the ordinary
course of business, all consistent with past practice. The Company shall not,
and shall cause each of its Subsidiaries not to, undertake any arrangement with
the intent to delay receipt of any funds by the Company or its Subsidiaries
until on or after the Distribution Date or to accelerate any payment to be made
by the Company or its Subsidiaries prior to the Distribution Date, except in
each case in the ordinary course of business consistent with past practice.
3.6 INSURANCE. The Company, for itself and on behalf of each
other member of the Company Group, does hereby release CFI and each other
member of the CFI Group from all Liabilities arising from or in connection
with the insurance policies described on Schedule 3.6(b), excluding
occurrences which commenced on or prior to October 1, 1996. The Company,
for itself and on behalf of each other member of the Company Group, does
hereby acknowledge that these policies are cancelled or terminated as to CFCD
and its subsidiaries as of October
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1, 1996 except to the extent of claims referred to in the preceding sentence.
The Company expressly waives any and all rights under section 1542 of the
Civil Code of California, which provides as follows:
"A General Release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the Release, which if known by him
must have materially affected his settlement with the
debtor."
3.7 COLLECTIONS AND PAYMENTS AFTER THE DISTRIBUTION DATE. Except
as may be explicitly provided in this Agreement and the Other Agreements, any
cash receipts arising out of or relating to the assets, liabilities or
operations of the Company or its past or present Subsidiaries received on or
after the Distribution Date shall be retained by the Company and such
Subsidiaries and any liabilities or obligations, other than any liabilities
or obligations relating to LJSC and arising on or prior to the Distribution
Date, arising out of, relating to or asserted on the basis of the assets,
liabilities or operations of the Company or its past or present Subsidiaries
due and unpaid on and after the Distribution Date or incurred on and after
the Distribution Date shall be payable by the Company and such Subsidiaries.
3.8 CERTAIN POST-DISTRIBUTION TRANSACTIONS. THE COMPANY. (i) The
Company shall, and shall cause each of its Subsidiaries to, comply with each
representation and statement made, or to be made, to any taxing authority in
connection with the IRS Ruling or any other ruling obtained, or to be obtained,
by the Company and CFI acting together, from any such taxing authority with
respect to any transaction contemplated by this Agreement; and (ii) until the
third anniversary of the Distribution Date, neither the Company nor any of its
Subsidiaries shall (A) make a material disposition, by means of a sale or
exchange of assets or capital stock, a distribution to stockholders or
otherwise, of its assets, (B) repurchase or issue any Company capital stock
(other than stock issued pursuant to employee plans), or (C) cease the active
conduct of its businesses independently, with its own employees and without
material change, unless, in each of cases (A), (B) and (C), in the opinion of
counsel
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<PAGE>
to the Company, which opinion shall be reasonably satisfactory to CFI,
or pursuant to a favorable IRS supplemental ruling letter reasonably
satisfactory to CFI, such act or omission would not adversely affect the tax
consequences of the Distribution to CFI or the stockholders of CFI, as set forth
in any ruling issued by any taxing authority; and the Company has no present
intention to take any such actions.
ARTICLE IV
INDEMNIFICATION
4.1 INDEMNIFICATION BY CFI. Except as otherwise provided by any
of the Other Agreements or as contemplated by Section 4.5 or Article VII
hereof, effective as of the Distribution Date, CFI agrees to indemnify,
defend and hold harmless the Company, each other member of the Company Group,
and their present or former officers, directors, shareholders, agents,
employees, representatives, successors-in-interest, parents, Affiliates,
insurers, attorneys and assigns (the "Company Indemnitees") from and against
any and all Losses of the Company Indemnitees arising out of or related in
any manner to any item set forth on Schedule 4.1.
