<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1996
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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:
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 NEW YORK STOCK EXCHANGE
SHARE
Securities to be registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
- --------------------------------------------------------------------------------
This Registration Statement consists of 101 sequentially numbered pages.
The Exhibit Index begins on sequentially numbered page II-3.
- --------------------------------------------------------------------------------
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<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>
, 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 , 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") and the Company has filed an
application to be listed on the NYSE.
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 SEPTEMBER 10, 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 , 1996, to holders of record of
CFI Common Stock at the close of business on , 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 , 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 Company
has filed an application to list the Common Stock on the New York Stock Exchange
(the "NYSE") under the symbol "CFW." See "The Distribution -- Listing and
Trading of the Common Stock."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE - 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 -, 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........................................................... 15
Relationship between CFI and the Company after the Distribution........ 23
Financing.............................................................. 27
Regulatory Approvals................................................... 27
Dividend Policy........................................................ 27
Pro Forma Capitalization............................................... 28
Pro Forma Consolidated Financial Statements............................ 29
Selected Historical Financial Data..................................... 35
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 37
Business............................................................... 42
Management............................................................. 49
Executive Compensation and Other Matters............................... 53
Summary Compensation Table............................................. 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
Annex A -- Opinion of Houlihan Lokey Howard & Zukin.............. A-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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<TABLE>
<S> <C>
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 the Company.
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 included in the package
containing this Information Statement. 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 , 1996, to participate
in the Odd-Lot Program. See "The Distribution --
Manner of Effecting the Distribution."
RECORD DATE............................ Close of business on , 1996.
DISTRIBUTION DATE...................... , 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 to holders of CFI Common
Stock on or about , 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..................... First Chicago Trust Company 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 or
the trading of CFI Common Stock for the period
generally between the Record Date and the
Distribution Date may call the Distribution Agent
at (800) 446-2617.
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
<PAGE>
<TABLE>
<S> <C>
private letter ruling from the Internal Revenue
Service ("IRS") in form and substance satisfactory
to the CFI Board or, in lieu of a private letter
ruling from the IRS, 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 requested 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
<PAGE>
<TABLE>
<S> <C>
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 $57 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. 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 Company has filed an
application to list the Common Stock on the NYSE
under the symbol "CFW." 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 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
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5
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<TABLE>
<S> <C>
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;
and (v) the Alternative Dispute Resolution
Agreement, providing for the resolution of disputes
arising between CFI and the Company. See
"Relationship Between CFI and the Company after the
Distribution."
</TABLE>
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, or costs of maintaining letters of credit and surety bonds in
connection with certain insurance programs. 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 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
<PAGE>
<TABLE>
<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) 4
Earnings (loss) per share (assuming 22,006,500
shares outstanding).............................. (1.22) (1.36)
BALANCE SHEET DATA (AS OF END OF PERIOD):
Current assets.................................... $ 440 $ 448 $ 419
Total assets...................................... 875 950 939
Long-term debt.................................... 15 15 15
Equity............................................ 223 279 274
<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
EBITDAR (e)....................................... $13,838 $ 72,005 $ 11,571 $ 64,900
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)
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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
EBITDAR (e)....................................... $ 71,372 $ 73,656 $ 168,961 $ 170,652 $ 190,190
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"). The Company estimates that losses in the
second quarter of 1994 resulting from the 1994 Strike were approximately $40
million.
(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" and "EBITDAR" mean, respectively, pretax income plus depreciation,
amortization and interest and pretax income plus depreciation, amortization,
interest and rents. EBITDA and EBITDAR 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 these measures of
performance are not calculated in accordance with generally accepted
accounting principles, they are widely used as a measure of a company's
operating performance because they assist 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
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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.
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.
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 to determine its optimal
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
9
<PAGE>
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."
OPINION OF FINANCIAL ADVISOR
In reaching a decision to undertake the Distribution, the CFI Board
considered, among other things, the advice of its financial advisor, Houlihan
Lokey Howard & Zukin ("Houlihan Lokey"). A summary of the opinion rendered by
Houlihan Lokey with respect to the Distribution is set forth below. Such opinion
assumes that the Distribution is consummated substantially as described in this
Information Statement.
