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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event
reported): May 27, 1997
CNF TRANSPORTATION INC.
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(Exact name of registrant as specified in its charter)
Delaware 1-5046 94-1444798
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3240 Hillview Avenue, Palo Alto, California 94304
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(Address of principal executive offices) (Zip Code)
(415) 494-2900
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(Registrant's telephone number, including area code)
Consolidated Freightways, Inc.
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(Former name or former address, if changed since last report)
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Item 5. Other Events.
On May 27, 1997, CNF Transportation Inc. (the "Company") announced a
proposed public offering of 2,000,000 trust convertible securities, Series A
("TECONS"). The TECONS will be issued by CNF Trust I, a newly formed Delaware
business trust, and will be convertible at the option of the holder into common
stock of the Company.
The Company is filing this Current Report on Form 8-K to make generally
available certain information set forth in the prospectus supplement relating to
the TECONS and to avail itself of the safe harbor provided in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to any written or oral "forward-looking statements" (within the meaning
of such Sections 27A and 21E) that may be made by the Company or its officers,
directors or employees.
Any such forward-looking statements are subject to a number of risks and
uncertainties and should not be relied upon as predictions of future events.
Certain such forward-looking statements can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will," "should,"
"seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or
the negative thereof or other variations thereof or comparable terminology, or
by discussions of strategy, plans or intentions. Such forward-looking statements
are necessarily dependent on assumptions, data or methods that may be incorrect
or imprecise and such statements may be incapable of being realized. In that
regard, the following factors, among others and in addition to the matters
discussed below, could cause actual results and other matters to differ
materially from those in such forward-looking statements: changes in general
business and economic conditions; increasing domestic and international
competition and pricing pressure; changes in fuel prices; uncertainty regarding
the Company's new contract with the United States Postal Service; labor matters,
including changes in labor costs, renegotiation of labor contracts and the risk
of work stoppages or strikes; changes in governmental regulations; environmental
and tax matters, including the aviation excise tax and aircraft maintenance tax
matters discussed herein; and matters relating to the recently completed spin-
off of Consolidated Freightways Corporation. As a result, no assurance can be
given as to future results of operations or financial condition.
The information set forth below should be read in conjunction with the
other information set forth and incorporated by reference in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and
other documents subsequently filed by the Company pursuant to Sections 13 or
15(d) of the Exchange Act.
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RISKS RELATING TO NEW POSTAL CONTRACT
After a competitive bidding process, on April 23, 1997, the United States
Postal Service (the "USPS") awarded Emery Worldwide Airlines, Inc. ("EWA"), a
subsidiary of the Company, a new contract for the sortation and transportation
of Priority Mail (a second-day delivery service) in portions of 13 states in the
eastern United States. The Company is subject to a number of risks and
uncertainties relating to the new contract between EWA and the USPS. Among other
things, the contract requires that the Company lease or acquire, improve, equip
and fully staff ten new Priority Mail processing centers ("PMPCs"), and further
requires that five of the PMPCs be operational and performing in accordance with
specified standards by late October 1997, and that all ten PMPCs be operational
and performing in accordance with specified standards by late February 1998. The
contract provides for the Company to pay liquidated damages if it does not meet
these deadlines, but also provides for bonuses to be paid to the Company if the
PMPCs become operational by required dates. The contract also contains a number
of specific service standards that the Company is required to meet. In
particular, the contract specifies a benchmark of 96.5% on-time and accurate
handling by the Company and provides for financial disincentives, which could be
substantial, if the Company fails to meet that standard.
Establishing the new Priority Mail network will place considerable demands
upon the Company, particularly as regards the deadlines by which the PMPCs must
be operational and performing in accordance with specified standards. Among
other things, the Company will need to locate, lease or acquire, and improve
buildings to house the PMPCs; acquire, install and successfully operate mail
sortation and other equipment; hire and train approximately 1,400 additional
full-time employees; and integrate the operations of the new network with its
existing airline and trucking transportation networks. Although the Company
believes that it will be able to operate in accordance with the terms of the new
contract, there can be no assurance that it will be able to do so or that
capital expenditures and other costs associated with the contract will not
exceed anticipated amounts.
The USPS has indicated that the Company could receive revenues of
approximately $1.7 billion over the initial 58-month term of the contract.
However, this amount is an estimate and is subject to a number of assumptions
and uncertainties, and there can be no assurance that the revenues actually
realized by the Company under the contract will not be substantially less than
this amount. Among other things, this estimate is based on assumed volumes of
Priority Mail to be handled by the Company and a projected growth rate for that
volume over the life of the contract and also assumes that the Company meets the
performance standards established by the contract. There can be no assurance
that the Company will meet these performance standards or that those volumes
will actually be achieved. In that regard, the contract does not specifically
set forth a minimum volume of Priority Mail to be handled by the Company.