4.2 INDEMNIFICATION BY THE COMPANY. Except as otherwise provided
by any of the Other Agreements or as contemplated by Section 4.5 or Article
VII hereof, effective as of the Distribution Date, the Company agrees to
indemnify, defend and hold harmless CFI, each other member of the CFI Group,
and their present or former officers, directors, shareholders, agents,
employees, representatives, successors-in-interest, parents, Affiliates,
insurers, attorneys and assigns (the "CFI Indemnitees") from and against any
and all Losses of the CFI Indemnitees arising out of or related in any manner
to any item set forth on Schedule 4.2.
4.3 LIMITATIONS ON INDEMNIFICATION OBLIGATIONS. The amount that
either CFI or the Company (an "Indemnifying Party") is or may be required to pay
to an indemnified party ("Indemnitee") pursuant to Section 4.1 or 4.2 shall be
reduced by any Insurance Proceeds or other amounts actually recovered by or on
behalf of such Indemnitee, in reduction of the related Loss. If an
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Indemnitee shall have received the payment required by this Agreement from an
Indemnifying Party in respect of any Loss and shall subsequently actually
receive Insurance Proceeds or other amounts in respect of such Loss, then
such Indemnitee shall pay to such Indemnifying Party a sum equal to the
amount of such Insurance Proceeds or other amounts actually received (up to
but not in excess of the amount of any indemnity payment made hereunder). No
insurer or other third party shall: (a) be relieved of the responsibility to
pay any claims which it would otherwise be obligated to pay in the absence of
the foregoing indemnification provisions; (b) solely by virtue of the
indemnification provisions hereof, have any subrogation rights with respect
to any claims which it would otherwise be obligated to pay; or (c) be
entitled to a benefit it would not be entitled to receive in the absence of
the foregoing indemnification provisions. Any Indemnifying Party shall
succeed to the rights of any Indemnitee with respect to any matter
contemplated by this Section 4.3.
4.4 PROCEDURES FOR INDEMNIFICATION. (a)(i) If an Indemnitee shall
receive notice or otherwise learn of the assertion of any claim or commencement
of any proceeding (including any governmental investigation) by a person who is
not a party to this Agreement (or any Affiliate of either party) (a "Third-Party
Claim") with respect to which an Indemnifying Party may be obligated to provide
indemnification pursuant to this Agreement, such Indemnitee shall give such
Indemnifying Party written notice thereof promptly after becoming aware of such
Third-Party Claim setting forth the particulars as to such claim or proceeding
in reasonable detail; PROVIDED that the failure of any Indemnitee to give notice
as provided in this Section 4.4(a) shall not relieve the related Indemnifying
Party of its obligations under this Article IV, unless such Indemnifying Party
is actually prejudiced by such failure to give notice and then only to the
extent of such actual prejudice.
(ii) An Indemnifying Party may, to the extent it wishes
within thirty days of receipt of notice of a Third Party claim and at its
cost and expense, elect to defend or to seek to settle or compromise any
Third-Party Claim; PROVIDED that the Indemnitee may participate in such
settlement or defense through its chosen counsel at its sole cost and
expense. After notice from an
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Indemnifying Party to an Indemnitee of its election to assume the defense of
a Third-Party Claim, such Indemnifying Party shall not be liable to such
Indemnitee under this Article IV for any legal or other expenses (except
expenses approved in advance by the Indemnifying Party) subsequently incurred
by such Indemnitee in connection with the defense thereof; PROVIDED that if
the defendants in any such Third-Party Claim include both the Indemnifying
Party and one or more Indemnitees and in any Indemnitee's reasonable judgment
a conflict of interest between one or more of such Indemnitees and such
Indemnifying Party exists in respect of such claim, such Indemnitees shall
have the right to employ separate counsel to represent such Indemnitees and
in that event the reasonable fees and expenses of such separate counsel (but
not more than one separate counsel reasonably satisfactory to the
Indemnifying Party) shall be paid by such Indemnifying Party; PROVIDED
FURTHER if and to the extent that there is a conflict of defenses or
positions among the Indemnitees, the Indemnitees shall have the right to
retain such number of additional separate counsel, reasonably satisfactory to
the Indemnifying Party, as is reasonably necessary to avoid such conflicts,
and the Indemnifying Party shall be responsible for the reasonable fees and
expenses of such additional separate counsel; PROVIDED FURTHER that the
Indemnitee may participate in the settlement or defense of a Third-Party
Claim through counsel chosen by such Indemnitee if the fees and expenses of
such counsel shall be borne by such Indemnitee. If an Indemnifying Party
elects not to assume responsibility for defending a Third-Party Claim, such
Indemnitee may defend or seek to compromise or settle such Third-Party Claim
but shall not thereby waive any right to indemnity therefor pursuant to this
Agreement. Notwithstanding the foregoing, the Indemnifying Party shall not be
liable for any settlement of any Third-Party Claim effected without its
written consent. The Indemnifying Party shall not, except with the consent of
the Indemnitee, (i) enter into any such settlement that does not include as
an unconditional term thereof the giving by the person or persons asserting
such Third-Party Claim to all Indemnitees an unconditional release from all
liability with respect to such Third-Party Claim, or (ii) consent to entry of
any judgment.