In a written opinion to be dated [ ], 1996, Houlihan Lokey will
state that, based upon the considerations set forth therein and on other factors
it deemed relevant, it is of the opinion that, assuming the Distribution is
consummated as proposed: (i) with respect to each of the Company and CFI,
immediately after giving effect to the Distribution (a) the fair value of such
company's aggregate assets would exceed such company's total liabilities
(including contingent liabilities); (b) the present fair saleable value of such
company's aggregate assets would be greater than such company's debts as such
debts become absolute and mature; (c) such company would be able to pay its
debts and other liabilities (including contingent liabilities) as they mature;
and (d) the capital remaining in such company after the Distribution would not
be unreasonably small for the business in which such company is engaged, as
management has indicated it is now conducted and is proposed to be conducted
following consummation of the Distribution; and (ii) the excess of the value of
aggregate assets of CFI, before consummation of the Distribution, over the total
identified liabilities (including contingent liabilities) of CFI would equal or
exceed the value of the Distribution to shareholders plus the stated capital of
CFI. The full text of Houlihan Lokey's opinion is set forth in Annex A, and this
summary is qualified in its entirety by reference to the text of such opinion.
It is a condition to the consummation of the Distribution that Houlihan Lokey
deliver an updated opinion to the CFI Board, to be dated as of the Distribution
Date, in substantially the same form as the opinion set forth in Annex A.
In preparing its opinion, Houlihan Lokey relied on the accuracy and
completeness of all information supplied or otherwise made available to it by
CFI, and did not independently verify such information or undertake any physical
inspection or independent appraisal of the assets or liabilities of the Company
or CFI. Such opinion was based on business, economic, market and other
conditions existing on the date such opinion was rendered.
Houlihan Lokey's opinion is also based on, among other things, its review of
the agreements relating to the Distribution, historical and pro forma financial
information and certain business information relating to the Company and CFI,
including that contained in this Information Statement, as well as certain
financial forecasts and other data provided by CFI relating to the businesses
and prospects of the Company and CFI. Houlihan Lokey also conducted discussions
with CFI's management with respect to the businesses and prospects of the
Company and CFI and conducted such financial studies, analyses and
investigations as it deemed appropriate in rendering its opinion.
In connection with the Distribution, CFI will pay Houlihan Lokey a fee of
$100,000 upon delivery of its opinion, plus reasonable out-of-pocket expenses.
DISTRIBUTION AGENT
The Distribution Agent is First Chicago Trust Company of New York,
Shareholder Relations, P.O. Box 2500, Jersey City, NJ 07303, telephone (800)
446-2617.
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.
10
<PAGE>
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 , 1996, certificates
representing Common Stock will be mailed by the Distribution Agent to holders of
record of CFI Common Stock entitled thereto on the basis of one share of Common
Stock for every two shares of CFI Common Stock held on the Record Date. 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 as soon as
practicable after the expiration of the period during which the Distribution
Agent is accepting authorization forms and in a manner designed to avoid any
undue impact on the market for the Common Stock. Brokerage fees and commissions
incurred by the Distribution Agent will be paid by the Company. 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 included in the package
containing this Information Statement. 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 , 1996, 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 ON OR ABOUT ,
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
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<PAGE>
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 requested a private letter ruling from the IRS 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. Assuming that the Distribution so qualifies, 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 gain or loss to the extent of the
difference between the holder's basis allocable 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
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 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.
In the event that the foregoing ruling has not been received prior to the
Distribution Date or for any other reason, the CFI Board may, in its sole
discretion, elect to proceed with the Distribution without such ruling. In that
case, however, the CFI Board will not proceed with the Distribution unless it
has received an opinion of Morrison & Foerster LLP, its special tax counsel, to
the effect that the Distribution would qualify as a tax-free distribution for
Federal income tax purposes and to the further effect set forth in clauses (1)
through (4) above. Any such ruling, if obtained, or such opinion of
12
<PAGE>
counsel, will be based upon certain factual representations and assumptions and,
in the case of any such opinion, on certain other information, data
documentation and other materials deemed necessary by legal counsel. In
addition, opinions of counsel are not binding on either the IRS or the courts.
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."
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 Company has filed an application to list the Common Stock on the NYSE.
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 September 10, 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, 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 Section 4(2) thereof or 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.
