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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File Number 1-5046
CNF TRANSPORTATION INC.
Incorporated in the State of Delaware
I.R.S. Employer Identification No. 94-1444798
3240 Hillview Avenue, Palo Alto, California 94304
Telephone Number (650) 494-2900
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common Stock ($.625 par value) New York Stock Exchange
Pacific Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
9-1/8% Notes Due 1999
Medium-Term Notes, Series A
7.35% Notes Due 2005
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes___X___ No_______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Yes ___X__ No ___ ___
Aggregate market value of voting stock held by persons other than
Directors, Officers and those shareholders holding more than 5% of the
outstanding voting stock, based upon the closing price per share Composite
Tape on January 31, 1999: $1,763,505,000.
Number of shares of Common Stock outstanding
as of February 28, 1999: 48,108,715
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV
CNF Transportation Inc. 1998 Annual Report to Shareholders (only those
portions referenced herein are incorporated in this Form 10-K).
Part III
Proxy Statement dated March 22, 1999 (only those portions referenced herein
are incorporated in this Form 10-K).
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CNF TRANSPORTATION INC.
FORM 10-K
Year Ended December 31, 1998
___________________________________________________________________________
INDEX
Item Page
PART I
1. Business 3
2. Properties 13
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 15
PART II
5. Market for the Company's Common Stock and Related
Security Holder Matters 15
6. Selected Financial Data 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
8. Financial Statements and Supplementary Data 17
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
10. Directors and Executive Officers of the Company 17
11. Executive Compensation 18
12. Security Ownership of Certain Beneficial Owners
and Management 18
13. Certain Relationships and Related Transactions 18
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
SIGNATURES 20
INDEX TO FINANCIAL INFORMATION 23
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CNF TRANSPORTATION INC.
FORM 10-K
Year Ended December 31, 1998
___________________________________________________________________________
PART I
ITEM 1. BUSINESS
CNF Transportation Inc. and subsidiaries (collectively the Registrant or
the Company) is a leading provider of transportation and logistics
services. The continuing operations of the Company encompass four business
segments: Con-Way Transportation Services (Con-Way), Emery Worldwide
(Emery), Menlo Logistics (Menlo), and Other. Con-Way provides regional
one- and two-day LTL freight trucking and full-service truckload freight
delivery throughout the U.S., portions of Canada and Mexico, and expedited
and guaranteed ground transportation. In 1998, Con-Way introduced
integrated supply chain services to provide logistics solutions to targeted
customers. Emery provides expedited and deferred domestic and
international air cargo services, ocean delivery, and customs brokerage.
Domestically, Emery relies primarily on aircraft operated by Emery
Worldwide Airlines (EWA) and its ground fleet to provide its services.
Internationally, Emery acts principally as a freight forwarder. Menlo is a
full-service contract logistics company that specializes in developing and
managing complex distribution networks. The Other operations consist
primarily of the Priority Mail contract with the U.S. Postal Service
(USPS), and include Road Systems, a trailer manufacturer, and VantageParts,
a wholesale distributor of truck parts and supplies.
EWA provides nightly air delivery services for Emery and Express Mail (a
next-day delivery service) under a contract awarded by the USPS. The
operations of the Express Mail contract are reported in the Emery business
segment. In 1997, EWA was awarded a new contract for the sortation and
transportation of Priority Mail (a second-day delivery service) in the
eastern United States. The operations of the Priority Mail contract are
included in the Other business segment.
On December 2, 1996, the Company completed the tax-free distribution (the
Spin-off) to its shareholders of a new publicly traded company,
Consolidated Freightways Corporation (CFC), a long-haul LTL motor carrier
and its related businesses. The Registrant's shareholders received one
share of CFC stock for every two shares of the Registrant's stock that was
owned on November 15, 1996. Following the Spin-off, the Company changed
its name to CNF Transportation Inc.
CNF Transportation Inc., formerly Consolidated Freightways, Inc., was
incorporated in Delaware in 1958 as a successor to a business originally
established in 1929.
In the fourth quarter of 1998, the Company adopted SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS 131 changed
the method of disclosing segment information to the manner in which the
Company's chief operating decision maker organizes the components for
making operating decisions, assessing performance and allocating resources.
Further discussion of SFAS 131, and an
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analysis by operating segment of revenues, operating income,
depreciation and amortization and capital expenditures
for the years ended December 31, 1998, 1997 and 1996, and
identifiable assets as of those dates are presented in Note 15 on pages 42
and 43 of the 1998 Annual Report to Shareholders and is incorporated herein
by reference.
The operations of the Company are primarily conducted in the U.S. but to an
increasing extent are conducted in major foreign countries. Geographic
group information is also presented in Note 15 of the 1998 Annual Report to
Shareholders. Intersegment revenues and related earnings have been
eliminated to reconcile to consolidated revenue and operating income.
CON-WAY TRANSPORTATION SERVICES SEGMENT
Con-Way Transportation Services (Con-Way) provides time-definite and day-
definite ground transportation services in the form of regional one- and
two-day LTL freight trucking, and full-service nationwide truckload freight
delivery, inter-regional joint service, guaranteed service and expedited
delivery. In 1998, Con-Way also introduced integrated supply chain
services to provide logistics solutions to targeted customers. Con-Way's
infrastructure facilitates service to all 50 states in the U.S. and Puerto
Rico and certain major population centers in Canada and Mexico.
Con-Way's strategies continue to emphasize operating margin improvement,
particularly through efforts to secure pricing commensurate with its
premium service. In addition, Con-Way's strategies include efforts to
increase the utilization of its freight system especially in the Pacific
Northwest and northeastern U.S. (areas in which it expanded its operations
in 1995 and 1996) and through the introduction and expansion of new premium
services.
Con-Way Regional Carriers
Con-Way's primary business units are three regional LTL motor carriers,
each of which operates a dedicated regional trucking network principally
serving core geographic territories with next-day and second-day service.
The regional carriers serve manufacturing, industrial, commercial and
retail business-to-business customers with a fleet of approximately 26,000
trucks, tractors and trailers at December 31, 1998. The regional carriers
include:
Con-Way Central Express (CCX), which was founded in June 1983, today
serves 23 states of the central and northeast U.S., Ontario and Quebec,
Canada and Puerto Rico. At December 31, 1998, CCX operated 211 service
centers.
Con-Way Southern Express (CSE) was founded in April 1987. CSE serves a
12-state southern market from Texas to the Carolinas and Florida, and
also serves Puerto Rico and parts of Mexico. CSE operated 100 service
centers at December 31, 1998.
Con-Way Western Express (CWX), which was founded in May 1983, today
operates in 15 western states and serves parts of Canada and Mexico. CWX
completed major geographic expansions in 1995 in the Pacific Northwest
and British Columbia. At December 31, 1998, CWX operated 81 service
centers.
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In 1998, Con-Way completed coast-to-coast service by fully linking its
three regional carriers. The expansion of Con-Way's joint service
offerings permits Con-Way's three regional carriers to provide full service
throughout the U.S. and to certain major population centers in Canada. By
offering joint services, the three regional carriers can now provide next-
day and second-day freight delivery between their respective core
territories utilizing existing infrastructure. The joint service program
generates additional business by allowing each carrier to provide coverage
of inter-regional market lanes not serviced as part of its core territory.
Due in large part to implementation of the joint service program, the
average length of haul for shipments handled by the regional carriers grew
to 561 in 1998. Also, average revenue per shipment grew from $111 in 1994
to $140 in 1998. The average weight per shipment was approximately 1,100
pounds in 1998.
Con-Way Truckload Services, Con-Way NOW and Con-Way Integrated Services
Con-Way's operations also include Con-Way Truckload Services (CWT), a full-
service, multi-modal truckload company, and Con-Way NOW, which serves the
expedited surface shipment market. CWT provides door-to-door delivery of
truckload shipments by highway and rail forwarding with domestic intermodal
marketing services, and assembly and distribution services. In addition,
CWT provides on-time service as a subcontractor for the Priority Mail
operation. Con-Way NOW specializes in time- definite shipments, such as
replacement parts, medical equipment and other urgent shipments, where
expedited delivery is critical. Con-Way NOW began operations in 1996 in the
Midwest, expanded to parts of the southeastern U.S. in 1997, and now has
delivery service to 48 states and parts of Canada. In 1998, Con-Way
introduced Con-Way Integrated Services to provide logistics services
including operating multi-client warehouses for medium-sized shipping
customers.
Employees
Con-Way's domestic employment has increased to approximately 16,600 regular
and supplemental employees at December 31, 1998 from 15,000 employees at
December 31, 1997 and approximately 14,300 at December 31, 1996.
Customers
There is broad diversity among customers served, size of shipments,
commodities transported and length of haul. No single customer or
commodity accounted for more than a small fraction of total revenues.
Competition
The trucking industry is intensely competitive. Principal competitors of
Con-Way include both regional carriers and 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). Competition in the trucking industry is based on, among other
things, freight rates, quality of service, reliability, transit times and
scope of operations. Over the past 15 years, periods of over-capacity in
the trucking industry have led to intense competition and price
discounting, resulting in decreased margins and a significant number of
business failures.
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Federal and State Regulation
Con-Way's business is subject to extensive regulation by various federal
and state governmental entities. Deregulation of the trucking industry
allowed 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.
Currently, the motor carrier industry is subject to federal regulation by
the Federal Highway Administration (FHWA) and the Surface Transportation
Board (STB), both of which are units of the United States Department of
Transportation (DOT). The FHWA performs certain functions inherited from
the ICC relating chiefly to motor carrier registration, cargo and liability
insurance, extension of credit to motor carrier customers, and leasing of
equipment by motor carriers from owner-operators. In addition, the FHWA
enforces comprehensive trucking safety regulations relating to driver
qualifications, driver hours of service, safety-related equipment
requirements, vehicle inspection and maintenance, record keeping on
accidents, and transportation of hazardous materials. As pertinent to the
general freight trucking industry, the STB has authority to resolve certain
types of pricing disputes and authorize certain types of intercarrier
agreements under jurisdiction inherited from the ICC.
At the state level, federal preemption of economic regulation does not
prevent the states from regulating motor vehicle safety on their highways.
In addition, federal law allows all states to impose insurance requirements
on motor carriers conducting business within their borders, and empowers
most states to require motor carriers conducting interstate operations
through their territory to make annual filings verifying that they hold
appropriate registrations from FHWA. Motor carriers also must pay state
fuel taxes and vehicle registration fees, which normally are apportioned on
the basis of mileage operated in each state.
EMERY WORLDWIDE SEGMENT
Emery Worldwide (Emery) was formed when the Company purchased Emery Air
Freight Corporation (EAFC) in April 1989. EAFC provides both domestic and
international air freight services. In North America, EAFC relies
principally on the dedicated aircraft of a separate subsidiary of the
Company, Emery Worldwide Airlines, Inc. (EWA) and EAFC's own ground fleet
to provide commercial door-to-door delivery for next-day, second-day and
deferred shipments. Internationally, EAFC acts principally as a freight
forwarder by providing door-to-door and airport-to-airport commercial
services in approximately 200 countries. International business is defined
as shipments that either originate or terminate outside of the United
States. At December 31, 1998, EAFC operated approximately 2,000 trucks,
vans, tractors and trailers, as well as equipment provided by its agents.
In providing the airlift for the commercial air freight operations of EAFC,
EWA utilized a fleet of 76 dedicated aircraft as of December 31, 1998. Of
these aircraft, 49 were leased on a long-term basis, 6 were owned and 21
were contracted on a short-term basis to supplement nightly capacity and to
provide feeder services. At December 31, 1998, the nightly lift capacity
of this aircraft fleet, excluding charters, was over 4 million pounds.
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In addition to providing aircraft for EAFC's commercial air freight
operations, EWA also provides air delivery services for Express Mail (a
next-day delivery service) under a ten-year contract with the USPS. The
original contract for this operation was awarded to EWA in 1989, and the
current contract was awarded to EWA in 1993. At December 31, 1998, EWA
used 23 dedicated aircraft to provide services to the USPS under this
contract. In addition, EWA has also received separate contracts to carry
peak-season Christmas and other mail for the USPS. Excluding Priority
Mail, Emery recognized approximately $214 million, $163 million and $140
million of revenue in 1998, 1997 and 1996, respectively, from contracts and
other arrangements to carry mail, primarily Express Mail, for the USPS.
The operations of the Express Mail contract and the separate peak-season
mail contracts are reported in the Emery Worldwide segment.
In 1997, EWA was also awarded a new contract for the sortation and
transportation of Priority Mail (a second-day delivery service) originating
in the eastern United States. In compliance with the adoption of SFAS 131,
the operations of the Priority Mail contract are included in the Other
segment. (Refer to Other Segment for discussion of the Priority Mail
operations).
While Emery's freight system is designed to handle parcels, packages and
shipments of a variety of sizes and weights, its air freight operations are
focused primarily on heavy air freight (defined as shipments of 70 pounds
or more) as opposed to envelopes. In 1998, Emery's air freight shipments
weighed an average of approximately 248 pounds and generated average
revenue of approximately $229 per shipment.
Customers are typically concerned with timely deliveries rather than the
mode of transportation used to transport freight. Because the average cost
of ground transportation is considerably less than air transportation,
Emery seeks to manage its costs by using trucks, rather than aircraft, to
transport freight whenever possible, typically in connection with second-
day and deferred deliveries.
EAFC provides services in North America through a system of sales offices
and service centers, and overseas through foreign subsidiaries, branches,
service centers and agents. EAFC's door-to-door service within North
America relies on the airlift system of EWA, supplemented with commercial
airlines. Internationally, EAFC operates primarily as an air freight
forwarder using commercial airlines, while utilizing controlled lift only
on a limited basis. EAFC's expansion plans have been focused on
international operations due to the expectation of greater opportunities in
an expanding worldwide economy and the lower capital requirements of the
non-asset based international operations. As a result of this strategy,
EAFC's total international air freight revenues increased 67% from 1994
through 1998, compared with a 15% increase for its total North American air
freight revenues for the same period. For 1998, total international
revenues of approximately $960 million comprised nearly 44% of Emery's
total revenues. Emery's fastest-growing regions internationally have been
Latin America and Asia, although in 1998 Asia declined as a result of a
severe regional economic downturn which also adversely impacted other
international regions.
EAFC's strategic initiatives include efforts to improve service and
reliability in order to achieve higher revenue-per-pound. Combined with
efforts to improve
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efficiencies, management expects these initiatives to
improve financial results. Accordingly, EAFC is modernizing its main Hub
facility, initiating programs to improve freight handling, increasing use
of owned agents in international markets and globally applying new
technologies. In addition, EWA is making modifications to its aircraft
fleet and increasing the pool of available aircraft.
EAFC's hub-and-spoke system is based at the Dayton, Ohio International
Airport, where its leased air cargo facility (the Hub) and related support
facilities are located. The Hub handles a wide variety of shipments,
ranging from small packages to heavyweight cargo, with a total effective
sort capacity of approximately 1.2 million pounds per hour, generally
handling over 5 million pounds of freight daily. In 1997, EAFC began a $60
million redesign and expansion of the Hub that is expected to increase
capacity 30% by the year 2000. The operation of the Hub in conjunction
with EWA's airlift system contributes to EAFC's ability to maintain service
reliability. In addition to the Dayton Hub, EAFC operates nine regional
hubs, strategically located around the United States near Sacramento and
Los Angeles, California; Dallas, Texas; Chicago, Illinois; Poughkeepsie,
New York; Charlotte, North Carolina; Atlanta, Georgia; Nashville,
Tennessee; and Orlando, Florida. In 1997, EAFC opened new distribution
centers in Singapore and Miami to serve Asia and Latin America,
respectively.
Because of the growing prominence of its international and logistics
services, Emery management modified certain of its strategic initiatives in
1998. Emery's growth strategy is focused on leveraging its unique position
as a worldwide, integrated forwarder. To execute this strategy, Emery will
further emphasize its inter-related logistics, expedited customs clearance
and ocean capabilities, while maintaining its key strength of time-
definite, global air freight services. Among its efforts to grow worldwide
revenues, Emery has acquired several agents in key international locations
and entered into partnerships with several others. In 1998, Emery launched
a joint venture in China to provide freight forwarding and logistics
services.
Other services
To enhance the range of services it can offer to its customers and to
provide further avenues for growth, Emery has established several non-asset
based "strategic business units." (The Company defines a non-asset-based
business as one requiring substantially less capital investment than its
principal domestic air freight and ground transportation business). These
other units include Emery Expedite!, a rapid response freight handling
subsidiary providing door-to-door delivery of shipments in North America
and overseas. Emery's logistics subsidiary, Emery Global Logistics,
operates warehouse and distribution centers for customers in six countries.
Emery Customs Brokerage (ECB) provides full service customs clearance
regardless of mode or carrier. Through ECB, Emery also serves as a global
freight forwarder and non-vessel-operating common carrier that provides
full and less-than-container load service.
Employees
As of December 31, 1998, Emery had approximately 11,500 regular full-time
employees compared with approximately 10,000 employees at December 31, 1997
and about 9,000 at December 31, 1996.
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Approximately 13% of the Emery's full-time employees were represented by
various labor unions. This percentage includes EWA's pilots who, on July
2, 1997, voted to approve representation by the Airline Pilots Association
(ALPA). Although contract negotiations between the Company and ALPA have
begun, the Company is unable to predict the outcome of those negotiations
or their effect on its results of operations.