The contract provides that EWA is to receive a fixed price per piece of
Priority Mail, subject to adjustments based on volume and percentage of on-time
and accurate handling and for increases in certain wage costs, and also provides
for EWA to be reimbursed for fuel costs. In light of this largely fixed price
arrangement, the effect of this contract on the Company's results of operations
will depend in part upon the Company's ability to manage and control its costs
of providing the services called for by the contract. Although the Company
believes that the contract provides opportunities to realize certain operating
efficiencies, failure by the Company to effectively manage its cost of
performing under the contract could have a material adverse effect on the
Company.
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In addition, the award and terms of the new contract with the USPS may be
subject to challenge by labor unions and competitors of the Company and the
USPS. Among other things, it is possible that labor unions could initiate legal
or other proceedings seeking to challenge, modify or void the contract. Such
proceedings, if successful, could require material adverse changes in the terms
of the contract or could lead the USPS, in certain circumstances, to terminate
the contract (or certain portions thereof) under the provisions described below.
In that regard, the USPS has advised the Company that both the American Postal
Workers Union and Mail Handlers Union have filed grievances challenging the
contract. In addition, competitors of the Company might initiate legal or other
proceedings seeking to invalidate the new contract on the grounds that, among
other things, it was improperly awarded. In that regard, a consulting company
has filed an agency level protest of the contract with the contracting officer
of the USPS. While the Company believes that, in the event of a termination of
the new postal contract, the Company has the right, in certain cases, to recoup
certain expenditures made in connection with the contract, to the extent that
any of the foregoing proceedings were successful, they could have a material
adverse effect on the Company.
The contract may be terminated by the USPS for failure by EWA to perform
its obligations thereunder and, as is common with government contracts
generally, it may also be terminated by the USPS "for convenience" (i.e.,
without cause), although the USPS may be required, following termination for
convenience, to reimburse the Company for certain expenditures associated with
the contract. While the Company believes that, in certain such cases, the new
contract provides it with the right to recoup certain expenditures made
in connection with the contract, any termination of the contract could have a
material adverse effect on the Company.
RISKS RELATING TO SPIN-OFF OF CFC
On December 2, 1996, the Company completed the spin-off (the "Spin-Off") to
its shareholders of CF MotorFreight, the Company's former long-haul,
less-than-truckload ("LTL") motor carrier. The spun-off businesses are currently
operating under the name of Consolidated Freightways Corporation ("CFC").
The Company is or may be subject to substantial liabilities with respect to
certain matters relating to CFC's business and operations, including, without
limitation, guarantees of certain indebtedness of CFC and liabilities for
employment-related and environmental matters. Although CFC is, in general,
either the primary obligor or jointly and severally liable with the Company
with respect to these matters, a failure to pay or other default by CFC with
respect to the obligations as to which the Company is or may be, or may be
perceived to be, liable, whether because of CFC's bankruptcy or insolvency or
otherwise, could lead to substantial claims against the Company. As a result,
any failure to pay or other default by CFC with respect to those obligations
could have a material adverse effect on the Company. Moreover, the transfer of
certain assets from CFC to the Company in connection with the Spin-off may be
subject to review under applicable fraudulent transfer laws in the event of the
bankruptcy or other financial difficulty of CFC. Under those laws, a court
could, under certain circumstances, direct the return of the transferred assets
to CFC or a fund for the benefit of its creditors.
CERTAIN TAX MATTERS RELATING TO EMERY
The Internal Revenue Service (the "IRS") has proposed adjustments that
would require that Emery Air Freight Corporation ("EAFC"), a subsidiary of the
Company, pay substantial additional aviation excise taxes for the period from
January 1, 1990 through September 30, 1995. The Company has filed protests
contesting these proposed adjustments and is engaged in discussions with the
administrative conference division (Appeals Office) of the IRS.
The Company believes that there is legal authority to support the manner in
which it has calculated and paid the aviation excise taxes and, accordingly,
the Company intends to continue to vigorously challenge the proposed
adjustments. Nevertheless, the Company is unable to predict the ultimate
outcome of this matter. As a result, there can be no assurance that the Company
will not have to pay a substantial amount of additional aviation taxes for the
1990 through 1995 tax period. In addition, it is possible that the IRS may seek
to increase the amount of the airline excise tax payable by EAFC for periods
subsequent to September 30, 1995. As a result, there can be no assurance that
this matter will not have a material adverse effect on the Company.