(b) Any claim on account of a Loss that does not result from a
Third-Party Claim shall be asserted
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by written notice given by the Indemnitee to the Indemnifying Party. Such
Indemnifying Party shall have a period of thirty (30) days after the receipt
of such notice within which to respond thereto. If such Indemnifying Party
does not respond within such thirty-day period, such Indemnifying Party shall
be deemed to have refused to accept responsibility to make payment. If such
Indemnifying Party does not respond within such thirty-day period or rejects
such claim in whole or in part, such Indemnitee shall be free to pursue such
remedies as may be available to such party under this Agreement or under
applicable law (except as provided in the ADR Agreement).
(c) In addition to any adjustments required pursuant to Section
4.3, if the amount of any Loss shall, at any time subsequent to the payment
required by this Agreement, be reduced by recovery, settlement or otherwise, the
amount of such reduction that has been received by the Indemnitee, less any
expenses properly incurred in connection therewith, shall promptly be repaid by
the Indemnitee to the Indemnifying Party.
(d) In the event of payment by an Indemnifying Party to any
Indemnitee in connection with any Third-Party Claim, such Indemnifying Party
shall have all rights of subrogation and shall stand in the place of such
Indemnitee as to any events or circumstances in respect of which such
Indemnitee may have any right or claim relating to such Third-Party Claim or
against any other person. Such Indemnitee shall cooperate with such
Indemnifying Party in a reasonable manner, and at the cost and expense of
such Indemnifying Party, in prosecuting any subrogated right or claim.
(e) Notwithstanding anything to the contrary herein or in the
Other Agreements, the foregoing indemnification provisions and procedures
shall apply to any other indemnification agreements herein or in the Other
Agreements.
4.5 RELEASES.
(a) Subject to Article VII and effective on the Distribution
Date, the Company and each other member of the Company Group releases and
forever discharges CFI, each other member of the CFI Group, and their present
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or former officers, directors, shareholders, agents, employees,
representatives, successors-in-interest, parents, Affiliates, insurers,
attorneys and assigns of and from any and all Liabilities (other than those
for which indemnification is available under (i) this Article IV or (ii) any
Other Agreement (subject to the provisions of Section 4.3)).
(b) Subject to Article VII and effective on the Distribution
Date, CFI and each other member of the CFI Group releases and forever
discharges the Company, each other member of the Company Group and their
present or former officers, directors, shareholders, agents, employees,
representatives, successors-in-interest, parents, Affiliates, insurers,
attorneys and assigns of and from any and all Liabilities (other than those
for which indemnification is available under this Article IV and any Other
Agreement (subject to the provisions of Section 4.3)).
(c) Each of the Company, for itself and on behalf of
each other member of the Company Group, and CFI, for itself and on behalf of
each other member of the CFI Group, expressly waives any and all rights under
section 1542 of the Civil Code of California, which provides as follows:
"A General Release does not extend to claims which the
creditor does not know or suspect to exist in his favor
at the time of executing the Release, which if known by
him must have materially affected his settlement with the
debtor."