Customers
The air freight industry is intensely competitive. 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. In 1998, Emery saw an
increase in competition from ground based competitors for shipments under
1000 pounds and moving less than 1000 miles. Competition in the air freight
industry is based on, among other things, freight rates, quality of
service, reliability, transit times and scope of operations.
Technology
An important element in the movement of goods is the rapid movement of
information to track freight, optimize carrier selections, and interlink
and analyze customer data. Starting in 1996, Emery began to invest in what
is expected to be a $75 million multi-year technology program to upgrade
its hardware and software systems architecture, including its global
tracking system called Emcon 2000. The Emcon 2000 system is expected to
provide enhanced tracking information for shipments to reduce mis-sorts,
avoid potential overloads and to signal freight with specialized handling
requirements.
Regulation of Air Transportation
EWA's and EAFC's business is subject to extensive regulation by various
federal, state and foreign governmental entities. The air transportation
industry is subject to federal regulation under the Federal Aviation Act of
1958, as amended (Aviation Act) and regulations issued by the Department of
Transportation (DOT) pursuant to the Aviation Act. EAFC, as an air freight
forwarder, and EWA, as an airline, are subject to different regulations.
Air freight forwarders are exempted from most DOT economic regulations and
are not subject to Federal Aviation Administration (FAA) safety
regulations, except security-related rules. Airlines such as EWA are
subject to, among other things, maintenance, operating and other safety-
related regulations by 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 EWA will be required to make expenditures in
order for its aircraft to comply with future government regulations.
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 have materially affected EWA's or EAFC's
operations. If such restrictions were to be imposed with respect to the
airports at which EWA's or EAFC's activities are centered (particularly
EAFC's major Hub at the Dayton International Airport), and no alternative
airports were available to serve the
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affected areas, there could be a material adverse
effect on EWA's or EAFC's operations. 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 establishes 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 EWA'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 by year-
end 1999. Although the ultimate cost of complying with these requirements
cannot be predicted with certainty, the Company estimates it will make
capital expenditures of approximately $10 million in 1999 to modify owned
or leased aircraft in order to comply with these requirements.
Regulation of Ground Transportation
When EAFC provides ground transportation of cargo having prior or
subsequent air movement, the ground transportation is exempt from the motor
carrier registration requirements and economic regulations that were
inherited from the ICC by the FHWA and the STB, respectively. Such ground
transportation, however, is subject to comprehensive trucking safety
regulation by the FHWA as described in the Con-Way Transportation Services
section. In addition, EAFC holds FHWA motor carrier registrations, which
can be utilized in providing non-exempt ground transportation. For a
description of applicable state regulations, refer to the discussion in the
Con-Way Transportation Services section.
MENLO LOGISTICS SEGMENT
Menlo Logistics, Inc. (Menlo), founded in 1990, specializes in developing
and managing complex national and global supply and distribution networks,
including transportation management, dedicated contract warehousing and
dedicated contract carriage. In serving its customers, Menlo uses and
develops logistics optimization and customer order and shipment tracking
software, and also provides real time warehouse, transportation and order
management systems. Menlo has developed the ability to link these systems
both with each other and with its customers' internal systems. The Company
believes that Menlo's technology skills, operations processes and design
expertise with respect to sophisticated logistics systems have established
it as a leader in the emerging field of contract logistics. Complex
projects which call upon Menlo's skills in managing carrier networks,
dedicated vehicle fleets and automated warehouses as an integrated system
recently have been the fastest growing segment of Menlo's business.
Menlo operates in a relatively new industry and has a limited number of
major competitors. Nonetheless, competition for the provision of logistics
services is intense. Menlo's competitors include both domestic and foreign
logistics companies and the logistics arms of integrated transportation
companies. Competition in this industry is based largely on computer
system skills and the ability to rapidly implement logistics solutions.
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The Company believes that three industry trends have driven Menlo's recent
growth. First, the Company believes that a number of businesses are
increasingly evaluating their overall logistics costs, including
transportation, warehousing and inventory carrying costs. Second, the
Company believes that outsourcing of non-core services, such as
distribution, has become more commonplace with many businesses. Finally,
the Company believes that the ability to access information through
computer networks has increased the value of capturing real time logistics
information to track inventories, shipments and deliveries.
Menlo's ability to provide solutions to intricate distribution issues for
large companies with complex supply chains helped them secure six new
projects in 1998. One of Menlo's primary strategies is also to increase
the services that it provides to current customers. In 1997 and 1996,
Menlo expanded the services it provides to existing clients such as Hewlett-
Packard, Sears, Coca-Cola and IBM. Menlo was also awarded projects in 1997
and 1996 by new clients such as Imation, Nike, Frigidaire, Herman Miller,
GM Delphi and Bell Atlantic. Compensation from Menlo's customers takes
different forms, including cost-plus, gain-sharing, per-piece, fixed dollar
and consulting fees. In some cases, customers reimburse start-up and
development costs.
Menlo seeks to limit the financial commitments it undertakes by typically
providing that any facility or major equipment lease that it enters into on
behalf of a customer must be assumed by the customer upon termination of
the contract with Menlo. However, to date relatively few customer
relationships have been ended by either Menlo or its customers.
At December 31, 1998, Menlo had a regular full-time workforce of
approximately 1,800 compared to approximately 1,300 employees at December
31, 1997 and nearly 1,000 at December 31, 1996. Menlo also uses a
significant number of professionals under contract for various projects.
While the Company seeks to take advantage of cross-business synergies
whenever possible, Menlo is operated as an independent business segment
within the Company and not as a conduit through which business can be
referred to Con-Way or Emery. The independence of Menlo from the Company's
other primary business units is viewed as essential to maintaining Menlo's
credibility with its customers.
OTHER SEGMENT
The Other segment comprises primarily operations under the Priority Mail
contract with the USPS, but also includes the operations of Road Systems
and VantageParts.
Priority Mail Contract
In April 1997, the USPS awarded EWA a contract for the sortation and
transportation of Priority Mail (a second-day delivery service) in portions
of 13 states in the eastern United States. This contract has an initial
term that ends in 2002 and may be renewed by the USPS for two successive
three-year terms. At the time the Priority Mail contract was entered into,
the USPS indicated that the Company could receive revenues of approximately
$1.7 billion over the initial term of the contract. However, this amount
is subject to a number of uncertainties and assumptions, and there can be
no assurance that the revenues realized by the
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Company will not be less than this amount.
Although the contract does not specifically set forth a
minimum volume of Priority Mail to be handled by the Company, current
revenue run rates are consistent with the Company receiving at least the
projected $1.7 billion of revenue over the life of the contract.
Among other things, the Priority Mail contract called for EWA to lease or
acquire, improve, equip, fully staff and operate ten Priority Mail
Processing Centers (PMPCs) in ten major metropolitan areas, primarily along
the eastern seaboard. All ten of the PMPCs were operational as of June 30,
1998. In 1998, the PMPC's processed over 350 million pieces of priority
mail.
EWA provides air transportation under the new USPS contract, manages the
ten PMPCs and provides ground transportation between the PMPCs and other
USPS facilities. Con-Way Truckload Services, a subsidiary of Con-Way
Transportation Services, acts as a subcontractor and provides highway
transportation between PMPCs. All revenues from the Priority Mail
operations are reported in the Other segment.
At December 31, 1998, the Priority Mail operations had approximately 3,800
regular full-time employees.
Road Systems and VantageParts
Two non-carrier operations are included in the Other segment and generate a
majority of their revenues from sales to other subsidiaries of the Company
and, prior to year-end 1996, from CFC. Road Systems primarily manufactures
and rebuilds trailers, converter dollies and other transportation
equipment. VantageParts serves as a distributor and remanufacturer of
vehicle component parts and accessories to the heavy-duty truck and trailer
industry, as well as the maritime, construction and aviation industries.
GENERAL
The research and development activities of the Company are not significant.
During 1998, 1997 and 1996 there was no single customer of the Company that
accounted for more than 10% of consolidated revenues.
The total number of regular, full-time employees is presented in the "Five
Year Financial Summary" on page 46 of the 1998 Annual Report to
Shareholders and is incorporated herein by reference.
The Company operates in industries that are affected directly by general
economic conditions and seasonal fluctuations, both of which affect demand
for transportation services. In a typical year for the trucking and air
freight industries, the months of September and October usually have the
highest business levels while the months of January and February usually
have the lowest business levels. Operations under the Priority Mail
contract peak in December due primarily to higher shipping demand related
to the holiday season.
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
PAGE 13
waste, 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 a Potentially Responsible Party
(PRP) by the EPA with respect to the disposal of hazardous substances at
various sites. The Company expects that its share of the clean-up costs
will not have a material adverse effect on the Company's financial position
or results of operations. The Company expects the costs of complying with
existing and future environmental laws and regulations to continue to
increase. On the other hand, it does not anticipate that such cost
increases will have a materially adverse effect on the Company.
ITEM 2. PROPERTIES
The following summarizes the freight service centers, warehouses and
sortation centers operated by the Company at December 31, 1998:
Owned Leased Total
Con-Way Transportation Services 80 289 369
Emery Worldwide 29 229 258
Menlo Logistics - 16 16
Priority Mail - 10 10
The following table sets forth the location and square footage of the
Company's principal freight service centers, warehouses and sortation
centers at December 31, 1998:
Location Square Footage
Con-Way - freight service centers
Des Plaines, IA 100,440
Indianapolis, IN 95,498
Columbus, OH 95,430
Oakland, CA 91,240
Coldwater, MI 88,234
Atlanta, GA 88,095
PAGE 14
Aurora, IL 86,475
Chicago, IL 84,500
Dallas, TX 82,000
Cincinnati, OH 80,346
Cleveland, OH 77,419
Shreveport, LA 74,040
Little Falls, NJ 73,190
Newburgh, NY 69,106
Houston, TX 67,160
Detroit, MI 66,320
Minneapolis, MN 65,873
Santa Fe Springs, CA 63,136
Chicopee, MA 62,378
Jackson, MS 61,860
Charlotte, NC 59,450
Carlstadt, NJ 54,629
Jacksonville, FL 53,667
Gary, IN 51,950
Milwaukee, WI 51,460
New Orleans, LA 51,050
Emery - freight service centers and warehouses
* Dayton, OH 800,000
Miami, FL 118,370
Kennedy Airport, NY 104,355
Los Angeles, CA 75,707
San Jose, CA 73,500
Chicago, IL 66,000
Dallas, TX 58,200
Atlanta, GA 56,000
Columbus, OH 55,000
* Facility partially or wholly financed through the issuance of
industrial revenue bonds. Principal amount of debt is secured by the
property.
Menlo - warehouses
Richmond, VA 315,867
Lathrop, CA 276,000
Memphis, CA 250,600
Holland, MI 120,000
Kansas City, MO 115,260
Dayton, OH 103,062
Ontario, CA 96,950
Middletown, PA 90,571
Boise, ID 80,600
Grove City, OH 78,505
Medford, OR 70,000
PAGE 15
Priority Mail - processing centers
Newark, NJ 301,742
Bethpage, NY 281,054
Boston, MA 260,000
Philadelphia, PA 246,091
Pittsburgh, PA 205,718
Miami, FL 195,148
Orlando, FL 167,051
Rochester, NY 161,211
Hartford, CT 158,200
Jacksonville, FL 124,507
ITEM 3. LEGAL PROCEEDINGS
The legal proceedings of the Company are summarized in Notes 6 and 13 on
pages 35, 36, 41 and 42 of the 1998 Annual Report to Shareholders and are
incorporated herein by reference. Discussions of certain environmental
matters are presented in Item 1 and Item 7.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is listed for trading on the New York and
Pacific Stock Exchanges under the symbol "CNF".
The Company's common stock prices for each of the quarters in 1998 and 1997
are included in Note 16 on page 44 of the 1998 Annual Report to
Shareholders and are incorporated herein by reference.
Cash dividends on common shares were paid in every year from 1962 to 1990.
In June 1990, the Company's Board of Directors suspended the quarterly
dividend. In December 1994, the Board of Directors reinstated a $.10 per
share quarterly cash dividend on common stock. The amounts of quarterly
dividends declared on common stock for the last two years are included in
Note 16 on page 44 of the 1998 Annual Report to Shareholders and are
incorporated herein by reference.
Under the terms of the restructured TASP Notes, as set forth in Note 4 on
page 33 of the 1998 Annual Report to Shareholders, the Company is
restricted from paying dividends in an aggregate amount in excess of $10
million plus one-half of the cumulative net income applicable to common
shareholders since the commencement of the agreement (which allows for $194
million of dividend payments at December 31, 1998).
As of December 31, 1998, there were 9,870 holders of record of the common
stock ($.625 par value) of the Company. The number of shareholders is also
presented in
PAGE 16
the "Five Year Financial Summary" on page 46 of the 1998
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data is presented in the "Five Year Financial
Summary" on page 46 of the 1998 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented in the "Financial Review and Management Discussion"
on pages 18 through 23, inclusive, of the 1998 Annual Report to
Shareholders and is incorporated herein by reference.
Certain statements included or incorporated by reference herein constitute
"forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to a number of
risks and uncertainties. Any such forward-looking statements contained or
incorporated by reference herein should not be relied upon as predictions
of future events. Certain such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "estimates" or "anticipates" or the negative thereof or other
variations thereof or comparable terminology, or by discussions of
strategy, plans or intentions. Such forward-looking statements are
necessarily dependent on assumptions, data or methods that may be incorrect
or imprecise and they may be incapable of being realized. In that regard,
the following factors, among others and in addition to the matters
discussed below and elsewhere in this document and in documents
incorporated by reference herein, could cause actual results and other
matters to differ materially from those in such forward-looking statements:
changes in general business and economic conditions; increasing domestic
and international competition and pricing pressure; changes in fuel prices;
uncertainty regarding the Company's Priority Mail contract with the USPS;
labor matters, including changes in labor costs, renegotiations of labor
contracts and the risk of work stoppages or strikes; changes in
governmental regulation; environmental and tax matters, including the
aviation excise tax and aircraft maintenance tax matters discussed in
documents incorporated by reference; and matters relating to the spin-off
of Consolidated Freightways Corporation (CFC). In that regard, 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, tax and environmental matters. Although CFC is, in
general, either the primary or secondary 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 of the foregoing, no assurance can
be given as to future results of operations or financial condition.
PAGE 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Report of Independent Public
Accountants are presented on pages 24 through 45, inclusive, of the 1998
Annual Report to Shareholders and are incorporated herein by reference.
The unaudited quarterly financial data is included in Note 16 on page 44 of
the 1998 Annual Report to Shareholders and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The identification of the Company's Directors is presented on pages 3
through 9, inclusive, of the Company's Proxy Statement dated March 22, 1999
and those pages are incorporated herein by reference.
The Executive Officers of the Company, their ages at December 31, 1998, and
their applicable business experience are as follows:
Gregory L. Quesnel, 50, President and Chief Executive Officer of the
Company. Mr. Quesnel joined the CNF organization as Director of Accounting
in 1975, following several years of professional experience with major
corporations in the petroleum and wood products industries. Mr. Quesnel
advanced through increasingly responsible positions and in 1986 was
promoted to the top financial officer position at the Company's largest
subsidiary. In 1990, Mr. Quesnel was elected Vice President and Treasurer
of CNF; in 1991, he was elected Senior Vice President and Chief Financial
Officer; and he was promoted to Executive Vice President and Chief
Financial Officer in 1994. As part of a planned succession, Mr. Quesnel
was elected President and Chief Operating Officer in July 1997. In May
1998, Mr. Quesnel was named President and Chief Executive Officer of the
Company. At that time, he was also elected as a member of the CNF Board of
Directors. Mr. Quesnel is a member of the Financial Executives Institute,
the California Business Roundtable, and the Conference Board. He also
serves as a member of the Executive Committee of the Bay Area Council of
the Boy Scouts of America. Mr. Quesnel earned a bachelor's degree in
finance from the University of Oregon and holds a master's degree in
business administration from the University of Portland. Mr. Quesnel is a
member of the Executive and Director Affairs Committees of the Board.
Gerald L. Detter, 54, President and Chief Executive Officer of Con-Way
Transportation Services and Senior Vice President of the Company. Mr.
Detter joined the former Consolidated Freightways Corporation of Delaware
(CFCD) in 1964 as a dockman and advanced through several positions of
increasing responsibility to become Division Manager in Detroit, Michigan
in 1976. In 1982, he was named the first President and Chief Executive
Officer of Con-Way Central Express. In 1997, Mr. Detter was named to his
current position.
PAGE 18
Roger Piazza, 59, President and Chief Executive Officer of Emery Worldwide
and Senior Vice President of the Company. Mr. Piazza originally joined the
former CF AirFreight in 1976 as manager of the Detroit Service Center.
During the following ten years he served as a division manager and area
vice president. Following the merger of CF AirFreight and Emery Worldwide
in 1989, Mr. Piazza was named Vice President - North America. In 1998, Mr.
Piazza was named to his current position.