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<PAGE>
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 investment grade ratings; (iii) the establishment of a
separate credit facility for CFCD; (iv) the receipt of an opinion of Houlihan
Lokey; (v) the receipt of certain third-party consents relating to certain
contracts, licenses and other agreements; (vi) 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; (vii) the receipt of a
letter from the Commission confirming that it will take no action with respect
to certain matters relating to the Distribution; (viii) the Registration
Statement under the Exchange Act filed by the Company with the Commission having
become effective and no stop order being in effect; (ix) 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; (x) approval for listing of the Common Stock on the NYSE; and
(xi) 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), (vi),
(vii), (viii), and (xi) 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.
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<PAGE>
RISK FACTORS
Shareholders of CFI should be aware that the Distribution and ownership of
the Common Stock involves 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 or the
costs of maintaining letters of credit or surety bonds required in connection
with certain insurance programs and, to the extent that the Company incurs
indebtedness or 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. 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 for Financial Condition
and Results of Operations."
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.
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<PAGE>
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 substantially the same
cost to the Company. 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 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 cost of transferring
proprietary software of CFI to the Company and the cost of assigning rights to
third party software to the Company, or obtaining consents allowing the Company
to receive the benefit of such software as a recipient of services, are
currently unknown, and there can be no assurance that such assignments or
consents will be obtained. In addition, 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."
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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.
Likewise, although the Company anticipates that CFCD will enter into a $225
million revolving credit facility prior to the Distribution (see "Financing"),
the availability of borrowings 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 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 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. 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, the Company anticipates that, as of October 1, 1996, CFCD will be
required to obtain letters of credit and surety bonds in an aggregate 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 be required to obtain 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 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 amount of indebtedness, letter
of credit and surety bond obligations which CFCD may incur in the future could
have important consequences, including the following: (i) CFCD's (and the
Company's) ability to obtain additional financing may be limited, (ii) CFCD will
be required to use cash to pay debt service and related fees, thereby reducing
funds available for operations and other purposes, and (iii) the anticipated
revolving credit facility will contain financial and other covenants which will
limit the
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Company's operating and financing flexibility. In addition, failure by the
Company to pay its indebtedness when due or to comply with covenants therein
could allow the holders of such indebtedness 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 or
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 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, 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. 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
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. As a result, the historical combined 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 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."
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CERTAIN TAX CONSIDERATIONS
CFI will either receive a private letter ruling from the IRS or an opinion
of special tax counsel, to the effect that, among other things, the Distribution
will generally qualify as a tax-free distribution for Federal income tax
purposes. Such ruling or opinion will be 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. In addition,
an opinion of counsel is not binding on the IRS or a court.
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. 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 possible 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 before the Distribution 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 Company has filed an application to list the Common Stock on the
NYSE, there can be no assurance that an
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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."
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 divided 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
operating results.
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 $57 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 transferor 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.
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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.
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 condition.
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
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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 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 prior to
October 1, 1996, CFI will continue to administer these claims. CFCD will, as of
October 1, 1996, 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 to secure CFCD's
obligations under such Agreement. As of October 1, 1996, CFCD will seek to
establish 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 will be
required to secure its obligations through letters of credit and surety bonds.
The Company currently anticipates that, as of October 1, 1996, CFCD will be
required to obtain letters of credit and surety bonds in an aggregate 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 be required to obtain 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 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
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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.
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, and, if so, that it will be able to maintain its current pricing
structure. Moreover, Menlo may have an incentive to transfer business to Conway
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.
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"). 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 in their entirety 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 pay all liabilities, costs
and expenses reflected on the balance sheet of CFI or arising out of CFI's
pre-Distribution business and the Company will pay all liabilities, costs and
expenses reflected on the balance sheet 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 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, unless otherwise provided in the Distribution
Agreement.
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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 the Company 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 cost of transferring proprietary software of CFI to the Company
and the cost of assigning rights to third party software to the Company, or
obtaining consents allowing the Company to receive the benefit of such software
as a recipient of services, is currently unknown and there can be no assurance
that such assignments or consents will be obtained. See "Risk Factors -- New
Stand-Alone Company; Lack of Prior Independent Operating History." In addition,
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
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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 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 computer
and networking 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
25
<PAGE>
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 options 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 his or her CFI-CFC Options to purchase CFI
Common Stock. After the 90 Day Period such options will expire.