In addition, the Company anticipates that the IRS will seek a substantial
proposed adjustment for tax years 1987 through 1990 based on the IRS' position
that certain aircraft maintenance costs should have been capitalized rather
than expensed for federal income tax purposes. The Company believes that its
practice of expensing these types of maintenance costs is consistent with
industry practice. However, if this adjustment were to be proposed by the IRS
and the issue were to be determined adversely to the Company, it could require
the Company to pay substantial additional tax. The Company is unable to predict
the ultimate outcome of this matter and intends to vigorously contest any such
proposed adjustment. There can be no assurance, however, that this matter will
not have a material adverse effect on the Company.
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COMPETITION
The trucking and air freight industries are intensely competitive and some
of Con-Way's and Emery's competitors may have greater financial and other
resources than the Company. (As used herein, all references to "Emery" and "Con-
Way" refer to the Company's Emery Worldwide and Con-Way Transportation Services
business segments.) Principal competitors of Con-Way include both national LTL
companies (some of which have continued to extend into regional markets and to
acquire and combine formerly independent regional carriers into inter-regional
groups) and regional companies. Principal competitors of Emery include other
integrated air freight carriers, air freight forwarders and international
airlines and, to a lesser extent, trucking companies, passenger and cargo air
carriers and others. Competition in the trucking and air freight industries is
based on, among other things, freight rates, quality of service, reliability,
transit times and scope of operations. Intense competition in the trucking
industry, coupled with industry over-capacity, has resulted in aggressive price
discounting, narrow margins and a significant number of business failures. There
can be no assurance that the Company will be successful in meeting the
competitive demands of the industry.
Menlo Logistics, Inc. ("Menlo"), the Company's contract logistics
subsidiary, operates in a relatively new business area and has a limited number
of major competitors. Nonetheless, competition for the provision of logistics
services is intense.
LABOR MATTERS
The pilots at Emery's leased air cargo facility (the "Hub") at the Dayton
International Airport in Ohio are currently considering whether to unionize;
the Company expects that they will vote on this matter in the near future.
In addition, labor unions have, from time to time, sought to unionize employees
at various Company locations. There can be no assurance that efforts to
unionize Company employees will not be successful, that the Company will not
become subject to additional work rules imposed by agreements with labor unions,
or that work stoppages or other labor disturbances will not occur in the
future, any of which could have a material adverse effect on the Company.
Similarly, there can be no assurance that union opposition to the Company's new
contract with the USPS will not have a material adverse effect on the Company.
See "--Risks Relating to New Postal Contract."
EFFECT OF ECONOMIC AND MARKET CONDITIONS
Interest rate fluctuations, increases in fuel prices, fuel shortages,
economic recession, changes in currency exchange rates, and changes in
customers' business cycles and business practices are among the factors over
which the Company has no control, but which may adversely affect its financial
condition or results of operations. For instance, prices for both diesel and jet
fuel increased significantly during 1996. The operations of the Company are
primarily conducted in the United States but, to an increasing extent, are
conducted in major foreign countries. As a result, the Company is subject to the
foregoing factors both domestically and, to an increasing extent,
internationally. See "Business" in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (the "1996 10-K").
CYCLICALITY AND SEASONALITY
The trucking and air freight industries are affected directly by general
economic conditions and seasonal fluctuations, both of which affect the amount
of freight to be transported. Freight shipments, operating costs and other
results of operations can also be affected adversely by inclement weather
conditions. The months of September and October of each year usually have the
highest business levels while the months of January and February of each year
usually have the lowest business levels.
GOVERNMENT REGULATIONS
The Company's business is subject to extensive regulation by various
federal, state and foreign governmental entities, and there can be no assurance
that changes in applicable laws and regulations, or costs of complying with
current or future laws and regulations, will not have a material adverse effect
on the Company. For example, deregulation of the trucking industry allows easier
access to the industry by new trucking companies, and has removed many
restrictions on expansion of services by existing carriers and increased price
competition. These and other factors have contributed to a consolidation in the
trucking industry, as a number of trucking companies have either merged or gone
out of business. Likewise, airlines such as EWA are subject to, among other
things, maintenance, operating and other safety-related regulations by the
Federal Aviation Administration (the "FAA"), including Airworthiness Directives
promulgated by the FAA which require airlines such as EWA to make modifications
to aircraft. In that regard, EWA expects that it will be required to make
expenditures to reinforce the floors and modify the doors of up to 17 of its
Boeing 727 aircraft to comply with Airworthiness Directives. Likewise, the
relative age of EWA's aircraft fleet may increase the likelihood that the
Company will be required to make expenditures in order for its aircraft to
comply with future government regulations. See "Business" in the 1996 10-K.