Chutta Ratnathicam, 51, Senior Vice President and Chief Financial Officer
of the Company. Mr. Ratnathicam joined the Company in 1977 as a corporate
auditor and following several increasingly responsible positions was named
Vice President Internal Audit for the Company in 1989. In 1991, he was
promoted to Vice President-International for Emery. In 1997, Mr.
Ratnathicam was named Senior Vice President and Chief Financial Officer of
the Company.
Eberhard G.H. Schmoller, 55, Senior Vice President, General Counsel and
Secretary of the Company. Mr. Schmoller joined CFCD in 1974 as a staff
attorney and in 1976 was promoted to CFCD Assistant General Counsel. In
1983, he was appointed Vice President and General Counsel of the former CF
AirFreight and assumed the same position with Emery after the acquisition
in 1989. Mr. Schmoller was named Senior Vice President and General Counsel
of the Company in 1993.
John H. Williford, 42, President and Chief Executive Officer of Menlo
Logistics and Senior Vice President of the Company. Mr. Williford joined
the Company in 1981 as an Economics/Senior Marketing Analyst. In 1984, he
was named Director of Marketing for the Company's international operations
and was later appointed Director of Marketing for the Company. Since its
inception in 1990, Mr. Williford has been the principal executive in charge
of Menlo Logistics, first as General Manager and then as President and
Chief Executive Officer. In 1998, Mr. Williford was named Senior Vice
President of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The required information for Item 11 is presented on pages 13 through 17,
inclusive, of the Company's Proxy Statement dated March 22, 1999, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information for Item 12 is included on pages 10, 11 and 25 of
the Proxy Statement dated March 22, 1999 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PAGE 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits Filed
1. Financial Statements
See Index to Financial Information.
2. Financial Statement Schedules
See Index to Financial Information.
3. Exhibits
See Index to Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
PAGE 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CNF TRANSPORTATION INC.
(Registrant)
March 26, 1999 /s/Gregory L. Quesnel
Gregory L. Quesnel
President and Chief Executive Officer
March 26, 1999 /s/Chutta Ratnathicam
Chutta Ratnathicam
Senior Vice President and Chief
Financial Officer
March 26, 1999 /s/Gary D. Taliaferro
Gary D. Taliaferro
Corporate Controller
PAGE 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 26, 1999 /s/Donald E. Moffitt
Donald E. Moffitt
Chairman of the Board
March 26, 1999 /s/Gregory L. Quesnel
Gregory L. Quesnel
President, Chief Executive Officer and
Director
March 26, 1999 /s/Robert Alpert
Robert Alpert, Director
March 26, 1999 /s/Earl F. Cheit
Earl F. Cheit, Director
March 26, 1999 ___________________________
Richard A. Clarke, Director
March 26, 1999 /s/Margaret G. Gill _
Margaret G. Gill, Director
March 26, 1999 /s/Robert Jaunich II
Robert Jaunich II, Director
March 26, 1999 _______________________________
W. Keith Kennedy, Jr., Director
PAGE 22
SIGNATURES
March 26, 1999 /s/Richard B. Madden
Richard B. Madden, Director
March 26, 1999 /s/Michael J. Murray
Michael J. Murray, Director
March 26, 1999 /s/Robert D. Rogers_
Robert D. Rogers, Director
March 26, 1999 /s/William J. Schroeder
William J. Schroeder, Director
March 26, 1999 /s/Robert P. Wayman
Robert P. Wayman, Director
PAGE 23
CNF TRANSPORTATION INC.
FORM 10-K
Year Ended December 31, 1998
___________________________________________________________________________
INDEX TO FINANCIAL INFORMATION
CNF Transportation Inc. and Subsidiaries
The following Consolidated Financial Statements of CNF Transportation Inc.
and Subsidiaries appearing on pages 24 through 45, inclusive, of the
Company's 1998 Annual Report to Shareholders are incorporated herein by
reference:
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1998 and 1997
Statements of Consolidated Income - Years Ended December 31, 1998,
1997 and 1996
Statements of Consolidated Cash Flows - Years Ended December 31, 1998,
1997 and 1996
Statements of Consolidated Shareholders' Equity - Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
In addition to the above, the following consolidated financial information
is filed as part of this Form 10-K:
Page
Consent of Independent Public Accountants 24
Report of Independent Public Accountants 24
Schedule II - Valuation and Qualifying Accounts 25
The other schedules have been omitted because either (1) they are neither
required nor applicable or (2) the required information has been included
in the consolidated financial statements or notes thereto.
PAGE 24
SIGNATURE
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included and incorporated by reference in this Form 10-K,
into the Company's previously filed Registration Statement File Nos. 2-
81030, 33-52599, 33-60619, 33-60625, 33-60629, 333-26595, 333-30327, 333-
48733 and 333-56667.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Francisco, California
March 25, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
CNF Transportation Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in CNF Transportation Inc.'s
1998 Annual Report to Shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated January 22, 1999. Our audit
was made for the purpose of forming an opinion on those statements taken as
a whole. The Schedule II--Valuation and Qualifying Accounts on page 25 is
the responsibility of the Company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Francisco, California
January 22, 1999
PAGE 25
SCHEDULE II
CNF TRANSPORTATION INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1998
(In thousands)
DESCRIPTION
ALLOWANCE FOR DOUBTFUL ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
1998 $20,155 $11,050 $ - $(10,107)(a) $21,098
1997 $18,712 $12,528 $ - $(11,085)(a) $20,155
1996 $16,870 $16,729 $ - $(14,887)(a) $18,712
(a) Accounts written off net of recoveries.
PAGE 26
INDEX TO EXHIBITS
ITEM 14(a)(3)
Exhibit No.
(3) Articles of incorporation and by-laws:
3.1 CNF Transportation Inc. Certificate of Incorporation, as
amended. (Exhibit 4(a) to the Company's registration statement
on Form S-3 dated May 6, 1997.*)
3.2 CNF Transportation Inc. By-laws, as amended September 28,
1998 (Exhibit 4(b) to the Company's registration statement on
Form S-3 dated November 10, 1998.*).
(4) Instruments defining the rights of security holders, including
debentures:
4.1 Certificate of Designations of the Series B Cumulative
Convertible Preferred Stock. (Exhibit 4.1 as filed on Form SE
dated May 25, 1989*)
4.2 Indenture between the Registrant and Bank One, Columbus, NA, as
successor trustee, with respect to 9-1/8% Notes Due 1999, Medium-
Term Notes, Series A and 7.35% Notes due 2005. (Exhibit 4.1 as
filed on Form SE dated March 20, 1990*)
4.3 Form of Security for 9-1/8% Notes Due 1999 issued by
Consolidated Freightways, Inc. (Exhibit 4.1 as filed on Form SE
dated August 25, 1989*)
4.4 Officers' Certificate dated as of August 24, 1989 establishing
the form and terms of debt securities issued by Consolidated
Freightways, Inc. (Exhibit 4.2 as filed on Form SE dated August
25, 1989*)
4.5 Form of Security for Medium-Term Notes, Series A to be issued by
Consolidated Freightways, Inc. (Exhibit 4.1 as filed on Form SE
dated September 18, 1989*)
4.6 Officers' Certificate dated September 18, 1989, establishing the
form and terms of debt securities to be issued by Consolidated
Freightways, Inc. (Exhibit 4.2 as filed on Form SE dated
September 19, 1989*)
4.7 Indenture between the Registrant and The First National Bank of
Chicago Bank, trustee, with respect to debt securities. (Exhibit
4(d) as filed on Form S-3 dated June 27, 1995*)
4.8 Indenture between the Registrant and Bank One, Columbus, NA,
trustee, with respect to subordinated debt securities.
(Exhibit 4(e) as filed on Form S-3 dated June 27, 1995*)
4.9 Form of Security for 7.35% Notes due 2005 issued by Consolidated
Freightways, Inc. (Exhibit 4.4 as filed on Form S-4 dated
June 27, 1995*)
* Previously filed with the Securities and Exchange Commission
and incorporated herein by reference.
PAGE 27
Exhibit No.
4.10 Declaration of Trust of the Trust (Exhibit 4(k) to the
Company's Amendment 1 to Form S-3 dated May 30, 1997*)
4.11 Form of Amended and Restated Declaration of Trust of the Trust,
including form of Trust Preferred Security. (Exhibit 4(l) to
the Company's Amendment 1 to Form S-3 dated May 9, 1997*)
4.12 Form of Guarantee Agreement with respect to Trust Preferred
Securities. (Exhibit 4(m) to the Company's Amendment 1 to Form
S-3 dated May 30, 1997*)
Instruments defining the rights of security holders of long-term debt
of CNF Transportation Inc., and its subsidiaries for which
financial statements are required to be filed with this Form 10-K,
of which the total amount of securities authorized under each such
instrument is less than 10% of the total assets of CNF Transportation
Inc. and its subsidiaries on a consolidated basis, have not been filed
as exhibits to this Form 10-K. The Company agrees to furnish a copy
of each applicable instrument to the Securities and Exchange
Commission upon request.
(10) Material contracts:
10.1 Consolidated Freightways, Inc. Long-Term Incentive Plan of 1988
as amended through Amendment 3. (Exhibit 10.2 as filed on Form
SE dated March 25, 1991*#)
10.2 Consolidated Freightways, Inc. Stock Option Plan of 1988 as
amended. (Exhibit 10(i) to the Company's Form 10-K for the year
ended December 31, 1987 as amended in Form S-8 dated
December 16, 1992*#)
10.3 Emery Air Freight Plan for Retirees, effective October 31, 1987.
(Exhibit 4.23 to the Emery Air Freight Corporation
Quarterly Report on Form 10-Q dated November 16, 1987**)
10.4 Consolidated Freightways, Inc. Common Stock Fund (formerly Emery
Air Freight Corporation Employee Stock Ownership Plan,
as effective October 1, 1987 ("ESOP"). (Exhibit 4.33 to
the Emery Air Freight Corporation Annual Report on Form 10-K
dated March 28, 1988**)
* Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
** Incorporated by reference to indicated reports filed under the
Securities Act of 1934, as amended, by Emery Air Freight
Corporation File No. 1-3893.
# Designates a contract or compensation plan for Management or
Directors.
PAGE 28
Exhibit No.
10.5 Employee Stock Ownership Trust Agreement, dated as of October 8,
1987, as amended, between Emery Air Freight Corporation and
Arthur W. DeMelle, Daniel J. McCauley and Daniel W. Shea, as
Trustees under the ESOP Trust. (Exhibit 4.34 to the Emery Air
Freight Corporation Annual Report on Form 10-K dated March 28,
1988**)
10.6 Amended and Restated Subscription and Stock Purchase Agreement
dated as of December 31, 1987 between Emery Air Freight
Corporation and Boston Safe Deposit and Trust Company in its
capacity as successor trustee under the Emery Air Freight
Corporation Employee Stock Ownership Plan Trust ("Boston Safe").
(Exhibit B to the Emery Air Freight Corporation Current Report
on Form 8-K dated January 11, 1988**)
10.7 Supplemental Subscription and Stock Purchase Agreement dated as
of January 29, 1988 between Emery Air Freight Corporation and
Boston Safe. (Exhibit B to the Emery Air Freight Corporation
Current Report on Form 8-K dated February 12, 1988**)
10.8 Trust Indenture, dated as of November 1, 1988, between City of
Dayton, Ohio and Security Pacific National Trust Company (New
York), as Trustee and Bankers Trust Company, Trustee. (Exhibit
4.1 to Emery Air Freight Corporation Current Report on Form 8-K
dated December 2, 1988**)
10.9 Bond Purchase Agreement dated November 7, 1988, among the City
of Dayton, Ohio, the Emery Air Freight Corporation and Drexel
Burnham Lambert Incorporated. (Exhibit 28.7 to the Emery Air
Freight Corporation Current Report on Form 8-K dated December 2,
1988**)
10.10 Lease agreement dated November 1, 1988 between the City of
Dayton, Ohio and Emery Air Freight Corporation. (Exhibit 10.1
to the Emery Air Freight Corporation Annual Report on Form 10-K
for the year ended December 31, 1988**)
10.11 $350 million Amended and Restated Credit Agreement
dated November 21, 1996 among Consolidated Freightways, Inc.
and various financial institutions. (Exhibit 10.18 to
the Company's Form 10-K for the year ended December 31, 1996*).
10.12 Official Statement of the Issuer's Special Facilities
Revenue Refunding Bonds, 1993 Series E and F dated
September 29, 1993 among the City of Dayton, Ohio and Emery
Air Freight Corporation. (Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended September 30, 1993*).
* Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
** Incorporated by reference to indicated reports filed under the
Securities Act of 1934, as amended, by Emery Air Freight
Corporation File No. 1-3893.
# Designates a contract or compensation plan for Management or
Directors.
PAGE 29
Exhibit No.
10.13 Trust Indenture, dated September 1, 1993 between the City of
Dayton, Ohio and Banker's Trust Company as Trustee.
(Exhibit 10.2 to the Company's Form 10-Q for the quarterly
period ended September 30, 1993*).
10.14 Supplemental Lease Agreement dated September 1, 1993 between
the City of Dayton, Ohio, as Lessor, and Emery Air Freight
Corporation, as Lessee. (Exhibit 10.3 to the Company's Form
10-Q for the quarterly period ended September 30, 1993*).
10.15 Supplemental Retirement Plan dated January 1, 1990. (Exhibit
10.31 to the Company's Form 10-K for the year ended December
31, 1993*#)
10.16 Directors' 24-Hour Accidental Death and Dismemberment Plan.
(Exhibit 10.32 to the Company's Form 10-K for the year ended
December 31, 1993*#)
10.17 Executive Split-Dollar Life Insurance Plan dated January 1,
1994. (Exhibit 10.33 to the Company's Form 10-K for the year
ended December 31, 1993*#)
10.18 Board of Directors' Compensation Plan dated January 1, 1994.
(Exhibit 10.34 to the Company's Form 10-K for the year ended
December 31, 1993*#)
10.19 Directors' Business Travel Insurance Plan. (Exhibit 10.36 to
the Company's Form 10-K for the year ended December 31, 1993*#)
10.20 Deferred Compensation Plan for Executives 1998 Restatement.
(Exhibit 10.20 to the Company's Form 10-K for the year ended
December 31, 1997. *#)
10.21 Amended and Restated 1993 Nonqualified Employee Benefit Plans
Trust Agreement dated January 1, 1995. (Exhibit 10.38 to the
Company's Form 10-K for the year ended December 31, 1994.*#)
10.22 CNF Transportation Inc., 1997 Equity and Incentive
Plan for Non- Employee Directors, as amended June 30, 1997.
(Exhibit 10.33 to the Company's Form 10-K for the year ended
December 31, 1997. *#)
10.23 Amended and Restated Retirement Plan for Directors of
Consolidated Freightways, Inc. dated January 1, 1994. (Exhibit
10.40 to the Company's Form 10-K for the year ended
December 31, 1994.*#)
10.24 CNF Transportation Inc. Return on Equity Plan, as amended
through Amendment No. 1 (Exhibit 10.24 to the Company's Form
10-K for the year ended December 31, 1997. *#)
10.25 Employee Benefit Matters Agreement by and between Consolidated
Freightways, Inc. and Consolidated Freightways Corporation dated
December 2, 1996. (Exhibit 10.33 to the Company's form 10-K for
the year ended December 31, 1996.*#)
* Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
** Incorporated by reference to indicated reports filed under the
Securities Act of 1934, as amended, by Emery Air Freight
Corporation File No. 1-3893.
# Designates a contract or compensation plan for Management or
Directors.
PAGE 30
Exhibit No.
10.26 Distribution Agreement between Consolidated
Freightways, Inc., and Consolidated Freightways Corporation
dated November 25, 1996. (Exhibit 10.34 to the Company's Form 10-
K for the year ended December 31, 1996.*#)
10.27 Transition Services Agreement between CNF Service
Company, Inc. and Consolidated Freightways Corporation dated
December 2, 1996. (Exhibit to the Company's Form 10-K for the
year ended December 31, 1996.*#)
10.28 Tax Sharing Agreement between Consolidated
Freightways, Inc., and Consolidated Freightways Corporation
dated December 2, 1996. (Exhibit to the Company's Form 10-K for
the year ended December 31, 1996.*#)
10.29 CNF Transportation Inc. 1997 Equity and Incentive Plan
as amended June 30, 1997. (Exhibit 10.22 to the Company's Form
10-K for the year ended December 31, 1997. *#)
10.30 CNF Transportation Inc. Deferred Compensation Plan for
Directors 1998 Restatement. (Exhibit 10.34 to the Company's Form
10-K for the year ended December 31, 1997. *#)
10.31 CNF Transportation Inc. Summary of Incentive Compensation plans
for 1999. #
10.32 CNF Transportation Inc. Executive Severance Plan. #
(12a) Computation of ratios of earnings to fixed charges
(12b) Computation of ratios of earnings to combined fixed charges and
preferred stock dividends.
(13) Annual report to security holders:
CNF Transportation Inc. 1998 Annual Report to Shareholders (Only
those portions referenced herein are incorporated in this Form
10-K. Other portions such as "Letter to Shareholders" are not
required and, therefore, are not "filed" as part of this
Form 10-K.)
(21) Significant Subsidiaries of the Company.
(27) Financial Data Schedule
* Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
# Designates a contract or compensation plan for Management or
Directors.
PAGE 31
Exhibit No.