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 and that CFI will assume responsibility for all
severance liabilities, if any, with respect to the Company employees in respect
of severance pay or similar liabilities arising out of and occurring prior to or
simultaneously with the Distribution.
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. 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
26
<PAGE>
respect to CFI's insurance program for workers' compensation and public
liability claims. It also provides that CFCD will provide CFI with security for
the performance of its obligations in an original amount of approximately $120
million (consisting of $30 million in letters of credit and approximately $90
million in real property), subject to periodic adjustment.
FINANCING
The Company expects CFCD to enter into a $225 million revolving credit
agreement provided by a group of banks that will be secured by CFCD's accounts
receivable and certain equipment. The agreement will allow for borrowings to
support working capital and capital expenditures, and will provide for the
issuance of letters of credit to support insurance programs and other needs. The
sum of borrowings and letters of credit will be limited to a borrowing base
calculated from the eligible accounts receivable and the value of the pledged
equipment.
Such agreement will contain customary events of default, including the
failure of the Company to comply with financial covenants. Upon occurrence of
events 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. The financial covenants
are expected to include restrictions on minimum tangible net worth, maximum
leverage, minimum fixed charge or debt service coverage, and maximum capital
expenditures.
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.
27
<PAGE>
PRO FORMA CAPITALIZATION
The following unaudited table sets forth the short-term debt and
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, 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
Industrial Development Revenue Bonds................................ $ 15,100 $ -- $ 15,100
---------- ---------- ---------
TOTAL LONG-TERM DEBT.................................................. 15,100 -- 15,100
---------- ---------- ---------
Shareholders' equity
CFI investment and advances......................................... 279,465 (16,002)(a)
(37,420)(b)
(3,355)(c)
(222,688)(d) --
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 (e).................... 220(d) 220
Additional paid-in capital.......................................... -- 222,468(d) 222,468
---------- ---------- ---------
Total Shareholders' equity........................................ 279,465 (56,777) 222,688
---------- ---------- ---------
TOTAL CAPITALIZATION.................................................. $ 294,565 $ (56,777) $ 237,788
---------- ---------- ---------
---------- ---------- ---------
Long-term debt as % of total capitalization........................... 5% 6%
---------- ---------
---------- ---------
</TABLE>
- ------------------------------
(a) Represents the transfers of certain assets 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) In connection with the transfer of certain real properties from CFCD and
LJSC to a subsidiary of CFI, the transfers will result in recognition of
taxable gain and a current tax payable by the Company.
(d) 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.
(e) 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.
28
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
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 financial data is presented for
informational purposes only and does not purport to be indicative of the results
that would have occurred had the Distribution occurred on those respective
dates, or which may be attained in the future.
29
<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 (24,520)(a) 430,334
(38,910)(b)
Other assets.......................................................... 8,993 (4,023)(a) 4,970
---------- ----------- ---------
TOTAL ASSETS.......................................................... $ 950,303 $(75,012) $ 875,291
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
30
<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 $(10,701)(a) $ 83,200
Accrued liabilities................................................. 207,382 (9,125)(a) 201,612
3,355(c)
Accrued claims costs................................................ 88,146 (82)(a) 88,064
---------- ----------- ---------
Total current liabilities....................................... 389,429 (16,553) 372,876
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 (18,235) 652,603
---------- ----------- ---------
Shareholders' equity
CFI investment and advances......................................... 279,465 (16,002)(a) --
(37,420)(b)
(3,355)(c)
(222,688)(d)
Common stock and paid-in capital.................................... -- 222,688(d) 222,688
---------- ----------- ---------
Total shareholders' equity...................................... 279,465 (56,777) 222,688
---------- ----------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 950,303 $(75,012) $ 875,291
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
31
<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(f) 927,493
Selling and administrative expenses................................. 112,974(e) -- 112,974
Depreciation........................................................ 31,219 (677)(f) 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 (i)................................................ (435) -- (435)
Miscellaneous, net.................................................. (2,352) (561)(g) (85)
2,828(h)
---------- ----------- ----------
(2,616) 2,267 (349)
---------- ----------- ----------
Loss before income tax benefits....................................... (40,840) 2,023 (38,817)
Income tax benefits................................................... (12,772) 789(j) (11,983)
---------- ----------- ----------
NET LOSS.............................................................. $ (28,068) $1,234 $ (26,834)
---------- ----------- ----------
---------- ----------- ----------
Loss per share (assuming 22,006,500 shares outstanding as of June
30, 1996).......................................................... $ (1.22)
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
32
<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(f) 1,873,066
Selling and administrative expenses................................. 214,535(e) -- 214,535