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During recent years, operations at several airports have been subject to
restrictions or curfews on arrivals or departures during certain night-time
hours designed to reduce or eliminate noise for surrounding residential areas.
None of these restrictions has materially affected Emery's operations. However,
if such restrictions were to be imposed with respect to the airports at which
Emery's activities are centered (particularly Emery's major Hub at the Dayton
International Airport), and no alternative airports were available to serve the
affected areas, there could be a material adverse effect on the Company. Under
applicable law, the FAA is authorized to establish aircraft noise standards and
the administrator of the Environmental Protection Agency is authorized to issue
regulations setting forth standards for aircraft emissions. The Company
believes that its present fleet of owned, leased and chartered aircraft is
operating in substantial compliance with currently applicable noise and
emission laws.
The Aviation Noise and Capacity Act of 1990 established a national aviation
noise policy. The FAA has promulgated regulations under this Act regarding the
phase-in requirements for compliance. This legislation and the related
regulations will require all of the Company's owned and leased aircraft eligible
for operation in the contiguous United States to either undergo modifications or
otherwise comply with Stage 3 noise restrictions in phases ending at year-end
1999. Although the ultimate cost of complying with these requirements cannot be
predicted with certainty, the Company will be required to make expenditures,
which could be substantial, to modify owned or leased aircraft in order to
comply with these requirements.
ENVIRONMENTAL MATTERS
The Company is subject to stringent laws and regulations that (i) govern
activities or operations that may have adverse environmental effects, such as
discharges to air and water, as well as handling and disposal practices for
solid and hazardous wastes, and (ii) impose liability for the costs of cleaning
up, and certain damages resulting from, sites of past spills, disposals or
other releases of hazardous materials. In particular, under applicable
environmental laws, the Company may be responsible for remediation of
environmental conditions and may be subject to associated liabilities
(including liabilities resulting from lawsuits brought by private litigants)
relating to its operations and properties. Environmental liabilities relating
to the Company's properties may be imposed regardless of whether the Company
leases or owns the properties in question and regardless of whether such
environmental conditions were created by the Company or by a prior owner or
tenant, and also may be imposed with respect to properties which the Company
may have owned or leased in the past.
The Company's operations involve the storage, handling and use of diesel
and jet fuel and other hazardous substances. In particular, the Company is
subject to stringent environmental laws and regulations dealing with underground
fuel storage tanks and the transportation of hazardous materials. The Company
has been designated as a potentially responsible party by the Environmental
Protection Agency with respect to the disposal of hazardous substances at
various sites, although the Company expects that its share of the clean-up costs
will not have a material adverse effect on the Company. In addition, the Company
expects that the costs of complying with existing and future environmental laws
and regulations will continue to increase. There can be no assurance that
matters relating to environmental conditions or compliance with environmental
laws will not have a material adverse effect on the Company.
CERTAIN ANTITAKEOVER PROVISIONS
The Company's Amended 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. In addition, the Company is
subject to Section 203 of the Delaware General Corporation Law, which limits the
ability of a publicly held Delaware corporation such as the Company from
engaging in a "business combination" with an "interested stockholder" for a
certain period of time. Moreover, the approval of holders of at least two-thirds
of the outstanding shares of the Company's Series B Cumulative Convertible
Preferred Stock (the "Series B Preferred Stock") is required, under certain
circumstances, for a consolidation or merger of the Company or the sale or other
transfer of certain assets of the Company. The foregoing provisions may deter
any potential unfriendly offers or other efforts to obtain control of the
Company and could deprive shareholders of opportunities to realize a premium on
shares of the Company's common stock ("Common Stock") held by them.
PROVISIONS OF CERTAIN INDEBTEDNESS
Holders of the Company's outstanding 9 1/8% Notes due 1999 and certain
restructured notes issued by the Company's Thrift and Stock Plan (the "TASP")
which are guaranteed by the Company have the right to require the Company to
repurchase such notes upon the occurrence of certain changes in control of the
Company or similar events coupled with certain declines in the credit rating on
the Company's long-
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term senior debt; the aggregate principal amount of the 9 1/8% notes due 1999
and the restructured TASP notes outstanding at March 31, 1997 was $117.7
million and $30.7 million, respectively. Holders of non-restructured notes
issued by the TASP with an outstanding principal amount of $113.1 million at
March 31, 1997 have the right to require that the Company repurchase such notes
if, among other things, both Moody's and Standard & Poor's have publicly rated
the Company's long-term senior debt at less than investment grade, unless,
within 45 days, the Company shall have obtained, through a guarantee, letter of
credit, other permitted credit enhancement or otherwise, a credit rating for
such notes of at least "A" from Moody's or Standard & Poor's (or another
nationally recognized rating agency selected by the holders of such notes) and
shall maintain a rating on such notes of "A" or better thereafter. The Company's
long-term senior debt is currently rated Baa3 by Moody's and BBB- by Standard &
Poor's, which are the minimum investment grade ratings from those agencies.