(99) Additional documents:
99.1 CNF Transportation Inc. 1998 Notice of Annual Meeting and
Proxy Statement dated March 22, 1999. (Only those portions
referenced herein are incorporated in this Form 10-K. Other
portions are not required and, therefore, are not "filed" as a
part of this Form 10-K. *)
99.2 Note Agreement dated as of July 17, 1989, between the ESOP,
Consolidated Freightways, Inc. and the Note Purchasers named
therein. (Exhibit 28.1 as filed on Form SE dated July 21,
1989*)
99.3 Guarantee and Agreement dated as of July 17, 1989, delivered by
Consolidated Freightways, Inc. (Exhibit 28.2 as filed on Form
SE dated July 21, 1989*).
99.4 Form of Restructured Note Agreement between Consolidated
Freightways, Inc., Thrift and Stock Ownership Trust as Issuer
and various financial institutions as Purchasers named therein,
dated as of November 3, 1992. (Exhibit 28.4 to the Company's
Form 10-K for the year ended December 31, 1992*).
The remaining exhibits have been omitted because either (1) they are
neither required nor applicable or (2) the required information has been
included in the consolidated financial statements or notes thereto.
* Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
# Designates a compensation plan for Management or Directors.
EXHIBIT 10.31
CNF TRANSPORTATION INC.
SUMMARY OF INCENTIVE COMPENSATION PLANS FOR
1999
For 1999, CNF Transportation Inc. and certain of its
subsidiaries (each a "CNF Company") have adopted short-
term incentive compensation plans that provide for annual
incentive compensation to be paid to plan participants if
certain performance goals are met by the applicable CNF
Company. This document summarizes the general terms of
those plans. The plans vary in terms of the performance
measures to be met, and the amount of compensation to be
paid, but generally contain the terms as described below.
THE PLANS
In order to motivate eligible employees to perform more
effectively and efficiently, each CNF Company has
established a short-term incentive compensation plan
(Plan), under which participants are eligible to receive
short-term incentive compensation payments based upon
calendar year 1999 Incentive Performance Goals.
DESIGNATION OF PARTICIPANTS
Participation in each Plan is limited to full-time non-
contractual employees of the applicable CNF Company. A
master list of each Plan's participants is maintained in
the office of the President of the applicable CNF
Company.
ELIGIBILITY FOR PAYMENT
Participants generally commence participation in the
Plans on January 1, 1999. Eligible employees who are
employed by a CNF Company after January 1 commence
participation at the beginning of the first full calendar
quarter after joining the CNF Company. Calendar quarters
begin January 1, April 1, July 1, and October 1 or the
first working day thereafter. A participant who
commences participation in the Plan during the 1999 Plan
year, and who participates less than four full quarters,
receives a pro rata payment based on the number of full
calendar quarters of Plan participation.
Subject to the following exceptions, no participant is
eligible to receive any payment under a Plan unless on
the date the payment is actually made that person is then
currently (i) employed by a CNF Company and (ii) a Plan
participant.
EXCEPTION 1. A Plan participant who is employed by a
CNF Company through December 31, 1999 but leaves that
employment or otherwise becomes ineligible after December
31, 1999 but before the final payment is made relating to
1999, unless terminated for cause, is entitled to receive
payments under the Plan.
EXCEPTION 2. An appropriate pro rata payment will be
made (1) to a Plan participant who retires prior to
December 31, 1999 pursuant to the CNF Transportation Inc.
Retirement Plan and who, at the time of retirement, was a
participant in the Plan, (2) to the heirs, legatees,
administrators or executors of a Plan participant who
dies prior to December 31, 1999 and who, at the time of
death, was a participant in the Plan, (3) to a Plan
participant who is placed on an approved leave prior to
December 31, 1999, or (4) to a Plan participant who is
transferred to another CNF Company and who remains an
employee through December 31, 1999.
METHOD OF PAYMENT
Each Plan participant is assigned an incentive
participation factor as a percent of annual compensation.
The incentive participation factor is indexed to specific
performance goals such as revenue, profit, service, etc.
Minimum and incentive factor performance goals are
established separately for each Plan. Participants are
not entitled to any payments under the Plan until the
minimum performance goal is achieved. Incentive
compensation for the assigned goals will be earned on a
pro rata basis for accomplishments between the minimum
level and the incentive factor goals and will continue to
be earned ratably for performance over the incentive
factor goal.
The maximum payment that any Plan participant may receive
is 200% of incentive compensation factor. In addition,
for certain Plans the aggregate amount of payments to all
participants is limited to the amount of a specified pool
of funds.
DATE OF PAYMENT
The President of each CNF Company may authorize a partial
payment of the estimated annual incentive compensation
earned under the Plan to be made in December 1999. The
final payment to participants, less any previous partial
payment, is to be made on or before March 15, 2000.
INCENTIVE PERFORMANCE GOALS
Incentive Performance Goals are defined by each Plan but
generally consist of profits equal to earnings before
deducting any amounts expensed under a Company and/or
qualified subsidiary incentive plans, before deducting
income taxes and for some plans exclude interest income
and expense. Incentive Performance Goals may also
include specific levels of revenue, profit, service or
other measurable factors.
ANNUAL COMPENSATION
Annual Compensation for incentive purposes for each Plan
participant is that participant's annualized salary
before any incentive or other special compensation
(including long term disability insurance plan payments)
as of the first pay period following the date the
participant becomes eligible to participate in this Plan.
The term "special compensation" used herein does not
include deferred salary arrangements wherein the
participant could have chosen to receive the deferred
salary in the Plan year.
LAWS GOVERNING PAYMENTS
No payment shall be made under this Plan in an amount
that is prohibited by law.
AMENDMENT, SUSPENSION, AND ADMINISTRATION OF PLAN
The Board of Directors of the CNF Company may at any time
amend, suspend, or terminate the operation of the Plans,
by thirty-day written notice to the Plan participants,
and has full discretion as to the administration and
interpretation of this Plan. No participant in this Plan
shall at any time have any right to receive any payment
under this Plan until such time, if any, as any payment
is actually made.
DURATION OF PLANS
The Plans are for the calendar year 1999 only.
1
Exhibit 10.32
CNF TRANSPORTATION INC.
EXECUTIVE SEVERANCE PLAN
CNF Transportation Inc. (the "Company") hereby adopts the CNF
Transportation Inc. Executive Severance Plan for the benefit of
certain executives of the Company and its subsidiaries, on the
terms and conditions hereinafter stated.
SECTION 1. DEFINITIONS. As hereinafter used:
1.1 "Affiliate" means an affiliate of the Company, as
defined in Rule 12b-2 promulgated under Section 12 of
the Exchange Act.
1.2 "Board" means the Board of Directors of the Company or
any successor thereto.
1.3 "Cause" for termination by the Employer of the Eligible
Employee's employment shall mean (i) the willful and
continued failure by the Eligible Employee to
substantially perform the Eligible Employee's duties
with the Employer (other than any such failure
resulting from the Eligible Employee's incapacity due
to disability, including physical or mental illness or
any such actual or anticipated failure after the
issuance by the Eligible Employee of a notice of intent
to terminate employment for Good Reason pursuant to
Section 1.12 hereof) after a written demand for
substantial performance is delivered to the Eligible
Employee by the Company's Chief Executive Officer and
General Counsel, which demand specifically identifies
the manner in which such Officers believe that the
Eligible Employee has not substantially performed the
Eligible Employee's duties, or (ii) the willful
engaging by the Eligible Employee in conduct which is
demonstrably and materially injurious to the Company or
its subsidiaries, monetarily or otherwise. For
purposes of clauses (i) and (ii) of this definition, no
act, or failure to act, on the Eligible Employee's part
shall be deemed "willful" unless done, or omitted to be
done, by the Eligible Employee not in good faith and
without reasonable belief that the Eligible Employee's
act, or failure to act, was in the best interest of the
Company. In the event of a dispute concerning the
application of this provision, no claim by the Company
or any Employer that Cause exists shall be given effect
unless the Company establishes (i) to the Plan
Administrator and (ii) in the event of an arbitration
to resolve the dispute, to the arbitrator, by clear and
convincing evidence that Cause exists.
1.4 "Change in Control" means the occurrence of any one of
the following events:
(1) any "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act (other than
(A) the Company or its Affiliates, (B) any trustee
or other fiduciary holding securities under an
employee benefit plan of the Company or its
Affiliates, and (C) any corporation owned,
directly or indirectly, by the stockholders of the
Company in substantially the same proportions as
their ownership of the Common Stock), is or
becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company (not
including in the securities beneficially owned by
such person any securities acquired directly from
the Company or its Affiliates) representing 25% or
more of the combined voting power of the Company's
then outstanding voting securities;
(2) the following individuals cease for any reason to
constitute a majority of the number of directors
then serving: individuals who, on the Effective
Date, constitute the Board and any new director
(other than a director whose initial assumption of
office is in connection with an actual or
threatened election contest, including but not
limited to a consent solicitation, relating to the
election of directors of the Company) whose
appointment or election by the Board or nomination
for election by the Company's stockholders was
approved or recommended by a vote of at least two-
thirds (2/3) of the directors then still in office
who either were directors on the Effective Date or
whose appointment, election or nomination for
election was previously so approved or
recommended;
(3) there is consummated a merger or consolidation of
the Company or any direct or indirect subsidiary
of the Company with any other corporation, other
than (A) a merger or consolidation which would
result in the voting securities of the Company
outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or
by being converted into voting securities of the
surviving or parent entity) more than 50% of the
combined voting power of the voting securities of
the Company or such surviving or parent entity
outstanding immediately afer such merger or
consolidation or (B) a merger or consolidation
effected to implement a recapitalization of the
Company (or similar transaction) in which no
"person" (as hereinabove defined), directly or
indirectly, acquired 25% or more of the combined
voting power of the Company's then outstanding
securities (not including in the securities
beneficially owned by such person any securities
acquired directly from the Company or its
Affiliates); or
(4) the stockholders of the Company approve a plan of
complete liquidation of the Company or there is
consummated an agreement for the sale or
disposition by the Company of assets having an
aggregate book value at the time of such sale or
disposition of more than 75% of the total book
value of the Company's assets on a consolidated
basis (or any transaction having a similar
effect), other than any such sale or disposition
by the Company (including by way of spin-off or
other distribution) to an entity, at least 50% of
the combined voting power of the voting securities
of which are owned immediately following such sale
or disposition by stockholders of the Company in
substantially the same proportions as their
ownership of the Company immediately prior to such
sale or disposition.
1.5 "Code" means the Internal Revenue Code of 1986, as it
may be amended from time to time.
1.6 "Common Stock" means the common stock, par value $0.625
per share, of the Company.
1.7 "Company" means CNF Transportation Inc. or any
successors thereto.
1.8 "Effective Date" means December 9, 1998.
1.9 "Eligible Employee" means an individual who,
immediately prior to a Change in Control, (a) is not a
party to an individual employment or severance
agreement with the Company and (b) has more than 1,300
"Hay Points;" provided, however, that in the event the
Company's use of the "Hay Point" system is terminated,
"Eligible Employee" shall mean an individual who (x) is
not a party to an individual employment or severance
agreement with the Company and (y) is classified in the
Company's then-existing compensation structure at or
above the level that corresponds to the 1,300 "Hay
Point" level under the current system. An Eligible
Employee becomes a "Severed Employee" once he or she
incurs a Severance.
1.10 "Employer" means the Company or any of its
subsidiaries.
1.11 "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time.
1.12. "Good Reason" for termination by the Eligible
Employee of the Eligible Employee's employment shall
mean the occurrence (without the Eligible Employee's
express written consent) after any Change in Control of
any one of the following acts by the Company, or
failures by the Company to act, unless such act or
failure to act is corrected within 30 days of receipt
by the Company of notice of the Eligible Employee's
intent to terminate for Good Reason hereunder:
(1) the failure of the successor company, following
the Change in Control, to assume the Plan and all
obligations thereunder, as of the date of such
Change in Control;
(2) the assignment to the Eligible Employee of any
duties inconsistent with the Eligible Employee's
status as an executive of the Company or a
substantial adverse alteration in the nature or
status of the Eligible Employee's responsibilities
from those in effect immediately prior to the
Change in Control;
(3) a reduction by the Employer in the Eligible
Employee's annual base salary or bonus
opportunity, each as in effect immediately prior
to the Change in Control or as the same may
thereafter be increased from time to time;
(4) the relocation of the Eligible Employee's
principal place of employment to a location that
results in an increase in the Eligible Employee's
one way commute of at least 50 miles more than the
Eligible Employee's one way commute immediately
prior to the Change in Control, except for
required travel on the Company's business to an
extent substantially consistent with the Eligible
Employee's business travel obligations immediately
prior to the Change in Control;
(5) the failure by the Company to pay to the Eligible
Employee when due any portion of the Eligible
Employee's current compensation;
(6) the failure by the Company to continue to provide
the Eligible Employee with benefits substantially
similar to those enjoyed by the Eligible Employee
under any of the Company's pension, savings, life
insurance, medical, health and accident, or
disability plans in which the Eligible Employee
was participating immediately prior to the Change
in Control (except for across the board changes
similarly affecting all or substantially all
employees of the Company and any entity in control
of the Company), the taking of any other action by
the Company which would directly or indirectly
materially reduce any of such benefits or deprive
the Eligible Employee of any material fringe
benefit enjoyed by the Eligible Employee
immediately prior to the Change in Control, or the
failure by the Company to provide the Eligible
Employee with the number of paid vacation days to
which the Eligible Employee is entitled.
The Eligible Employee's right to terminate the
Eligible Employee's employment for Good Reason
shall not be affected by the Eligible Employee's
incapacity due to disability, including physical
or mental illness. The Eligible Employee's
continued employment shall not constitute consent
to, or a waiver of rights with respect to, any act
or failure to act constituting Good Reason
hereunder.
1.13 "Plan" means the CNF Transportation Inc. Executive
Severance Plan, as set forth herein, as it may be
amended from time to time.
1.14 "Plan Administrator" means, prior to a Change in
Control, the person or persons appointed from time to
time by the Board and following a Change in Control, a
committee consisting of three persons, at least two of
whom were directors or executive officers of the
Company immediately prior to the Change in Control.
1.15 "Potential Change in Control" shall be deemed to have
occurred if:
(1) the Company enters into an agreement, the
consummation of which would result in the
occurrence of a Change in Control;
(2) the Company or any "person" (as defined in Section
1.4(1)) publicly announces an intention to take or
to consider actions, including but not limited to
proxy contests or consent solicitations, which, if
consummated, would constitute a Change in Control;
(3) any "person" (as defined in Section 1.4(1))
becomes the beneficial owner (as defined in Rule
13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company
representing 15% or more of either the then
outstanding shares of Common Stock of the Company
or the combined voting power of the Company's then
outstanding securities (not including in the
securities beneficially owned by such "person" any
securities acquired directly from the Company or
its Affiliates); or
(4) the Board adopts a resolution to the effect that,
for purposes of this Plan, a Potential Change in
Control has occurred.
1.16 "Severance" means the termination of an Eligible
Employee's employment with the Employer on or within
one year immediately following the date of the Change
in Control, (i) by the Employer other than for Cause,
or (ii) by the Eligible Employee for Good Reason.
For purposes of this Plan, an Eligible Employee's
employment shall be deemed to have been terminated
following a Change in Control by the Company without
Cause or by the Eligible Employee with Good Reason, if
(i) the Eligible Employee's employment is terminated by
the Company without Cause following a Potential Change
in Control but prior to a Change in Control (whether or
not a Change in Control ever occurs) and such
termination was at the request or direction of a
"person" (as defined in Section 1.4(1)) who has entered
into an agreement with the Company the consummation of
which would constitute a Change in Control, (ii) the
Eligible Employee terminates his employment for Good
Reason following a Potential Change in Control but
prior to a Change in Control (whether or not a Change
in Control ever occurs) and the circumstance or event
which constitutes Good Reason occurs at the request or
direction of such "person"; or (iii) the Eligible
Employee's employment is terminated by the Company
without Cause or by the Executive for Good Reason and
such termination or the circumstance or event which
constitutes Good Reason is otherwise in connection with
or in anticipation of a Change in Control (whether or
not a Change in Control ever occurs).
An Eligible Employee will not be considered to have
incurred a Severance (i) if his or her employment is
discontinued by reason of the Eligible Employee's death
or disability, including a physical or mental condition
causing such Eligible Employee's inability to
substantially perform his or her duties with the
Employer, including, without limitation, such condition
entitling him or her to benefits under any sick pay or
disability income policy or program of the Employer or
(ii) by reason of the divestiture of a facility, sale
of a business or business unit, or the outsourcing of a
business activity with which the Eligible Employee is
affiliated, notwithstanding the fact that such
divestiture, sale or outsourcing constitutes, or takes
place within one year following, a Change in Control,
if the Eligible Employee is offered comparable
employment by the successor company and such successor
company agrees to assume the obligations of this Plan
with respect to such Eligible Employee.