Depreciation........................................................ 63,556 (1,354)(f) 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 (i)................................................ (918) -- (918)
Miscellaneous, net.................................................. (850) (1,096)(g) (217)
1,729(h)
---------- ----------- ----------
(1,012) 633 (379)
---------- ----------- ----------
Loss before income tax benefits....................................... (43,798) 145 (43,653)
Income tax benefits................................................... (13,889) 57(j) (13,832)
---------- ----------- ----------
NET LOSS.............................................................. $ (29,909) $ 88 $ (29,821)
---------- ----------- ----------
---------- ----------- ----------
Loss per share (assuming 22,006,500 shares outstanding as of June
30, 1996).......................................................... $ (1.36)
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
33
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(a) Represents the transfer of certain assets and liabilities from LJSC 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) In connection with the transfer of certain real properties from CFCD and
LJSC to a subsidiary of CFI, the transfers will result in recognition of
taxable gain and a current tax payable by the Company.
(d) Represents the distribution of CFI's remaining investment in CFCD and LJSC
to shareholders of CFI pursuant to the Distribution.
(e) 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.
(f) 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.
(g) 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 commitment and facility fees on CFCD's anticipated
revolving credit facility. The letter of credit and surety bond 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.
(h) To eliminate the intercompany interest expense, net, charged on balances
payable to CFI.
(i) The historical financial statements do not include any allocation of
interest expense for CFI's consolidated borrowings. See "Risk Factors --
Operating Losses; -- Substantial Capital Requirements; Unavailability of
Future Financings from CFI; Need for Additional Capital."
(j) To adjust for the effects of the pro forma adjustments on income tax
expense using an estimated marginal income tax rate of 39%.
34
<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 or costs of maintaining letters of
credit and surety bonds in connection with certain insurance programs. 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) 4 (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
EBITDAR (e)................ $11,571 $64,900 $71,372 $73,656 $168,961 $170,652 $190,190
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>
- ------------------------------
(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"). The Company estimates that losses in the
second quarter of 1994 resulting from the 1994 Strike were approximately $40
million.
(b) Includes special charges of $17.3 million related to operation changes at
CFCD and the write-off of certain Canadian operating rights.
35
<PAGE>
(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" and "EBITDAR" mean, respectively, pretax income plus depreciation,
amortization and interest and pretax income plus depreciation, amortization,
interest and rents. EBITDA and EBITDAR 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 these measures of
performance are not calculated in accordance with generally accepted
accounting principles, they are widely used as a measure of a company's
operating performance because they assist 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.
36
<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 Company's
financial statements do not reflect any allocation of CFI's consolidated
borrowings or interest expense thereon or costs of maintaining letters of credit
and surety bonds in connection with insurance programs.
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.
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 2.4% and 0.5%, 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 decreased only slightly as the Company
continued to refine operations to reduce costs by increasing dock and city pick
up and delivery productivity during implementation of BAS. Also contributing to
the increased costs relative to revenue levels was an increase in fuel costs and
a 3.5% contractual labor wage and benefit increase beginning April 1, 1996.
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.
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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 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 $16.3 million from $3.5 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 $32.1 million from the $4.0 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.
MISCELLANEOUS EXPENSE, NET was $0.9 million for 1995, a change of $4.5
million from $3.6 million of miscellaneous income 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.
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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%.
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 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 decrease 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 decrease 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.
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.
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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. The
Company expects that borrowings under this credit facility will be secured by
its accounts receivables and certain equipment. 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. 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 $90 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 qualified to self-insure in various states
for claims incurred prior to October 1, 1996.
The Company anticipates that, as of October 1, 1996, CFCD will be required
to provide, or obtain on its behalf, letters of credit and surety bonds in an
aggregate 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
obtain 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
to
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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.
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.
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.
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BUSINESS
The Company is a newly formed holding company which will operate the
businesses conducted by CFCD. 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.