4.6 ENVIRONMENTAL LIABILITIES. Notwithstanding anything
contained herein or in any Other Agreement to the contrary, neither party
shall have any obligation to indemnify the other party with respect to any
Environmental Liabilities.
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ARTICLE V
ACCESS TO INFORMATION; SERVICES
5.1 ACCESS TO INFORMATION. From and after the Distribution Date, CFI
and its Subsidiaries shall afford to the Company and its authorized accountants,
counsel and other designated representatives (collectively, "Representatives")
reasonable access (including using reasonable efforts to give access to the
person or firms possessing information) and duplicating rights during normal
business hours to all administrative records, books, contracts and
instruments, and all Company-owned computer software and computer data and
other Company-owned data and information (collectively, "Information") within
CFI's or any such Subsidiary's possession or control relating to the Company
or any Company Subsidiary and to any property owned by CFI that was leased or
operated by the Company or any Company Subsidiary, insofar as such access is
reasonably required by the Company or any Company Subsidiary. Similarly, the
Company and its Subsidiaries shall afford to CFI and its Representatives
reasonable access (including using reasonable efforts to give access to
persons or firms possessing information) and duplicating rights during normal
business hours to Information within the Company's or any such Subsidiary's
possession or control relating to CFI or any CFI Subsidiary or relating to
the Company prior to the Distribution Date and to any property owned by the
Company that was leased or operated by CFI or any CFI Subsidiary (other than
the Company and its Subsidiaries), insofar as such access is reasonably
required by CFI or any CFI Subsidiary. Information may be requested under
this Article V for, without limitation, audit, accounting, claim, litigation
and tax purposes, as well as for purposes of fulfilling disclosure and
reporting obligations and for performing this Agreement and the transactions
contemplated hereby.
5.2 PRODUCTION OF WITNESSES. After the Distribution Date, each of
CFI and the Company and its respective Subsidiaries shall use reasonable efforts
to make available to the other party and its Subsidiaries, upon written request,
its directors, officers, employees and agents as witnesses to the extent that
any such person may reasonably be required in connection with any
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legal, administrative or other proceedings in which the requesting party may
from time to time be involved.
5.3 PROVISION OF SERVICES. In addition to any services
contemplated to be provided following the Distribution Date by any Other
Agreement, each party, upon written request, shall make available to the
other party, during normal business hours and in a manner that will not
interfere unreasonably with such party's business, its financial, tax,
accounting, legal, employee benefits and similar staff services
(collectively, "Services") whenever and to the extent that they may be
reasonably required in connection with the preparation of tax returns,
audits, claims, litigation or administration of employee benefit plans, and
otherwise to assist in effecting an orderly transition following the
Distribution.
5.4 REIMBURSEMENT. Except to the extent otherwise provided in any
Other Agreement, each party providing Information, witnesses or Services under
Section 5.1, 5.2 or 5.3 to the other party shall be entitled to receive from the
recipient, upon the presentation of invoices therefor, payment for all out-of-
pocket costs and expenses as may be reasonably incurred in providing such
Information, witnesses or Services. For purposes of this Section 5.4,
salaries and other compensation payable to employees of either party shall be
deemed to be an out-of-pocket cost or expense reimbursable hereunder.
5.5 RETENTION OF RECORDS. Except as otherwise required by law or
agreed to in writing, each of CFI and the Company shall retain, and shall cause
its respective Subsidiaries to retain following the Distribution Date, all
significant information ("Information") relating to the business of the other
and the other's subsidiaries, for a period (a "Retention Period") consistent
with the document retention policies in effect at CFI and the Company,
respectively. In addition, such Information shall not be destroyed or otherwise
disposed of if during such period a party shall request in writing that any of
the Information be retained for additional specific and reasonable periods of
time at the expense of the party so requesting. After the applicable Retention
Period, any party may destroy or otherwise dispose of any Information at any
time, provided that, prior to such destruction or disposal, (a) such party shall
provide no less than ninety (90) days' prior written notice to the other
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party, identifying the Information proposed to be destroyed or disposed of,
and (b) if the recipient of such notice shall request in writing prior to the
scheduled date for such destruction or disposal that any of the Information
proposed to be destroyed or disposed of be delivered to such requesting
party, the party proposing the destruction or disposal shall promptly arrange
for the delivery of such of the Information as was requested at the expense
of the requesting party.