1.17 "Severance Benefits" means, at the Company's expense,
(a) the continued participation by a Severed Employee
in all health and welfare benefits plans of the Company
(to the extent such Severed Employee was participating
in such plans prior to incurring a Severance) and (b)
outplacement services determined by the Company to be
suitable to the Severed Employee's position, in each
case for a period of one year following such Severed
Employee's Severance Date; provided, however, that
benefits otherwise receivable by the Eligible Employee
hereunder shall be reduced to the extent benefits of
the same type are received by or made available to the
Eligible Employee during the one-year period following
the Eligible Employee's incurring a Severance (and any
such benefits received by or made available to the
Eligible Employee shall be reported to the Company by
the Eligible Employee); provided, further, however,
that the Company shall reimburse the Eligible Employee
for the excess, if any, of the cost of such benefits to
the Eligible Employee over such cost immediately prior
to the Eligible Employee's incurring a Severance or, if
more favorable to the Eligible Employee, immediately
prior to the Change in Control. In the Severed
Employee dies during the period of one year following
the Severed Employee's Severance Date at a time when
health and dental benefits are being provided under
this Section 1.17 to the Severed Employee's dependents,
the Company shall continue to provide such benefits to
the dependents for the remainder of the one year period
on the same basis as if the Severed Employee had
survived throughout that period.
1.18 "Severance Date" means the date on or after the date of
the Change in Control on which an Eligible Employee
incurs a Severance.
1.19 "Severance Payment" means a payment, in lieu of any
other severance payment or benefit pursuant to any
other plan or agreement of the Company or any
subsidiary thereof to which the Eligible Employee is
otherwise entitled, of an amount equal to the sum of
(a) the Severed Employee's annual base salary
immediately prior to the time of Severance or, if
higher, in effect immediately prior to the Change in
Control and (b) the greater of (i) the Severed
Employee's target bonus for the year in which the
Severance occurred and (ii) the Severed Employee's
actual or target bonus (whichever is greater) for the
year in which the Change in Control occurred (in either
case, determined as if such target bonus had been
earned in full).
SECTION 2. BENEFITS.
2.1 An Eligible Employee who incurs a Severance shall be
entitled to receive (a) a Severance Payment and (b)
Severance Benefits.
2.2 The Severance Payment shall be paid to an eligible
Severed Employee in a cash lump sum, as soon as
practicable following the Severance Date, but in no
event later than 10 business days immediately following
the expiration of the revocation period, if any,
applicable to such Severed Employee's release,
described in Section 2.4.
2.3 No Severed Employee shall be eligible to receive a
Severance Payment or Severance Benefits under the Plan
unless he or she (or, in the event of the death of the
Severed Employee, the executor, personal representative
or administrator of the Severed Employee's estate)
first executes a written release substantially in the
form attached as Exhibit A hereto.
2.4 In the event of a claim by an Eligible Employee as to
the amount or timing of any distribution, such Eligible
Employee shall present the reason for his or her claim
in writing to the Plan Administrator. The Plan
Administrator shall, within sixty (60) days after
receipt of such written claim, send a written
notification to the Eligible Employee as to its
disposition. In the event the claim is wholly or
partially denied, such written notification shall (a)
state the specific reason or reasons for the denial,
(b) make specific reference to pertinent Plan
provisions on which the denial is based, (c) provide a
description of any additional material or information
necessary for the Eligible Employee to perfect the
claim and an explanation of why such material or
information is necessary, and (d) set forth the
procedure by which the Eligible Employee may appeal the
denial of his or her claim. In the event an Eligible
Employee wishes to appeal the denial of his or her
claim, he or she may request a review of such denial by
making application in writing to the Plan Administrator
within sixty (60) days after receipt of such denial.
Such Eligible Employee (or his or her duly authorized
legal representative) may, upon written request to the
Plan Administrator, review any documents pertinent to
his or her claim, and submit in writing issues and
comments in support of his or her position. Within
sixty (60) days after receipt of a written appeal
(unless special circumstances, such as the need to hold
a hearing, require an extension of time, but in no
event more than one hundred twenty (120) days after
such receipt), the Plan Administrator shall notify the
Eligible Employee of the final decision. The final
decision shall be in writing and shall include specific
reasons for the decision, written in a manner
calculated to be understood by the claimant, and
specific references to the pertinent Plan provisions on
which the decision is based.
2.5 Any further dispute or controversy arising under or in
connection with this Agreement which remains after the
final decision of the Plan Administrator as
contemplated by Section 2.4 shall be finally settled
exclusively by arbitration in Palo Alto, California, in
accordance with the rules of the American Arbitration
Association then in effect; provided, however, that the
evidentiary standards set forth in this Agreement shall
apply; and provided further, that the arbitrator shall
apply the applicable provisions of ERISA, and
applicable regulations adopted thereunder, in such
arbitration proceeding. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
2.6 The Company shall pay to the Eligible Employee all
legal fees and expenses incurred by the Eligible
Employee in seeking in good faith to obtain or enforce
any benefit or right provided by this Agreement. Such
payments shall be made within five (5) business days
after delivery of the Eligible Employee's written
requests for payment accompanied with such evidence of
fees and expenses incurred as the Company reasonably
may require.
2.7 The Company shall be entitled to withhold from amounts
to be paid to the Severed Employee hereunder any
federal, state or local withholding or other taxes or
charges which it is from time to time required to
withhold.
2.8 The Company agrees that, if the Eligible Employee's
employment with the Company terminates during the one
year period following a Change in Control, the Eligible
Employee is not required to seek other employment or to
attempt in any way to reduce any amounts payable to the
Eligible Employee hereunder. Further, the amount of
any payment or benefit provided for in this Agreement
shall not be reduced (except as provided in Section
1.17 hereof) by any compensation earned by the Eligible
Employee as the result of employment by another
employer, by retirement benefits, by offset against any
amount claimed to be owed by the Eligible Employee to
the Company, or otherwise.
SECTION 3. PLAN ADMINISTRATION.
3.1 The Plan shall be interpreted, administered and
operated by the Plan Administrator, who shall have
complete authority, in its sole discretion subject to
the express provisions of the Plan, to interpret the
Plan, to prescribe, amend and rescind rules and
regulations relating to it, and to make all other
determinations necessary or advisable for the
administration of the Plan.
3.2 All questions of any character whatsoever arising in
connection with the interpretation of the Plan or its
administration or operation shall be submitted to and
settled and determined by the Plan Administrator in an
equitable and fair manner in accordance with the
procedure for claims and appeals described in
Section 2.3. Subject to the rights to arbitration
provided in Section 2.5 hereof, any such settlement and
determination shall be final and conclusive, and shall
bind and may be relied upon by the Employer, each of
the Eligible Employees and all other parties in
interest.
3.3 The Plan Administrator may delegate any of its duties
hereunder to such person or persons from time to time
as it may designate.
3.4 The Plan Administrator is empowered, on behalf of the
Plan, to engage accountants, legal counsel and such
other personnel as it deems necessary or advisable to
assist it in the performance of its duties under the
Plan. The functions of any such persons engaged by the
Plan Administrator shall be limited to the specified
services and duties for which they are engaged, and
such persons shall have no other duties, obligations or
responsibilities under the Plan. Such persons shall
exercise no discretionary authority or discretionary
control respecting the management of the Plan. All
reasonable expenses thereof shall be borne by the
Employer.
SECTION 4. PLAN MODIFICATION OR TERMINATION.
The Plan may be amended or terminated by the Board or a duly
appointed committee of the Board at any time; provided,
however, that during the pendency of and within six (6)
months following the cessation of a Potential Change in
Control and within one year following a Change in Control,
the Plan may not be terminated nor may any amendment be
adopted which is in any manner adverse to the interests of
Eligible Employees.
SECTION 5. GENERAL PROVISIONS.
5.1 Except as otherwise provided herein or by law, no right
or interest of any Eligible Employee under the Plan
shall be assignable or transferable, in whole or in
part, either directly or by operation of law or
otherwise, including without limitation by execution,
levy, garnishment, attachment, pledge or in any manner;
no attempted assignment or transfer thereof shall be
effective; and no right or interest of any Eligible
Employee under the Plan shall be liable for, or subject
to, any obligation or liability of such Eligible
Employee. When a payment is due under this Plan to a
Severed Employee who is unable to care for his or her
affairs, payment may be made directly to his or her
legal guardian or personal representative.
5.2 If the Company or any Affiliate is obligated pursuant
to applicable law or by virtue of being a party to a
contract (but not pursuant to any severance plan) to
pay severance pay, a termination indemnity, notice pay
or the like or if the Company or any Affiliate is
obligated by law to provide advance notice of
separation ("Notice Period"), then any Severance
Payment hereunder shall be reduced by the amount of any
such severance pay, termination indemnity, notice pay
or the like, as applicable, and by the amount of any
compensation received during any Notice Period.
5.3 Neither the establishment of the Plan, nor any
modification thereof, nor the creation of any fund,
trust or account, nor the payment of any benefits shall
be construed as giving any Eligible Employee, or any
person whomsoever, the right to be retained in the
service of the Employer, and all Eligible Employees
shall remain subject to discharge to the same extent as
if the Plan had never been adopted.
5.4 If any provision of this Plan shall be held invalid or
unenforceable, such invalidity or unenforceability
shall not affect any other provisions hereof, and this
Plan shall be construed and enforced as if such
provisions had not been included.
5.5 This Plan shall be binding upon and shall inure to the
benefit of and be enforceable by the Company and its
successors and assigns, and by each Eligible Employee
and by the personal and legal representatives,
executors, administrators, successors, heirs,
distributees, devisees and legatees of each Eligible
Employee. If any Eligible Employee shall die while any
amount would still be payable to such Eligible Employee
(other than amount which, by their terms, terminate
upon the death of the Eligible Employee) if the
Eligible Employee had continued to live, all such
amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Plan to the
executors, personal representatives or administrators
of the Eligible Employee's estate.
5.6 The headings and captions herein are provided for
reference and convenience only, shall not be considered
part of the Plan, and shall not be employed in the
construction of the Plan.
5.7 The Plan shall not be funded. No Eligible Employee
shall have any right to, or interest in, any assets of
any Employer which may be applied by the Employer to
the payment of benefits or other rights under this
Plan.
5.8 All notices and all other communications provided for
in this Plan (i) shall be in writing, (ii) shall be
hand delivered, sent by overnight courier or by United
States registered mail, return receipt requested and
postage prepaid, addressed, in the case of the Company,
to 3240 Hillview Avenue, Palo Alto, California 94304,
and in the case of an Eligible Employee, to the last
known address of such Eligible Employee, and (iii)
shall be effective only upon actual receipt.
5.9 This Plan shall be construed and enforced according to
the laws of the State of California to the extent not
preempted by federal law, which shall otherwise
control.
CNF TRANSPORTATION INC.
By: /s/Eberhard G.H. Schmoller
Name: Eberhard G.H. Schmoller
Title: Sr. Vice President, General
Counsel & Secretary
Executed: December 9, 1998
<TABLE> Exhibit 12(a)
CNF TRANSPORTATION INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest expense $ 32,627 $ 39,553 $ 39,766 $ 33,407 $ 27,065
Capitalized interest 2,342 2,077 2,092 731 793
Dividend requirement on Series B
Preferred Stock(1) 12,133 12,377 12,645 12,419 12,475
Interest component of
rental expense (2) 40,750 35,607 28,521 29,210 28,776
Fixed Charges $ 87,852 $ 89,614 $ 83,024 $ 75,767 $ 69,109
Earnings:
Income from continuing
operations before taxes $ 250,411 $ 221,814 $ 147,132 $ 152,942 $ 165,129
Fixed charges 87,852 89,614 83,024 75,767 69,109
Capitalized interest (2,342) (2,077) (2,092) (731) (793)
Preferred dividend requirements(3) (12,133) (12,377) (12,645) (12,419) (12,475)
$ 323,788 $ 296,974 $ 215,419 $ 215,559 $ 220,970
Ratio 3.7x 3.3x 2.6x 2.8x 3.2x
<FN>
(1) Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt
service on notes issued by the Company's Thrift and Stock Plan.
(2) Estimate of the interest portion of lease payments.
(3) Preferred stock dividend requirements included in combined fixed charges but not deducted in
the determination of Income from Continuing Operations Before Income Taxes.
</TABLE>
<TABLE> Exhibit 12(b)
CNF TRANSPORTATION INC.
COMPUTATION OF RATIOS OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Year Ended December 31,
<CAPTION>
1998 1997 1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Combined Fixed Charges and Preferred
Stock Dividends:
Interest expense $ 32,627 $ 39,553 $ 39,766 $ 33,407 $ 27,065
Capitalized interest 2,342 2,077 2,092 731 793
Dividend requirement on Series B
Preferred Stock(1) 12,133 12,377 12,645 12,419 12,475
Dividend requirement on Series C
Preferred Stock (1) - - - 2,207 10,627
Dividend requirement on preferred
securities of subsidiary trust 6,250 3,471 - - -
Interest component of
rental expense (2) 40,750 35,607 28,521 29,210 28,776
Fixed Charges $ 94,102 $ 93,085 $ 83,024 $ 77,974 $ 79,736
Earnings:
Income from continuing
operations before taxes $250,411 $221,814 $147,132 $152,942 $165,129
Fixed charges 94,102 93,085 83,024 77,974 79,736
Capitalized interest (2,342) (2,077) (2,092) (731) (793)
Preferred dividend requirements(3) (12,133) (12,377) (12,645) (14,626) (23,102)
$330,038 $300,445 $215,419 $215,559 $220,970
Ratio 3.5x 3.2x 2.6x 2.8x 2.8x
<FN>
(1) Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt
service on notes issued by the Company's Thrift and Stock Plan. Preferred stock dividends include
dividends on the Series C Conversion Preferred Stock, all of which was converted into Common
Stock in March 1995.
(2) Estimate of the interest portion of lease payments.
(3) Preferred stock dividend requirements included in combined fixed charges but not deducted in
the determination of Income from Continuing Operations Before Income Taxes.
</TABLE>
EXHIBIT 13
PAGE 18
Financial Review and Management Discussion
The Company's total operating income in 1998 of $290.5
million exceeded 1997 results by 9.7% and was a record for
the third consecutive year. The increased operating income
was the result of significantly higher income from Con-Way
Transportation Services, increased income from Menlo
Logistics and a reduced loss from the Other segment, which
consists mostly of the operations under the Priority Mail
contract with the U.S. Postal Service. These improvements
were partially offset by significantly lower operating
income from Emery Worldwide. The Company's operating income
for 1997 was a record $264.9 million, which represented a
37.9% increase over 1996. Aided by a strong economy in 1997,
the increase resulted primarily from significant operating
income improvements from Con-Way, Emery and Menlo,
offsetting losses in the Other segment from the start-up
phase of the Priority Mail operations.
Total Company revenues for 1998, a record at $4.94 billion,
increased 15.8% over 1997. The increase was largely due to
higher revenues from Con-Way, significantly higher revenue
growth from Menlo, and higher revenues from the Other
segment, as a result of full operations following completion
of the start-up phase of the Priority Mail contract.
Partially offsetting these increases was a small decline in
revenues from Emery Worldwide. Total Company revenues for
1997, previously a record at $4.27 billion, increased 16.5%
over the previous record achieved in 1996. The most
significant revenue increases in 1997 came from Emery, Con-
Way and Menlo.
Operating results for 1996 reflect the results of
Consolidated Freightways Corporation (CFC) as a discontinued
operation. CFC was the Company's former long-haul, less-than-
truckload (LTL) carrier, which was spun off to shareholders
on December 2, 1996.
Con-Way Transportation Services
Revenues for Con-Way in 1998 were another record at $1.68
billion, a 14.3% increase over 1997, reflecting the combined
improvement from both higher tonnage levels and higher
revenue per hundredweight. Total Con-Way regional carrier
tonnage in 1998 increased 6.2% and LTL tonnage increased
6.6% over 1997. The volume improvements resulted from
continued market share gains in previously expanded regions
and growth from its premium service mix. Average revenue per
hundredweight was up approximately 10% over 1997, reflecting
increased joint-service business and continued success of
its premium service offerings. Also as a result of increased
tonnage and revenue per hundredweight, Con-Way's 1997
revenues increased 14.0% compared to 1996. Total regional
carrier tonnage for 1997 was 9.3% above 1996 with LTL
tonnage up 9.7%. Adding to these volume increases were
higher rates, as average revenue per hundredweight was up
about 5% compared to 1996.
Operating income for Con-Way in 1998 increased 40.6% to
$206.9 million compared with 1997, a $59.8 million
improvement. Operating income throughout 1998 exceeded $50
million each quarter and was in part due to the continued
expansion of more profitable premium services. As in the
prior year, productivity improvements that contributed to
the higher operating income included more efficient
utilization of the freight system's capacity, increased load
factors, freight handling efficiencies, growth from joint-
service business, and some benefit from lower fuel costs.
Con-Way reported a significant increase in operating income
in 1997 of 45.6% above 1996. Factors contributing to this
increase included higher revenues from the more profitable
premium services and similar productivity improvements
described for 1998.
Emery Worldwide
Emery revenues for 1998 decreased 2.1% from 1997 due
primarily to lower domestic and international airfreight
revenues, partially offset by revenue growth from other
transportation services, including the Express Mail contract
with the U.S. Postal Service. Total domestic revenues in
1998 were down only 2.3% from 1997 despite a sharper decline
of 9.6% in domestic airfreight revenues reflecting higher
revenues from other transportation services. Domestic
airfreight tonnage in 1998 declined 8.2% from 1997.