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 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
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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 available 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.
- 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
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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. 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.
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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.
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.
45
<PAGE>
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 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.
46
<PAGE>
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 the first six months of 1996. As of June 30, 1996, however, fuel
prices have decreased to $0.668 per gallon. As a result of the increase in fuel
costs, monthly operating costs increased by approximately $800,000 from 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.
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 under
the Comprehensive Environmental Response Compensation and Liability Act or other
Federal or state environmental statutes at several hazardous waste sites. 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 believes its obligations with respect to such sites would involve
immaterial monetary liability, although there can be no assurances in this
regard.
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.
47
<PAGE>
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.
48
<PAGE>
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
Patrick H. Blake 47 Executive Vice President -- Operations
David F. Morrison 43 Executive Vice President and Chief Financial Officer
Stephen D. Richards 53 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 and Chairman of the Board
G. Robert Evans (1) 65 Director
Paul B. Guenther (1) 56 Director
Robert W. Hatch (2) 57 Director
J. Frank Leach (2) 75 Director
John M. Lillie (1) 59 Director
James B. Malloy (2) 69 Director
Raymond F. O'Brien (2) 74 Director
</TABLE>
- ------------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
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.
STEPHEN D. RICHARDS -- 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,
49
<PAGE>
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 served as
a director of CFI from September 24, 1994 until , when he
resigned 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 served as a director of CFI from
September 24, 1990 until , when he resigned 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 PaineWebber Group Inc.
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
50
<PAGE>
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 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.
51
<PAGE>
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
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 $2,250 for each of Messrs. Curry,
Blake, Richards, Seeley and Wrightson.
53
<PAGE>
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth, as to the executive officers named in the
Summary Compensation Table above, (i) the number of shares of CFI Common Stock
subject to options granted to each executive officer during fiscal year 1995,
(ii) the percentage each such grant represents of the total number of options
granted to all CFI employees during fiscal 1995, and (iii) the expiration dates
of such options. All such options were granted under the CFI Stock Option Plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
- ------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OF GRANT DATE
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
GRANTED (#)(2) FISCAL YEAR ($/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 are exercisable in whole or in part on the first anniversary of
the grant date or earlier upon a change in control of CFI.
(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 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) Mr. Curry has 300,582 exercisable options valued at $2,474,416; 30,000
unexercisable options valued at $97,500; and 24,419 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 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 5,103 SARs valued at $67,775.
(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.
LONG-TERM INCENTIVE PLAN AWARDS TABLE
There were no Long-Term Incentive Plan awards made in 1995 to the executives
named in the Summary Compensation Table above.
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.
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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 subject to the actual terms 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.
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 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
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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). In the case of a LSAR granted to a participant,
however, who is subject to the reporting requirements of Section 16(a) of the
Exchange Act (a "Section 16 Individual"), such Section 16 Individual will only
be entitled to receive such amount if the LSAR has been outstanding for at least
six (6) months as of the date of the change in control.
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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.
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 Plan
Administrator has provided otherwise in an Award Agreement). 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 Unit grant
beyond the date the basic restrictions may lapse.
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 Board or the committee 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.
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AMENDMENT; TERMINATION
The 1996 Stock Plan will terminate five years after the Distribution Date
(the "Termination Date"). The Board or the committee 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 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 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
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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.)
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 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 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 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
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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.
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
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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.
<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%
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) 6.81%(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 721( )(5) * (4)(5)
Patrick H. Blake 631( )(5) * (4)(5)
Stephen D. Richards 329( )(5) * (4)(5)
Phillip W. Seeley 835( )(5) * (4)(5)
Robert E. Wrightson 754( )(5) * (4)(5)
William D. Walsh 20,000(5) * (5)
G. Robert Evans 1,000(5) * (5)
J. Frank Leach 2,000(5) * (5)
Raymond F. O'Brien 117,845( )(6) * (5)(6)
All directors and officers as a group (9 144,165( )(5) * (4)(5)
persons) (7)
</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. 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) Excludes Restricted Awards to be made in connection with the Distribution
pursuant to the 1996 Stock Plan, as follows: 320,000 shares of restricted
stock to be granted to Mr. Curry (300,000 in his capacity as Chief
Operating Officer and 20,000 in his capacity as a director); 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 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. See "Consolidated Freightways
Corporation 1996 Stock Incentive Plan."