5.6 CONFIDENTIALITY. Each of the CFI Group on the one hand, and the
Company Group on the other hand, shall use commercially reasonable efforts to
hold, and cause its Representatives to hold, in strict confidence, all
Information concerning the other in its possession or furnished by the other or
the other's Representatives pursuant to this Agreement or any of the Other
Agreements (except to the extent that such Information is (a) in the public
domain through no fault of such party or (b) later lawfully acquired on a non-
confidential basis from other sources which are not subject to any
confidentiality litigation with the subject party by such party or subsequently
developed by such party), and neither party shall release or disclose such
Information to any other person, except to its auditors, attorneys, financial
advisors, bankers and other consultants and advisors, and on terms and
conditions substantially the same as the terms and conditions on which such
party releases its own Information, unless compelled to disclose by judicial or
administrative process or, as advised by its counsel, by other requirements of
law.
5.7 PROVISION OF CORPORATE RECORDS.
(a) Except as may otherwise be provided in any Other
Agreement, CFI shall arrange as soon as practicable following the
Distribution Date, to the extent not previously delivered, for the
transportation (at the Company's cost) to the Company of the Company's books
and records in its possession, except to the extent such items are already in
the possession of the Company. Such books and records shall be the property
of the Company, but shall be available to CFI for review and duplication
until CFI shall notify the Company in writing that such records are no longer
of use to CFI.
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(b) Except as otherwise provided in any Other Agreement, the
Company shall arrange as soon as practicable following the Distribution Date, to
the extent not previously delivered, for the transportation (at CFI's cost) to
CFI of CFI's and its Subsidiaries' books and records in its possession, except
to the extent such items are already in the possession of CFI or a Subsidiary of
CFI. Such books and records shall be the property of CFI, but shall be
available to the Company for review and duplication until the Company shall
notify CFI in writing that such records are no longer of use to the Company.
5.8 PRIVILEGED MATTERS. The Company and CFI recognize that legal and
other professional services that have been and will be provided prior to the
Distribution Date have been and will be rendered for the benefit of both CFI and
the Company and that both CFI and the Company should be deemed to be the client
for the purposes of asserting all privileges related thereto. No party may
waive any privilege which could be asserted under any applicable law, and in
connection with which the other party has a material interest, without the
consent of the other party, except to the extent reasonably required in
connection with any litigation with third parties.
ARTICLE VI
REPRESENTATIONS, WARRANTIES AND COVENANTS
The Company, for itself and on behalf of each other member of the
Company Group, makes the following representations and warranties to, and
covenants with, CFI, for its benefit and for the benefit of each other member
of the CFI Group, each and all of which shall survive the execution and
delivery of this Agreement and the Distribution Date.
6.1 FINANCIAL STATEMENTS. The consolidated balance sheets of the
Company and its Subsidiaries and the consolidated statements of earnings and
consolidated statement of cash flows for the Company and its Subsidiaries, each
in the form included in the Information Statement, have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be
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indicated in the notes thereto) and fairly present the consolidated financial
position of the Company and its Subsidiaries as of the dates indicated
therein and the results of operations and cash flows for the periods
indicated therein.
6.2 FORM 10 AND INFORMATION STATEMENT. The Form 10 and the
Information Statement each do not misstate any material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, provided, however, there shall be excluded therefrom any
information provided by CFI.