International airfreight revenues were down 5.0% on a
tonnage decline of 0.8%. Domestic airfreight revenue per
pound in 1998 was relatively unchanged from the prior year
with international revenue per pound down 3.4% from 1997.
Emery revenues for 1997 increased 14.3% over 1996. In 1997,
international airfreight revenues increased 16.0% and
domestic revenue was up 12.5%. Tonnage increases in 1997 for
the same international and domestic services were 13.7% and
9.8%, respectively.
PAGE 19
Domestic airfreight volume in 1998 declined primarily from
decreased demand from certain industries serviced by Emery,
increased ground-based competition, and implementation of
Emery's yield management program designed to re-price or
eliminate certain low margin business. The prior year also
included approximately $30 million of revenue attributed to
the two-week strike at a major parcel carrier in August
1997. International airfreight volumes in 1998 were down
from 1997 due primarily to adverse economic conditions in
the international markets served by Emery.
Partially as a result of the lower revenue levels, and
compounded by higher incremental costs of service
initiatives, operating income in 1998 for Emery declined
43.6% from 1997. Service initiatives aimed at improving
service levels to facilitate changes to Emery's domestic
premium service mix required some incremental cost
increases. These included costs from enhanced short-term
airlift capacity and other freight handling processes. The
impact, when combined with lower revenues, resulted in a
more dramatic decrease in margins. The comparatively lower
fuel costs in 1998 were essentially mitigated by fuel
surcharges realized in 1997. Emery's operating income for
1997 increased to a record $114.0 million, a 45.3% increase
over 1996. The improved results reflected the benefits of
revenue growth, combined with limited benefits from premium
service mix, the parcel carrier strike and continued cost
control strategies.
Emery's management strategies will focus on restoring
revenue levels with emphasis on the preferred service mix,
which includes higher margin guaranteed service. Programs
are also in place to control costs commensurate with revenue
levels that include efforts to balance short-term airlift
capacity necessary to attain required service levels.
Expansion plans will also focus on developing existing
international business with the non-asset based operations
that have lower capital requirements so costs can be
adjusted more closely with changes in revenue levels. In an
effort to increase the share of international business to
total revenues, management will convert more agent locations
to owned operations and enhance marketing efforts. Continued
technology projects also play a key roll in developing the
premium services in both the domestic and international
markets.
Menlo Logistics
Menlo operating results were previously reported as a part
of the Other segment, but now are reported as an independent
segment following the adoption of SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information."
Menlo revenues in 1998 of $586.8 million increased 28.7%
from 1997 partially as a result of the addition of new
contracts secured earlier in 1998 with several large
customers. Also contributing to the revenue growth in 1998
was an increase in revenues from existing contracts entered
into prior to this year. Menlo revenues in 1997 increased
26.9% over 1996.
Operating income in 1998 was $19.5 million, up 13.3% from
the prior year. The increased operating income was driven by
revenue growth and in part by improved margins from maturing
contracts. Partially offsetting the increased income from
existing contracts were costs of implementing several new
contracts secured in the first half of 1998. In 1997, Menlo
reported a 57.3% increase in operating income to reach $17.2
million. The 1997 increase partially resulted from an
increased mix of integrated solution projects that produced
higher margins than in 1996.
Other Operations
The Other segment consists primarily of the operations under
the Priority Mail contract with the U.S. Postal Service, and
includes Road Systems and VantageParts. The 1998 revenue
increase was due primarily to Priority Mail revenues that
increased to $410.8 million from $51.6 million in 1997. The
third quarter of 1998 was the first quarter in which the
full system of 10 Priority Mail Processing Centers was
complete and operational. The Company is seeking cost
recoveries from the USPS for expenses incurred in connection
with system modifications required by the USPS for the 1998
holiday operations. The claim seeks reimbursement for excess
costs incurred plus profit thereon. Included in 1998
revenues were unbilled revenues for this claim filed with
the USPS to recover a portion of the costs incurred in
connection with modifications for holiday operations. The
Priority Mail contract, which was signed in April 1997 and
PAGE 20
was in its start-up phase that same year, provided revenues
beginning only in the fourth quarter of 1997.
The operating loss for the Other segment in 1998 was
primarily due to losses incurred by the Priority Mail
operations. However, the Priority Mail contract loss of $3.0
million decreased 77.0% from the prior year as the 1997 loss
of $13.0 million included higher cost levels during the
start-up phase of operations. The loss incurred in 1998 was
primarily due to costs during completion of the start-up
phase in the first quarter of 1998 and the costs of
maintaining service levels and making required system
modifications for the holiday season in December, 1998. The
Other segment operating loss in 1997 was down $15.2 million
from operating income in 1996 as a result of losses incurred
during the 1997 start-up phase of the Priority Mail
contract.
Other Income (Expense)
Other expense for 1998 was down 6.8% compared to 1997
primarily due to lower interest expense resulting from
reduced interest rates following the refinancing in both
1998 and 1997 of certain debt obligations. Also contributing
to the lower interest expense in 1998 were lower average
short-term borrowings partially offset by dividend
requirements on preferred securities of a subsidiary trust
(TECONS) issued in June 1997. Other expense in 1997
decreased 4.4% from 1996 primarily as a result of lower
interest expense after the repayment of short-term
borrowings with proceeds from the issuance of the TECONS.
Income Taxes
The effective tax rate for 1998 was 44.5% compared to a rate
of 45.5% for 1997 and 1996. The decline in the effective tax
rate was primarily attributable to the implementation of
certain tax planning strategies and fewer non-deductible
items. The effective tax rate of 45.5% for 1997 and 1996
reflects comparable levels of non-deductible items and taxes
incurred in other jurisdictions.
Net Income
The 1998 net income available to common shareholders was
$130.8 million, a 15.8% increase compared with $113.0
million in 1997. The increased net income was attributable
to the combination of higher operating income, lower other
expenses and a lower effective tax rate. Higher operating
income in 1997 contributed to net income available to common
shareholders that increased 57.8% over 1996, which was
adversely impacted by a $52.6 million loss from discontinued
operations.
Liquidity and Capital Resources
During 1998, net capital and technology expenditure
requirements of $303.2 million exceeded cash flow from
operating activities of $266.8 million. Additionally,
dividend payments used $30.3 million in cash. To fund these
requirements, cash and cash equivalents declined $23.7
million and short-term borrowings increased $43.0 million.
Comparing 1998 to 1997, cash flow from operations declined
$21.4 million, as higher payments for current and other
liabilities more than offset increased cash from net income.
Receivables grew proportionately with business levels in
both years, while growth in operating liabilities slowed in
1998. Cash flow from operations in 1997 increased $71.9
million over 1996 primarily due to higher net income and
depreciation and amortization.
Investing activities for 1998 used $54.9 million more cash
than in 1997, reflecting a $25.3 million increase in capital
expenditures and a $40.4 million increase in expenditures
for purchased and internally developed software. The capital
expenditure increase primarily came from Emery and was
partially offset by lower capital expenditures for the
Priority Mail operations than in 1997. The increased
expenditures for software were for significant technology
projects to develop operating, finance and administrative
systems. Capital expenditures in 1997 increased $41.5
million compared to 1996 primarily due to expenditures
required for the Priority Mail contract.
Financing activities provided $37.1 million more cash in
1998 than in 1997, mostly reflecting the increase in short-
term borrowings. In 1997, proceeds from the issuance of the
TECONS and exercise of stock options
PAGE 21
were substantially offset by the repayment of borrowings.
Dividend payments were only slightly higher in 1998 than
in 1997 and 1996.
At December 31, 1998, the Company had borrowings of $28.0
million under its $350 million unsecured credit facility and
another $15.0 million under $95 million of other uncommitted
lines of credit.
The $350 million facility is also available for issuance of
letters of credit. Under that facility, outstanding letters
of credit totaled $66.6 million at December 31, 1998, which
left available capacity of $255.4 million. In addition, the
Company had available capacity of $80.0 million under the
other uncommitted lines of credit. Under several other
unsecured facilities, $51.5 million of letters of credit
were outstanding at December 31, 1998.
On October 1, 1998, the Company redeemed $46 million of
Series A revenue bonds used as partial financing of a
sorting facility in Dayton, Ohio. These redeemed bonds, with
an effective interest rate of 8% and due in October 2009,
were replaced with $46 million of Series A refinancing bonds
due in February 2018 with an interest rate of 5.625%.
The aggregate principal amount of the Company's unsecured
91/8% Notes is repayable on August 15, 1999. The Company has
the ability and intent to refinance the outstanding
principal on a long-term basis. Refer to Note 4 of the Notes
to Consolidated Financial Statements.
The Company filed a shelf registration statement with the
Securities and Exchange Commission in June 1998 that covers
$250 million of debt and equity securities for future
issuance with terms to be decided when and if issued.
The Company's ratio of total debt to capital decreased to
36.4% at December 31, 1998, from 37.9% at December 31, 1997,
primarily due to higher shareholders' equity from net
income. The current ratio was 1.2 to 1 at December 31, 1998,
compared to 1.3 to 1 at December 31, 1997.
Cyclicality and Seasonality
The Company operates in industries that are affected
directly by general economic conditions and seasonal
fluctuations, both of which affect demand for transportation
services. In the trucking and air freight industries, for a
typical year, the months of September and October usually
have the highest business levels while the months of January
and February usually have the lowest business levels.
Operations under the Priority Mail contract peak in December
primarily due to higher shipping demand related to the
holiday season.
Market Risk
The Company's policy is to enter into derivative financial
instruments only in circumstances that warrant the hedge of
an underlying asset or liability against exposure to some
form of market, interest rate or currency-related risk. This
policy also prohibits entering into derivative instruments
for trading purposes.
In certain situations, the Company used derivative financial
instruments to mitigate potential volatility in interest
rates. At December 31, 1998, these derivatives consisted of
plain vanilla interest rate swaps with high correlation to
the underlying exposure such that fluctuations in the value
of the derivatives offset reciprocal changes in the
underlying exposure. The underlying exposure consists
primarily of equipment lease obligations with variable
interest rate components that are adjusted quarterly. At
December 31, 1998, the Company estimates that the net
payments under the swaps given a hypothetical adverse change
of 10% in market interest rates would not have a material
effect on the Company's consolidated financial position or
results of operations.
The Company may also be exposed to the effect of interest
rate fluctuations on the fair value of the Company's long-
term debt and capital lease obligations, as described in
Notes 4 and 5 of the Notes to Consolidated Financial
Statements. The change in the fair value of the Company's
long-term obligations given a hypothetical 10% change in
interest rates would be approximately $15 million at
December 31, 1998.
At December 31, 1998, the Company had not entered into any
derivatives to hedge its foreign currency exchange exposure.
The Company may from time to time enter into fuel purchase
contracts to hedge the market exposure to fuel prices.
However, no material contracts were entered into at December
31, 1998.
Accounting Standards
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting
for the Costs of Computer
PAGE 22
Software Developed or Obtained for Internal Use"
(SOP 98-1). SOP 98-1, which provides for the
capitalization of the costs of internal-use software if
certain criteria are met, is effective for fiscal years
beginning after December 15, 1998. As provided by SOP 98-1,
the Company elected to adopt the pronouncement early and has
applied the new provisions prospectively as of January 1,
1998. Prior to adoption of SOP 98-1, it was the Company's
policy to capitalize purchased software costs and to expense
all internally developed internal-use software costs. For
the year ended December 31, 1998, costs of $35.9 million
were capitalized as internally developed internal-use
software.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 establishes accounting and
reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value and that
changes in fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
Qualifying hedges allow a derivative's gains and losses to
offset related results on the hedged item in the income
statement. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. Management does not expect the adoption
of SFAS 133 to have a material impact on the Company's
consolidated financial position or results of operations and
plans to adopt the statement in the first quarter of 2000.
YEAR 2000
Renovation of all business-critical IT Systems is scheduled
to be substantially complete by the end of the second
quarter of 1999. Validation, which is currently in process
for its systems and software applications, is scheduled for
completion by the end of the third quarter of 1999.
Like many other companies, an issue affecting the Company is
the ability of its computer systems and software to process
the year 2000 (Y2K or Year 2000). To ensure that the
Company's systems are Year 2000 compliant, a team of
Information Technology professionals began preparing for the
Y2K issue in 1996. In 1997, the Company formed a Steering
Committee composed of senior executives to address
compliance issues. The Y2K team developed, and the Steering
Committee approved, a Company-wide initiative to address
issues associated with the Year 2000. Company management has
designated the Y2K project as the highest priority of the
Company's Information Technology Department.
The Company's Y2K compliance efforts are focused on business-
critical items. Systems and software are considered
"business-critical" if a failure would either have a
material adverse impact on the Company's business, financial
condition or results of operations or involve a safety
exposure to employees or customers.
State of Readiness - The Company has identified distinct
categories for its Y2K compliance efforts: (1) Information
Technology (IT) Systems, (2) Non-IT Systems, and (3) IT and
Non-IT Systems of third parties with which the Company has
major relationships. The Company intends to fix or replace
non-compliant software and systems through a process that
involves taking inventory of its systems, assessing risks
and impact, correcting non-compliant systems through
renovation or replacement, and validating compliance through
testing. The Company intends to commit the resources
necessary to bring the project to scheduled completion.
IT Systems - IT Systems include mainframes, mid-range
computers and servers, networks and workstations, related
operating systems and application software. The Company has
inventoried and assessed all business-critical IT Systems.
Renovation efforts are in progress or are substantially
complete, depending on the system or software. The following
percentages of system and software renovations were achieved
as of December 31, 1998. Mainframe hardware has been fully
renovated. Certain peripheral mainframe hardware is
approximately 95% renovated. Mainframe operating systems and
mainframe applications software are approximately 85% and
45% renovated, respectively. Mid-range computers and servers
are estimated to be 55% renovated while approximately 30% of
related operating systems and application software programs
have been renovated. Network hardware (excluding servers)
and computer workstations are approximately 90% renovated
and an estimated 20% of the related operating systems and
application software programs have been renovated.
Non-IT Systems - Non-IT Systems include operating equipment,
security systems, and other equipment that may contain
microcontrollers with
PAGE 23
embedded technology. Certain IT Systems may also
include embedded technology. The Company has contacted
all business-critical operating and support
facilities to identify the extent of its embedded technology
and has received responses from approximately 80% of those
surveyed locations. The Company is assessing these results
and, when embedded technology is determined to exist, the
Company is surveying the vendor or manufacturer of the
embedded technology or the affected equipment or system to
identify risks related to the Year 2000. Approximately 60%
of the embedded technology the Company is aware of has been
confirmed as Y2K compliant. The Company's remaining systems
are being assessed and, if necessary, will be replaced if
determined to be non-compliant. These systems are expected
to be Y2K compliant by the end of the second quarter of 1999
and to be validated by the end of the third quarter of 1999.
Third Party Systems - In addition to its own IT and Non-IT
Systems, the Company is also reliant upon system
capabilities of third parties (including, among others,
customers, vendors, domestic and international government
agencies, and U.S. and international airports). The Company
believes these third party risks are inherent in the
industry and not specific to the Company.
The Company has initiated communications with third parties
with whom the Company has material business relationships to
determine the extent to which the Company's systems are
vulnerable to those third parties' failure to make necessary
changes related to Y2K issues. The intent of these inquiries
through questionnaires and interviews is to ascertain the
level of readiness of the identified third parties.
Essentially all of the Company's critical vendors have been
contacted and approximately 95% have responded to the
surveys. If a vendor is determined to be non-compliant, the
Company is working to identify a Y2K-compliant vendor as a
replacement. In an effort to mitigate risks related to the
system capabilities of certain customers, the Company plans
to provide Y2K-compliant software upgrades to its tracking
and tracing software and other proprietary software utilized
by its customers.
The International Air Transport Association and the Air
Transport Association of America are involved in global and
industry-wide studies aimed at assessing the Y2K compliance
status of airports and other U.S. and international
government agencies. As a member of these associations,
Emery Worldwide is analyzing the results of these studies as
they become available.
Costs to Address Y2K Compliance - Since 1996, the Company has
expensed approximately $22 million on Y2K compliance and
expects that approximately $18 million of additional Y2K
compliance costs will be expensed through December 31, 1999.
All Y2K costs have been and are expected to be funded from
operations. In 1998, the Company capitalized $15.5 million
of purchased software costs and $35.9 million of internally
developed software costs. A portion of the capitalized
software costs was for new financial and administrative
systems that are Y2K compliant. These systems have replaced
or are expected to replace certain non-compliant systems.
Risks - While the Company believes its efforts to address the
Year 2000 issue will be successful in avoiding any material
adverse effect on the Company's operations or financial
condition, it recognizes that failing to resolve Year 2000
issues on a timely basis would, in a most reasonably likely
worst case scenario, significantly limit its ability to
provide its services for a period of time, especially if
such failure is coupled with a third-party failure. As a
result, there can be no assurance that this matter will not
have a material adverse effect on the Company.
Contingency Plans - The Company is establishing a Y2K
contingency plan to evaluate business disruption scenarios,
coordinate the establishment of Y2K contingency plans, and
identify and implement preemptive strategies. Detailed
contingency plans for critical business processes are
scheduled to be formulated by the end of the second quarter
of 1999 and, if necessary, would undergo modification should
there be any changes in the status of the Company's Y2K
renovation efforts.