(6) 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.
(7) 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 , 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 in its entirety by reference to the provisions of the 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 earnings of such
subsidiaries and on dividends and other payments 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 will provide that there shall be no
preemptive rights.
The transfer agent and registrar for the Common Stock will be First Chicago
Trust Company of New York.
64
<PAGE>
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 in its entirety 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 Bylaws divide 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."
65
<PAGE>
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, 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 90 days nor more than 120 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
66
<PAGE>
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. 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 stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock
67
<PAGE>
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, voting as a class, to amend certain
provisions of the Company Charter (including the provisions discussed above in
this section). The Company Charter and 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 NYSE 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.
68
<PAGE>
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 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 not 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 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 interest 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 applications
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.
69
<PAGE>
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 in their entirety 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 Company has filed an application to list the Common Stock on the NYSE.
Certain reports and other information concerning the Company can be inspected
and copied at the office of the NYSE at Room 401, 20 Broad Street, New York, New
York 10005.
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 a favorable letter ruling from the Internal Revenue Service and
to other 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. 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 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.
F-9
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND CERTAIN RELATIONSHIPS (CONTINUED)
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 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.
F-10
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
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 indebtedness and require CFI to maintain minimum
amounts of tangible net worth and fixed charge coverage.
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.
F-11
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
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>
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>
F-12
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
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.
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
F-13
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
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.
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>
F-14
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
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>
F-15
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
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
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
F-16
<PAGE>
CONSOLIDATED FREIGHTWAYS CORPORATION
OF DELAWARE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. CONTINGENCIES (CONTINUED)
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. 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 business,
financial condition 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.
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) 3,479
------------- -------------
NET INCOME (LOSS)................................................................... $ (28,068) $ 4,033
------------- -------------
------------- -------------
</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) 4,033
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) 18,513
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 Distribution Agreement between Consolidated Freightways, Inc. and Consolidated Freightways Corporation,
dated as of , 1996
*3.1 Amended and Restated Certificate of Incorporation of Consolidated Freightways Corporation
*3.2 Amended Bylaws of Consolidated Freightways Corporation
*4.1 Form of Common Stock Certificate
*10.1 Transition Services Agreement between Consolidated Freightways, Inc. and Consolidated Freightways
Corporation, dated as of , 1996
*10.2 Alternative Dispute Resolution Agreement between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation, dated as of , 1996
*10.3 Employee Benefit Matters Agreement between Consolidated Freightways, Inc. and Consolidated Freightways
Corporation, dated as of , 1996
*10.4 Tax Sharing Agreement between Consolidated Freightways, Inc. and Consolidated Freightways Corporation,
dated as of , 1996
*10.5 Reimbursement and Indemnification Agreement between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation of Delaware, dated as of , 1996
*10.6 Consolidated Freightways Corporation 1996 Stock Incentive Plan
*21.1 Subsidiaries of the Registrant
</TABLE>
- ------------------------
* to be filed by amendment.
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: ____September 10, 1996____
II-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
*2.1 Distribution Agreement between Consolidated Freightways, Inc. and Consolidated Freightways
Corporation, dated as of , 1996.....................................................
*3.1 Amended and Restated Certificate of Incorporation of Consolidated Freightways Corporation........
*3.2 Amended Bylaws of Consolidated Freightways Corporation...........................................
*4.1 Form of Common Stock Certificate.................................................................
*10.1 Transition Services Agreement between Consolidated Freightways, Inc. and Consolidated Freightways
Corporation, dated as of , 1996.....................................................
*10.2 Alternative Dispute Resolution Agreement between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation, dated as of , 1996.........................................
*10.3 Employee Benefit Matters Agreement between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation, dated as of , 1996.........................................
*10.4 Tax Sharing Agreement between Consolidated Freightways, Inc. and Consolidated Freightways
Corporation, dated as of , 1996.....................................................
*10.5 Reimbursement and Indemnification Agreement between Consolidated Freightways, Inc. and
Consolidated Freightways Corporation of Delaware, dated as of , 1996................
*10.6 Consolidated Freightways Corporation 1996 Stock Incentive Plan...................................
*21.1 Subsidiaries of the Registrant...................................................................
</TABLE>
II-3