Holders of both the restructured and non-restructured TASP notes also have the
right to require the Company to repurchase the notes, in whole or in part, on
July 1, 1999. In addition, the Company's $350 million bank credit facility,
which is guaranteed by the Company's material subsidiaries, permits the lenders
to require immediate repayment of all borrowings thereunder upon a change of
control or similar event with respect to the Company. The occurrence of any
event or condition requiring the Company to repurchase or repay any such notes
or borrowings could have a material adverse effect on the Company. Moreover,
there can be no assurance that the Company would have sufficient funds to
repurchase or repay such notes or borrowings in the event that it were required
to do so or that it would be able to arrange financing for that purpose.
Certain of the Company's debt instruments contain restrictive covenants
that could limit the amount of dividends payable by the Company. In particular,
under the terms of the restructured notes issued by the TASP, the Company is
restricted from paying dividends in an aggregate amount in excess of $10 million
plus one-half of its cumulative adjusted consolidated net income from November
3, 1992. As of March 31, 1997, the Company would have been permitted to pay
approximately $112.2 million of dividends on its Common Stock under the terms
of the restructured TASP notes.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Common Stock is subject to fluctuations in
response to a variety of factors, including quarterly variations in operating
results, conditions in the trucking and air freight industries generally,
comments or recommendations issued by analysts who follow the Company, its
competitors or the industry segments in which it operates, and general economic
and market conditions. In addition, the stock market has from time to time
experienced extreme price and volume volatility. These fluctuations may be
unrelated to the operating performance of particular companies whose shares are
traded. Market fluctuations may adversely affect the market price of the Common
Stock. Accordingly, there can be no assurance that the market price of the
Common Stock will not be subject to substantial fluctuations in the future.
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MANAGEMENT
The directors and principal operating management of the Company are set forth
below:
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<TABLE>
<CAPTION>
NAME AGE TITLE
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<C> <C> <S>
Donald E. Moffitt........ 65 Director, Chairman of the Board, President and
Chief Executive Officer
Robert Alpert............ 65 Director
Earl F. Cheit............ 70 Director
Richard A. Clarke........ 67 Director
Margaret G. Gill......... 57 Director
Robert Jaunich II........ 57 Director
W. Keith Kennedy, Jr..... 53 Director
Richard B. Madden........ 68 Director
Michael J. Murray........ 52 Director
Robert D. Rogers......... 60 Director
William J. Schroeder..... 52 Director
Robert P. Wayman......... 51 Director
Gregory L. Quesnel....... 49 Executive Vice President and Chief Financial
Officer
David I. Beatson......... 49 Senior Vice President of the Company, President
and Chief Executive Officer of Emery Air
Freight Corporation
Robert T. Robertson...... 55 Senior Vice President of the Company, President
and Chief Executive Officer of Con-Way
Transportation Services, Inc.
Eberhard G. H. 53 Senior Vice President, General Counsel and
Schmoller............... Secretary
John H. Williford........ 40 President and Chief Executive Officer of Menlo
Logistics, Inc.
</TABLE>
Donald E. Moffitt, Chairman of the Board, President and Chief Executive
Officer of the Company, has advised the Company's Board of Directors that,
consistent with prior discussions, he intends to relinquish the office of
President during 1997 and to retire as Chief Executive Officer in 1998. The
Board of Directors has begun the process of selecting a successor to Mr.
Moffitt. It is anticipated that the successor to Mr. Moffitt will be named
President and, initially, Chief Operating Officer.
A registration statement relating to the TECONS has been filed with the
Securities and Exchange Commission. This Report on Form 8-K shall not constitute
an offer to sell or the solicitation of an offer to buy nor shall there be any
offer of the TECONS in any State in which such offer, solicitation or sale would
be unlawful prior to the registration or qualification under the securities laws
of any such state. Copies of the preliminary prospectus supplement relating to
the TECONS may be obtained by contacting Daniel Boncic, J.P. Morgan & Co., 60
Wall Street, New York, New York, 10260.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CNF Transportation Inc.
(Registrant)
Date: May 27, 1997
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Gregory L. Quesnel
Executive Vice President and
Chief Financial Officer
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