SUBSEQUENT EVENT
In January, 1999, the Company settled a lawsuit. The net
proceeds to the Company from the settlement are expected to
be approximately $16 million, and will be recognized as a
gain in the first quarter of 1999.
PAGE 24
<TABLE>
CNF TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands)
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 73,897 $ 97,617
Trade accounts receivable, net of allowance (Note 1) 810,550 703,785
Other accounts receivable 51,865 32,067
Operating supplies, at lower of average cost or market 41,764 36,580
Prepaid expenses 32,741 35,682
Deferred income taxes (Note 6) 89,544 103,656
Total Current Assets 1,100,361 1,009,387
Property, Plant and Equipment, at Cost
Land 114,146 109,768
Buildings and leasehold improvements 468,123 403,350
Revenue equipment 714,195 685,618
Other equipment 425,476 297,960
1,721,940 1,496,696
Accumulated depreciation and amortization (737,464) (616,854)
984,476 879,842
Other Assets
Restricted funds 2,655 10,601
Deferred charges and other assets 125,972 102,005
Capitalized software, net (Note 1) 64,285 18,867
Unamortized aircraft maintenance, net (Note 1) 143,349 123,352
Goodwill (Note 1) 268,314 277,442
604,575 532,267
Total Assets $ 2,689,412 $ 2,421,496
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements
</TABLE>
PAGE 25
<TABLE>
CNF TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands except per share data)
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
<S> <C> <C>
Current Liabilities
Accounts payable $ 285,832 $ 268,064
Accrued liabilities (Note 3) 446,171 423,237
Accrued claims costs 114,880 99,848
Current maturities of long-term debt and capital leases (Notes 4 and 5) 5,259 4,875
Short-term borrowings (Note 4) 43,000 -
Federal and other income taxes (Note 6) 12,340 10,114
Total Current Liabilities 907,482 806,138
Long-Term Liabilities
Long-term debt and guarantees (Note 4) 356,905 362,671
Long-term obligations under capital leases (Note 5) 110,730 110,817
Accrued claims costs 58,388 55,030
Employee benefits (Note 9) 183,416 141,351
Other liabilities and deferred credits 55,268 72,428
Deferred income taxes (Note 6) 115,868 89,958
Total Liabilities 1,788,057 1,638,393
Commitments and Contingencies (Notes 4, 5 and 13)
Company-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Convertible Debentures of
the Company (Note 7) 125,000 125,000
Shareholders' Equity (Note 8)
Preferred stock, no par value; authorized 5,000,000 shares:
Series B, 8.5% cumulative, convertible, $.01 stated value; designated
1,100,000 shares; issued 854,191 and 865,602 respectively 9 9
Additional paid-in capital, preferred stock 129,914 131,649
Deferred compensation (Note 10) (94,836) (101,819)
Total Preferred Shareholders' Equity 35,087 29,839
Common stock, $.625 par value; authorized 100,000,000 shares;
issued 54,797,707 and 54,370,182 shares, respectively 34,249 33,981
Additional paid-in capital, common stock 314,440 302,256
Retained earnings 584,991 473,250
Deferred compensation, restricted stock (Note 11) (4,599) (2,528)
Cost of repurchased common stock
(6,922,285 and 6,977,848 shares, respectively) (170,678) (172,048)
758,403 634,911
Accumulated foreign currency translation adjustments (9,140) (6,647)
Minimum pension liability adjustment (7,995) -
Accumulated other comprehensive loss (17,135) (6,647)
Total Common Shareholders' Equity 741,268 628,264
Total Shareholders' Equity 776,355 658,103
Total Liabilities and Shareholders' Equity $ 2,689,412 $ 2,421,496
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
PAGE 26
<TABLE>
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEARS ENDED DECEMBER 31
(Dollars in thousands except per share data)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES $ 4,941,490 $ 4,266,801 $ 3,662,183
Costs and Expenses
Operating expenses 3,878,640 3,333,721 2,918,682
Selling, general and administrative expenses 627,637 557,117 463,930
Depreciation 144,695 111,096 87,423
4,650,972 4,001,934 3,470,035
OPERATING INCOME 290,518 264,867 192,148
Other Income (Expense)
Investment income 327 1,378 52
Interest expense (32,627) (39,553) (39,766)
Dividend requirement on preferred securities of
subsidiary trust (Note 7) (6,250) (3,471) -
Miscellaneous, net (1,557) (1,407) (5,302)
(40,107) (43,053) (45,016)
Income from continuing operations before income tax 250,411 221,814 147,132
Income taxes (Note 6) 111,433 100,925 66,951
INCOME FROM CONTINUING OPERATIONS 138,978 120,889 80,181
Loss from discontinued operations, net of income
tax benefits (Note 2) - - (36,386)
Loss from discontinuance, net of income tax benefits - - (16,247)
- - (52,633)
Net income 138,978 120,889 27,548
Preferred stock dividends 8,169 7,886 8,592
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 130,809 $ 113,003 $ 18,956
Average Shares Outstanding (Note 1)
Basic 47,659,745 46,236,688 44,041,159
Diluted 55,514,318 53,077,468 49,531,101
Earnings Per Share (Note 1)
Basic
Income from continuing operations $ 2.74 $ 2.44 $ 1.63
Loss from discontinued operations - - (0.83)
Loss from discontinuance - - (0.37)
Net income $ 2.74 $ 2.44 $ 0.43
Diluted
Income from continuing operations $ 2.45 $ 2.19 $ 1.48
Loss from discontinued operations - - (0.73)
Loss from discontinuance - - (0.33)
Net income $ 2.45 $ 2.19 $ 0.42
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
PAGE 27
<TABLE>
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31
(Dollars in thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash and Cash Equivalents, Beginning of Year $ 97,617 $ 82,094 $ 59,787
Operating Activities
Net income 138,978 120,889 27,548
Adjustments to reconcile net income to net cash provided
by operating activities:
Discontinued operations - - 52,633
Depreciation and amortization 163,382 123,391 95,746
Increase (decrease) in deferred income taxes 40,022 31,840 (6,705)
Amortization of deferred compensation 9,764 7,132 6,403
Losses (gains) from property disposals, net (1,309) 927 (1,577)
Changes in assets and liabilities:
Receivables (126,563) (144,193) (30,006)
Prepaid expenses 2,941 (4,433) (2,933)
Accounts payable 17,768 57,663 27,308
Accrued liabilities 30,584 52,582 36,074
Accrued incentive compensation (7,650) 21,158 9,366
Accrued claims costs 18,390 9,626 11,616
Income taxes 2,226 17,564 18,040
Employee benefits 34,070 25,881 (14,565)
Deferred charges and credits (40,937) (25,783) (16,552)
Other (14,873) (6,034) 3,893
Net Cash Provided by Operating Activities 266,793 288,210 216,289
Investing Activities
Capital expenditures (267,668) (242,343) (200,835)
Software expenditures (51,415) (11,022) (10,815)
Proceeds from sales of property 15,836 5,043 7,689
Net Cash Used by Investing Activities (303,247) (248,322) (203,961)
Financing Activities
Proceeds from issuance of long-term debt 46,000 1,997 -
Repayment of long-term debt and capital lease obligations (51,469) (4,020) (2,436)
Proceeds from (repayment of) net short-term borrowings 43,000 (155,000) 105,000
Proceeds from issuance of subsidiary preferred securities,
net of costs of issuance - 121,431 -
Proceeds from exercise of stock options 5,483 41,500 1,887
Payments of common dividends (19,068) (18,497) (17,604)
Payments of preferred dividends (11,212) (11,776) (11,935)
Net Cash Provided (Used) by Financing Activities 12,734 (24,365) 74,912
Net Cash Provided (Used) by Continuing Operations (23,720) 15,523 87,240
Net Cash Used by Discontinued Operations - - (64,933)
Increase (Decrease) in Cash and Cash Equivalents (23,720) 15,523 22,307
Cash and Cash Equivalents, End of Year $ 73,897 $ 97,617 $ 82,094
Supplemental Disclosure
Cash paid for income taxes, net of refunds $ 67,955 $ 38,568 $ 13,822
Cash paid for interest, net of amounts capitalized 33,141 47,948 36,047
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
PAGE 28
<TABLE>
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
<CAPTION>
Preferred Stock Series B Common Stock Additional
Number of Number of Paid-in Deferred
Shares Amount Shares Amount Capital Compensation
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 954,412 $ 10 51,451,490 $ 32,157 $ 384,852 $ (114,896)
Net income - - - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - - - -
Comprehensive income - - - - - -
Exercise of stock options including
tax benefits of $1,565 - - 138,027 86 3,778 -
Issuance of restricted stock - - 6,310 4 158 (162)
Recognition of deferred compensation - - - - - 6,403
Repurchased common stock
issued for conversion of preferred stock (79,221) (1) - - (12,801) -
Common dividends declared ($.40 per share) - - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,696 - - - - - -
Distribution of investment in CFC (Note 2) - - - - - -
Balance, December 31, 1996 875,191 9 51,595,827 32,247 375,987 (108,655)
Net income - - - - - -
Other comprehensive loss:
Foreign currency translation adjustment - - - - - -
Comprehensive income - - - - - -
Exercise of stock options including
tax benefits of $16,612 - - 2,688,824 1,681 56,431 -
Issuance of restricted stock - - 85,531 53 2,771 (2,824)
Recognition of deferred compensation - - - - - 7,132
Repurchased common stock issued
for conversion of preferred stock (9,589) - - - (1,284) -
Common dividends declared ($.40 per share) - - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,389 - - - - - -
Balance, December 31, 1997 865,602 9 54,370,182 33,981 433,905 (104,347)
Net income - - - - - -
Other comprehensive loss:
Foreign currency translation adjustment - - - - - -
Minimum pension liability adjustment (Note 9) - - - - - -
Comprehensive income - - - - - -
Exercise of stock options including
tax benefits of $2,576 - - 321,079 201 7,858 -
Issuance of restricted stock, net
of forfeitures - - 106,446 67 3,935 (4,852)
Issuance of employee stock awards - - - - 13 -
Recognition of deferred compensation - - - - - 9,764
Repurchased common stock issued
for conversion of preferred stock (11,411) - - (1,357) -
Common dividends declared ($.40 per share) - - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $2,982 - - - - - -
Balance, December 31, 1998 854,191 $ 9 54,797,707 $ 34,249 $ 444,354 $ (99,435)
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
PAGE 29
<TABLE>
<CAPTION>
Cost of Accumulated
Repurchased Other
Retained Common Comprehensive Comprehensive
Earnings Stock Income (Loss) Income
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 608,399 $ (186,134) $ (2,028)
Net income 27,548 - - $ 27,548
Other comprehensive income:
Foreign currency translation adjustment - - 736 736
Comprehensive income - - - $ 28,284
Exercise of stock options including
tax benefits of $1,565 - - -
Issuance of restricted stock - - -
Recognition of deferred compensation - - -
Repurchased common stock
issued for conversion of preferred stock - 12,802 -
Common dividends declared ($.40 per share) (17,604) - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,696 (8,592) - -
Distribution of investment in CFC (Note 2) (231,007) - 4,571
Balance, December 31, 1996 378,744 (173,332) 3,279
Net income 120,889 - - $ 120,889
Other comprehensive loss:
Foreign currency translation adjustment - - (9,926) (9,926)
Comprehensive income - - - $ 110,963
Exercise of stock options including
tax benefits of $16,612 - - -
Issuance of restricted stock - - -
Recognition of deferred compensation - - -
Repurchased common stock issued
for conversion of preferred stock - 1,284 -
Common dividends declared ($.40 per share) (18,497) - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,389 (7,886) - -
Balance, December 31, 1997 473,250 (172,048) (6,647)
Net income 138,978 - - $ 138,978
Other comprehensive loss:
Foreign currency translation adjustment - - (2,493) (2,493)
Minimum pension liability adjustment (Note 9) - - (7,995) (7,995)
Comprehensive income - - - $ 128,490
Exercise of stock options including
tax benefits of $2,576 - - -
Issuance of restricted stock, net
of forfeitures - - -
Issuance of employee stock awards - 13 -
Recognition of deferred compensation - - -
Repurchased common stock issued
for conversion of preferred stock - 1,357 -
Common dividends declared ($.40 per share) (19,068) - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $2,982 (8,169) - -
Balance, December 31, 1998 $ 584,991 $ (170,678) $ (17,135)
</TABLE>
PAGE 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principal Accounting Policies
Basis of Presentation and Principles of Consolidation: The
consolidated financial statements include the accounts of
CNF Transportation Inc. (the Company or CNF) and its wholly
owned subsidiaries. On December 2, 1996, the Company
(formerly Consolidated Freightways, Inc.) completed the spin-
off of Consolidated Freightways Corporation (CFC) as
described in Note 2. CFC has been reflected as discontinued
operations in the consolidated financial statements and,
unless otherwise stated, is excluded from the accompanying
notes.
The continuing operations of the Company encompass four
business segments: Con-Way Transportation Services, Emery
Worldwide, Menlo Logistics, and Other. Con-Way provides
regional one- and two-day LTL freight trucking and full-
service truckload freight delivery throughout the U.S.,
Canada and Mexico, and expedited and guaranteed ground
transportation. In 1998, Con-Way introduced integrated
supply chain services to provide logistics solutions to
targeted customers. Emery provides expedited and deferred
domestic and international air cargo services, ocean
delivery, and customs brokerage. Domestically, Emery relies
primarily on its dedicated aircraft and ground fleet to
provide its services. Internationally, Emery acts
principally as a freight forwarder. Menlo is a full-service
contract logistics company that specializes in developing
and managing complex distribution networks. The Other
operations consist primarily of the Priority Mail contract
with the U.S. Postal Service, and include Road Systems, a
trailer manufacturer, and VantageParts, a wholesale
distributor of truck parts and supplies.
Recognition of Revenues: Transportation freight charges are
recognized as revenue when freight is received for shipment.
The estimated costs of performing the total transportation
service are then accrued. This revenue recognition method
does not result in a material difference from in-transit or
completed service methods of recognition.
Revenue from long-term contracts is recognized in accordance
with contractual terms as services are provided. Under
certain long-term contracts, there are provisions for price
re-determinations that give rise to unbilled revenue.
Unbilled revenue representing contract change orders or
claims is included in revenue only when the amounts are
determinable and realization is probable. When adjustments
in contract revenue are determined, any changes from prior
estimates are reflected in earnings in the current period.
The amount of unbilled revenue recognized at December 31,
1998 was approximately $11 million.
Cash Equivalents: Short-term interest-bearing instruments
with maturities of three months or less at the date of
purchase are considered cash equivalents.
Trade Accounts Receivable, Net: Trade accounts receivable
are net of allowances of $21,098,000 and $20,155,000 at
December 31, 1998 and 1997, 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, 10 years or less for aircraft, 5
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, except
for aircraft, are charged to operating expenses as incurred;
betterments are capitalized. Gains (losses) on sales of
equipment are recorded in operating expenses.
The costs to perform required maintenance inspections of
engines and aircraft frames for leased and owned aircraft
are capitalized and amortized to expense over the shorter of
the period until the next scheduled maintenance or the
remaining term of the lease agreement. Accordingly, the
PAGE 31
Company has recorded unamortized maintenance of $198,973,000
and $180,198,000 at December 31, 1998 and 1997,
respectively. Under certain of the Company's aircraft lease
agreements, the Company is expected to return the aircraft
with a stipulated number of hours remaining on the aircraft
and engines until the next scheduled maintenance. The
Company has recorded $55,624,000 and $56,846,000 at December
31, 1998 and 1997, respectively, to accrue for this
obligation and any estimated unusable maintenance at the
date of lease return or other disposal. The net amount,
which represents the difference between maintenance
performed currently and that required or remaining at the
expiration of the lease or other disposal, is classified as
Unamortized Aircraft Maintenance, net, in the Consolidated
Balance Sheets.
Capitalized Software: Capitalized Software, net, consists of
costs to purchase and develop software. In March 1998, the
American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use"
(SOP 98-1). SOP 98-1, which provides for the capitalization
of the costs of internal-use software if certain criteria
are met, is effective for fiscal years beginning after
December 15, 1998. As provided by SOP 98-1, the Company
elected to adopt the pronouncement early and has applied the
new provisions prospectively as of January 1, 1998. Prior to
adoption of SOP 98-1, it was the Company's policy to
capitalize purchased software costs and to expense all
internally developed internal-use software costs. For the
year ended December 31, 1998, costs of $35.9 million ($0.42
per share basic and $0.36 per share diluted) were
capitalized as internally developed internal-use software
and are included in Capitalized Software, net, in the
Consolidated Balance Sheets. Amortization of capitalized
software is computed on an item-by-item basis over a period
of 3 to 7 years, depending on the life of the software.
Goodwill: Goodwill, net, which represents the costs in
excess of net assets of businesses acquired, is capitalized
and amortized on a straight-line basis up to a 40-year
period. Impairment is periodically reviewed based on a
comparison of estimated, undiscounted cash flows from the
underlying segment to the related investment. In the event
goodwill is not considered recoverable, an amount equal to
the excess of carrying amount of goodwill less the estimated
discounted cash flows from the segment will be charged
against goodwill with a corresponding expense to the income
statement. Based on this review, management does not believe
goodwill is impaired. Accumulated amortization at December
31, 1998 and 1997 was $95,194,000 and $86,053,000,
respectively.