6.3 MARKS. None of CFI's existing trademarks, trade names and
service marks that are not also Marks ("CFI marks" as set forth in Schedule
6.3) infringe in any manner any of the Marks or otherwise interfere with the
Company's expected use of the Marks, and none of the Company nor any other
member of the Company Group shall, at any time, bring or join in any suit,
claim or other proceeding or action adverse to CFI or any other member of the
CFI Group relating to the use of the CFI marks.
ARTICLE VII
SHARED CLAIMS
7.1 ACKNOWLEDGMENT. Each party acknowledges that, from and after
the Distribution Date, there may be claims and proceedings against such party
and its Subsidiaries (other than workers' compensation claims which pertain
to any persons who remain employed by LJSC on the day after the Distribution
Date ("Excluded Claims") which shall remain the sole responsibility of LJSC)
that relate (in whole or in part) to activities alleged to have transpired
prior to the Distribution Date and with respect to which it would be fair and
appropriate to apportion liability therefor between the parties ("Shared
Claims").
7.2 NOTIFICATION. If any party shall receive notice or otherwise
learn of the assertion of any claim or the commencement of any proceeding which
such party believes may constitute a Shared Claim (including, without
limitation, any such claim or proceeding that names or identifies the other
party or any of its Subsidiaries
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as a responsible party), such party shall (i) immediately assume the defense
thereof and shall in all respects respond thereto in a timely manner and (ii)
promptly provide written notice thereof to the other party, setting forth the
particulars as to such claim or proceeding in reasonable detail; PROVIDED
that the failure of such party to give such notice shall not relieve the
other party of any obligation to accept liability unless it is actually
prejudiced by such failure and then only to the extent of such actual
prejudice.
7.3 COOPERATION. The parties shall cooperate with each other in the
defense or settlement of Shared Claims to the effect that (i) subject to the
provisions of Section 7.2, the party bearing the greater liability shall be
responsible for the control and administration of any Shared Claim and (ii) the
other party shall cooperate with such party with respect to such control and
administration.
7.4 LIABILITY. The parties shall seek to apportion liability between
them with respect to any Shared Claim, and in so doing shall take cognizance of
all relevant factors, including but not limited to, the time and duration of
any alleged activity giving rise thereto. If the parties are unable to agree
on an apportionment of liability within thirty days of receipt of
notification as provided in Section 7.2, they shall submit the matter for
resolution as provided in the ADR Agreement.
7.5 NON-SHARED LIABILITIES. Anything to the contrary contained in
this Article VII notwithstanding, claims or proceedings arising out of or
relating to LJSC, its employees and operations on or prior to the
Distribution Date (other than Excluded Claims) shall be allocated as
described below. The Company shall assume and indemnify CFI against all
Losses and Liabilities arising out of or related to personnel matters that
are caused by employees who are employed by LJSC immediately following the
Distribution Date. CFI shall assume and indemnify the Company against all
other Losses and Liabilities arising out of or related to LJSC on or prior to
the Distribution Date, including all other personnel matters. If employees
of both the Company and CFI cause any such Losses or Liabilities relating to
LJSC, then they shall be Shared Claims and dealt with as provided in this
Article VII.
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ARTICLE VIII
MISCELLANEOUS
8.1 COMPLETE AGREEMENT; CONSTRUCTION. This Agreement and the Other
Agreements, including any schedules and exhibits hereto or thereto, shall
constitute the entire agreement between the parties with respect to the subject
matter hereof and shall supersede all previous negotiations, commitments and
writings with respect to such subject matter.
8.2 EXPENSES. Except as otherwise set forth in this Agreement and
the Other Agreements, (i) CFI will pay all out-of-pocket costs and expenses
that are necessary to effect the Distribution and incurred prior to the
Distribution and (ii) each party shall bear its costs and expenses arising
after the Distribution in connection with the Distribution; provided,
however, CFI shall pay the reasonable moving and relocation costs of
separating employees of CFI and CFC in Portland into two buildings, excluding
design and architectural fees, phone and data connections infrastructure and
labor associated with the move, including any other capital improvements,
except that CFI shall pay for the costs of wheelchair ramp access, ADA required
upgrades and lobby expansion.
8.3 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without regard to the
principles of conflicts of laws thereof.
8.4 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be delivered by hand,
mailed by registered or certified mail (return receipt requested), or sent by
cable, telegram, telecopy (confirmed by regular, first-class mail), to the
parties at the following addresses (or at such other addresses for a party as
shall be specified by like notice) and shall be deemed given on the date on
which such notice is received:
if to CFI:
Consolidated Freightways, Inc.
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3240 Hillview Avenue
Palo Alto, California 94304
Attn: General Counsel
if to the Company:
Consolidated Freightways Corporation
175 Linfield Drive
Menlo Park, California 94025
Attn: General Counsel
8.5 AMENDMENTS AND WAIVERS. This Agreement may not be altered or
amended, nor may rights hereunder be waived, except by an instrument in writing
executed by the party or parties to be charged with such amendment or waiver.
No waiver of any term, provision or condition of or failure to exercise or delay
in exercising any rights or remedies under this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, provision, condition, right or remedy or as a waiver of
any other term, provision or condition of this Agreement.
8.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.
8.7 SUCCESSORS AND ASSIGNS. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties and their
respective successors and permitted assigns.
8.8 TERMINATION. This Agreement may be terminated and the
Distribution abandoned at any time prior to the Distribution Date by and in the
sole discretion of the CFI Board without the approval of the Company or the
shareholders of CFI. In the event of such termination, no party shall have any
liability of any kind to any other party on account of such termination except
that expenses incurred in connection with the transactions contemplated hereby
shall be paid as provided in Section 8.2.
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8.9 NO THIRD-PARTY BENEFICIARIES. Except for the provisions of
Article IV relating to Indemnitees, this Agreement is solely for the benefit of
the parties hereto and their respective Affiliates and should not be deemed to
confer upon third parties (including any employee of the CFI Group or the
Company Group) any remedy, claim, reimbursement, cause of action or other right
other than those existing without reference to this Agreement.
8.10 TITLES AND HEADINGS. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.
8.11 LEGAL ENFORCEABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. Without prejudice to
any rights or remedies otherwise available to any party hereto, each party
hereto acknowledges that damages would be an inadequate remedy for any breach of
the provisions of this Agreement and agrees that the obligations of the parties
hereunder shall be specifically enforceable.
8.12 FURTHER ASSURANCES. In addition to the actions specifically
provided for elsewhere in this Agreement, each of the parties hereto will use
its reasonable efforts to (i) execute and deliver such further documents and
take such other actions as any other party may reasonably request in order to
effectuate the purposes of this Agreement and to carry out the terms hereof, and
(ii) take, or cause to be taken, all actions, and to do, or cause to be done,
all things, reasonably necessary, proper or advisable under applicable laws,
regulations and agreements or otherwise to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
using its reasonable efforts to obtain any consents and approvals and make any
filings and applications necessary or desirable in order to consummate the
transactions contemplated by this Agreement.
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8.13 NO SOLICITATION OF EMPLOYEES. For a period of three years
after the Distribution Date, neither CFI nor the Company, nor any of their
Subsidiaries, will directly solicit the employment of any employee of the
other company, or any of its Subsidiaries, without the prior written consent
of such other company; PROVIDED, HOWEVER, that if the Company shall cease to
receive services provided by CNF Service Company, Inc. pursuant to the
Services Agreement after the Distribution Date, it may solicit employees
(employed either at the time of notification by the Company of the
termination of services, or in the preceding six months) from the groups that
had been providing such services.
8.14 DISPUTE RESOLUTION. Any dispute between the parties concerning
the performance of this Agreement shall be resolved in accordance with the
provisions of the ADR Agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
CONSOLIDATED FREIGHTWAYS, INC.
on behalf of itself and its
wholly owned subsidiaries
By:
------------------------------
Its:
CONSOLIDATED FREIGHTWAYS CORPORATION
on behalf of itself and its
wholly owned subsidiaries
By:
------------------------------
Its:
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