Income Taxes: The Company follows the liability method of
accounting for income taxes.
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 on trends of losses for
filed claims and claims estimated to be incurred but not
filed. The long-term portion of accrued claims costs relate
primarily to workers' compensation and vehicular claims that
are payable over several years.
Foreign Currency Translation: Adjustments resulting from
translating foreign functional currency financial statements
into U.S. dollars are included in the Foreign Currency
Translation Adjustment in the Statements of Consolidated
Shareholders' Equity.
Earnings Per Share: Basic and diluted earnings per share
(EPS) are calculated in accordance with SFAS 128, "Earnings
Per Share." Basic EPS is computed by dividing reported Net
Income Available to Common
PAGE 32
Shareholders by the weighted-
average shares outstanding. Diluted EPS from continuing
operations is calculated as follows:
(Dollars in thousands except per share data)
1998 1997 1996
Earnings:
Net income available to
common shareholders $130,809 $113,003 $71,589
Add-backs:
Dividends on Series B preferred stock,
net of replacement funding 1,274 1,231 1,769
Dividends on preferred securities of
subsidiary trust, net of tax 3,816 2,118 -
$135,899 $116,352 $73,358
Shares:
Weighted-average
shares outstanding 47,659,745 46,236,688 44,041,159
Stock option and restricted
stock dilution 708,042 1,029,415 1,021,417
Series B preferred stock 4,021,531 4,075,254 4,468,525
Preferred securities of
subsidiary trust 3,125,000 1,736,111 -
55,514,318 53,077,468 49,531,101
Diluted earnings per share $2.45 $2.19 $1.48
Estimates: Management makes estimates and assumptions when
preparing the financial statements in conformity with
generally accepted accounting principles. These estimates
and assumptions affect the amounts reported in the
accompanying financial statements and notes thereto. Actual
results could differ from those estimates.
Reclassification: Certain amounts in prior years' financial
statements have been reclassified to conform to the current
year presentation.
2. Business Divestitures
On December 2, 1996, the Company completed a tax-free
distribution (the Spin-off) to the Company's shareholders of
all the outstanding shares of CFC. CFC was the Company's
former long-haul, LTL segment, comprising CF MotorFreight, a
domestic LTL motor carrier and its Canadian operations. The
Company's shareholders received one share of CFC common
stock for every two shares of the Company's common stock
owned on November 15, 1996.
The accompanying consolidated financial statements have been
restated to report the discontinued operations of CFC
separately from continuing operations of the Company. CFC
revenues from discontinued operations totaled $1.98 billion
for the year ended December 31, 1996. A loss from
discontinued operations of $36.4 million for the year ended
December 31, 1996 is reported net of income tax benefits of
$11.9 million. The Company incurred costs in connection with
the Spin-off, including legal and advisory fees, costs of
relocating administrative, data processing and other
operating locations, severance, and other transaction costs.
These costs are reported net of $7.0 million of income tax
benefits in the Statements of Consolidated Income as Loss
from Discontinuance in 1996.
3. Accrued Liabilities
Accrued liabilities consisted of the following as of
December 31:
(Dollars in thousands) 1998 1997
Other accrued liabilities $163,227 $169,572
Holiday and vacation pay 59,237 52,263
Purchased transportation 33,616 40,732
Taxes other than income taxes 56,840 36,794
Wages and salaries 40,550 28,173
Estimated revenue adjustments 39,799 34,637
Interest 18,315 18,829
Incentive compensation 34,587 42,237
Total accrued liabilities $446,171 $423,237
PAGE 33
4. Debt and Guarantees
As of December 31, long-term debt and guarantees consisted
of the
following:
(Dollars in thousands) 1998 1997
91/8% Notes due 1999 (interest
payable semi-annually) $117,705 $117,705
7.35% Notes due 2005 (interest
payable semi-annually) 100,000 100,000
6.14% Industrial Revenue Bonds due
2014 (interest payable quarterly) 4,800 4,800
TASP Notes guaranteed, 8.42% to 9.04% due
through 2009 (interest payable semi-annually) 139,600 143,800
Other debt - 1,179
362,105 367,484
Less current maturities (5,200) (4,813)
Total long-term debt and guarantees $356,905 $362,671
The Company has a $350 million unsecured credit facility to
provide for letter of credit and working capital needs.
Borrowings under the agreement, which expires in 2001, bear
interest at a rate based upon select indices plus a margin
dependent on the Company's credit rating. The agreement
contains various restrictive covenants that limit the
incurrence of additional indebtedness and require the
Company to maintain minimum amounts of net worth and fixed
charge coverage. At December 31, 1998, the Company had $28.0
million of short-term borrowings and $66.6 million of
letters of credit outstanding under this agreement. Under
$95.0 million of other uncommitted lines of credit, the
Company had $15.0 million of short-term borrowings at
December 31, 1998. The weighted-average interest rate of
short-term borrowings outstanding at December 31, 1998 was
7.1%. There were no short-term borrowings at December 31,
1997.
The 91/8% Notes due in 1999 and the 7.35% Notes due in 2005
contain certain covenants limiting the incurrence of
additional liens.
The aggregate principal amount of the Company's unsecured
91/8% Notes is repayable on August 15, 1999. The Company has
the ability to refinance the outstanding principal on a long-
term basis and it is therefore included in Long-term Debt
and Guarantees in the Consolidated Balance Sheet as of
December 31, 1998.
The Company guarantees the restructured and non-restructured
notes issued by the Company's Thrift and Stock Plan. Holders
of both the restructured and non-restructured notes have the
right to require the Company to purchase the notes, in whole
or in part, on July 1, 1999. The Company has the ability to
refinance the outstanding principal of $139.6 million on a
long-term basis and it is therefore included in Long-term
Debt and Guarantees in the Consolidated Balance Sheet as of
December 31, 1998.
Of the $139.6 million TASP Notes, $110.5 million are subject
to redemption at the option of the holders should a certain
designated event occur or ratings by both Moody's and S&P of
senior unsecured indebtedness decline below investment
grade. The remaining $29.1 million of the notes contain
financial covenants including a common dividend restriction
equal to $10.0 million plus one-half of the Company's
earnings since inception of the agreement.
The Company's consolidated interest expense as presented on
the Statements of Consolidated Income is net of interest
capitalized of $2,342,000 in 1998, $2,077,000 in 1997 and
$2,092,000 in 1996.
The aggregate annual maturities and sinking fund
requirements of Long-Term Debt and Guarantees for the next
five years ending December 31 are $122,905,000 in 1999,
$6,400,000 in 2000, $7,500,000 in 2001, $8,700,000 in 2002,
and $10,100,000 in 2003.
5. Leases
The Company and its subsidiaries are obligated under various
non-cancelable leases. The principal capital lease covers a
sorting facility in Dayton, Ohio (the Hub). The Hub is
financed by City of Dayton, Ohio revenue bonds. On October
1, 1998, the Company redeemed $46 million of the Series A
revenue bonds. These redeemed bonds, with an effective
interest rate of 8% and due in October 2009, were replaced
with $46 million of Series A refinancing bonds due in
February 2018 with an interest rate of
PAGE 34
5.625%. The remaining $62 million are due in 2009
and bear rates of interest between 6.05%
and 6.20%, and have various call provisions.
Included in property, plant and equipment is $36,136,000 of
equipment and leasehold improvements, net, related to the
Hub.
Future minimum lease payments under all leases with initial
or remaining non-cancelable lease terms in excess of one
year, at December 31, 1998, are as follows:
(Dollars in thousands)
Year ending December 31: Capital Leases Operating
Leases
1999 $6,819 $182,738
2000 6,819 133,464
2001 6,819 89,817
2002 6,819 60,705
2003 6,819 40,940
Thereafter (through 2018) 173,046 72,125
Total minimum lease payments 207,141 $579,789
Amount representing interest (96,352)
Present value of minimum lease payments 110,789
Current maturities of obligations under
capital leases (59)
Long-term obligations
under capital leases $110,730
Certain operating leases contain financial covenants equal to or
less restrictive than covenants on debt. Certain operating leases also
contain provisions that allow the Company to extend the leases for
various renewal periods.
Rental expense for operating leases is comprised of the
following:
(Dollars in thousands) 1998 1997 1996
Minimum rentals $232,008 $203,521 $178,781
Sublease rentals (4,001) (5,087) (2,355)
Amortization of deferred gains (4,012) (4,487) (4,487)
$223,995 $193,947 $171,939
6. Income Taxes
The components of pretax income and income taxes are as
follows:
(Dollars in thousands) 1998 1997 1996
Pretax income
U.S. corporations $240,838 $206,055 $137,918
Foreign corporations 9,573 15,759 9,214
Total pretax income $250,411 $221,814 $147,132
Income taxes
Current
U.S. federal $59,429 $49,187 $57,397
State and local 7,829 12,109 6,430
Foreign 4,153 7,789 5,762
71,411 69,085 69,589
Deferred
U.S. federal 37,284 31,162 (2,903)
State and local 2,738 678 265
40,022 31,840 (2,638)
Total income taxes $111,433 $100,925 $ 66,951
PAGE 35
The components of deferred tax assets and liabilities at
December 31, relate to the following:
(Dollars in thousands) 1998 1997
Deferred tax assets
Reserves for accrued claims costs $44,400 $39,969
Reserves for post retirement health benefits 39,452 34,732
Other reserves not currently deductible 45,904 62,217
Reserves for employee benefits 66,916 49,118
196,672 186,036
Deferred tax liabilities
Depreciation and amortization 194,691 159,912
Unearned revenue 4,601 2,853
Other 23,704 9,573
222,996 172,338
Net deferred tax asset (liability) $(26,324) $13,698
Deferred tax assets and liabilities in the Consolidated
Balance Sheets are classified based on the related asset or
liability creating the deferred tax. Deferred taxes not
related to a specific asset or liability are classified
based on the estimated period of reversal. Although
realization is not assured, management believes it more
likely than not that all deferred
tax assets will be realized.
Income taxes vary from the amounts calculated by applying
the U.S. statutory income tax rate to the pretax income as
set forth in the following reconciliation:
1998 1997 1996
U.S. statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of
federal income tax benefit) 3.8 4.3 4.4
Foreign taxes in excess of
U.S. statutory rate .9 1.0 1.7
Non-deductible operating expenses 1.1 1.2 1.8
Amortization of goodwill 1.2 1.4 2.2
Foreign tax credits, net (1.6) (1.1) -
Other, net 4.1 3.7 0.4
Effective income tax rate 44.5% 45.5% 45.5%
The cumulative undistributed earnings of the Company's
foreign subsidiaries (approximately $25.2 million at
December 31, 1998), 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 $2.5 million.
The Company is currently under examination by the Internal
Revenue Service (IRS) for tax years 1987 through 1996.
Except for the effect, if any, of the items discussed in the
paragraph below, it is the opinion of management that any
adjustments related to the examination for these years would
not have a material impact on the Company's financial
position or results of operations. In addition, as part of
the Spin-off, the Company and CFC entered into a tax sharing
agreement which provides a mechanism for the allocation of
any additional tax liability and related interest that arise
due to adjustments from the IRS for years prior to the Spin-
off.
PAGE 36
The IRS has proposed a substantial 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. In
addition, the Company believes it is likely that the IRS
will propose an additional adjustment, based on the same IRS
position with respect to aircraft maintenance costs, for
subsequent tax years. The Company believes that its practice
of expensing these types of maintenance costs is consistent
with industry practice. However, if this issue is determined
adversely to the Company, there can be no assurance that the
Company will not have to pay substantial additional tax. The
Company is unable to predict the ultimate outcome of this
matter and intends to vigorously contest the proposed
adjustment. There can be no assurance, however, that this
matter will not have a material adverse effect on the
Company.
7. Preferred Securities of Subsidiary Trust
On June 11, 1997, CNF Trust I (the Trust), a Delaware
business trust wholly owned by the Company, issued 2,500,000
of its $2.50 Term Convertible Securities, Series A (TECONS)
to the public for gross proceeds of $125 million. The
combined proceeds from the issuance of the TECONS and the
issuance to the Company of the common securities of the
Trust were invested by the Trust in $128.9 million aggregate
principal amount of 5% convertible subordinated debentures
due June 1, 2012 (the Debentures) issued by the Company. The
Debentures are the sole assets of the Trust.
Holders of the TECONS are entitled to receive cumulative
cash distributions at an annual rate of $2.50 per TECONS
(equivalent to a rate of 5% per annum of the stated
liquidation amount of $50 per TECONS). The Company has
guaranteed, on a subordinated basis, distributions and other
payments due on the TECONS, to the extent the Trust has
funds available therefor and subject to certain other
limitations (the "Guarantee"). The Guarantee, when taken
together with the obligations of the Company under the
Debentures, the Indenture pursuant to which the Debentures
were issued, and the Amended and Restated Declaration of
Trust of the Trust [including its obligations to pay costs,
fees, expenses, debts and other obligations of the Trust
(other than with respect to the TECONS and the common
securities of the Trust)], provide a full and unconditional
guarantee of amounts due on the TECONS.
The Debentures are redeemable for cash, at the option of the
Company, in whole or in part, on or after June 1, 2000 at a
price equal to 103.125% of the principal amount, declining
annually to par if redeemed on or after June 1, 2005, plus
accrued and unpaid interest. In certain circumstances
relating to federal income tax matters, the Debentures may
be redeemed by the Company at 100% of the principal plus
accrued and unpaid interest. Upon any redemption of the
Debentures, a like aggregate liquidation amount of TECONS
will be redeemed. The TECONS do not have a stated maturity
date, although they are subject to mandatory redemption upon
maturity of the Debentures on June 1, 2012, or upon earlier
redemption.
Each TECONS is convertible at any time prior to the close of
business on June 1, 2012 at the option of the holder into
shares of the Company's common stock at a conversion rate of
1.25 shares of the Company's common stock for each TECONS,
subject to adjustment in certain circumstances.
8. Shareholders' Equity
Series B Preferred Stock - In 1989, the Board of Directors
designated a series of 1,100,000 preferred shares as Series
B Cumulative Convertible Preferred Stock, $.01 stated value,
which is held by the CNF Thrift and Stock Plan (TASP). The
Series B preferred stock is convertible into common stock,
as described in Note 10, at the rate of 4.71 shares for each
share of preferred stock subject to antidilution adjustments
in certain circumstances. Holders of the Series B preferred
stock are entitled to vote with the common stock and are
entitled to a number of votes in such circumstances equal to
the product of (a) 1.3 multiplied by (b) the number of
shares of common stock into which the Series B preferred
stock is convertible on the record date of such vote.
Holders of the Series B preferred stock are also entitled to
vote separately as a class on certain other matters. The
TASP trustee is required to vote the allocated shares based
upon instructions from the participants; unallocated shares
are voted in proportion to the voting instructions received
from the participants with allocated shares.
PAGE 37
Comprehensive Income - In 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income." which requires companies
to report a measure of all changes in equity except those
resulting from investment by owners and distribution to
owners, in a financial statement for the period in which
they are recognized. The Company has elected to disclose
Comprehensive Income in the Statements of Consolidated
Shareholders' Equity. Prior years have been restated to
conform to the requirements of SFAS 130.
9. Employee Benefit Plans
In 1998, the Company adopted SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement
Benefits." SFAS 132 supercedes the disclosure requirements
of SFAS 87, "Employers' Accounting for Pensions" and SFAS
106, "Employers Accounting for Postretirement Benefits Other
than Pensions." SFAS 132 only addresses disclosure and does
not address measurement or recognition. Disclosures for the
prior year have been restated.
Pension Plans The Company has a non-contributory defined
benefit pension plan (the Plan) covering non-contractual
employees in the United States. The Company's annual pension
provision and contributions are based on an independent
actuarial computation. Although it is the Company's funding
policy to contribute the minimum required tax-deductible
contribution for the year, it may increase its contribution
above the minimum if appropriate to its tax and cash
position and the Plan's funded status. Benefits under the
Plan are based on a career average final five-year pay
formula. Approximately 94% of the 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.
The following sets forth the change in funded status and the
determination of the accrued benefit cost included in
Employee Benefits in the Consolidated Balance Sheets at
December 31:
(Dollars in thousands) 1998 1997
Change in benefit obligation:
Projected benefit obligation at beginning of year $330,658 $252,090
Service cost - benefits earned during the year 30,497 23,664
Interest cost on projected benefit obligation 25,338 21,818
Actuarial loss 10,712 39,192
Benefits paid (6,338) (6,106)
Projected benefit obligation at end of year 390,867 330,658
Change in plan assets:
Fair value of plan assets at beginning of year 312,818 271,669
Actual return on plan assets 46,136 46,577
Transfers from defined contribution plan 1,934 678
Benefits paid (6,338) (6,106)
Fair value of plan assets at end of year 354,550 312,818
Funded status (36,317) (17,840)
Unrecognized actuarial gain (26,745) (18,772)
Unrecognized prior service costs 7,816 9,000
Unrecognized net asset at transition (5,646) (6,775)
Accrued benefit cost $(60,892) $(34,387)
Weighted-average assumptions as of December 31:
Discount rate 7.00% 7.25%
Expected long-term rate of return on assets 9.50% 9.50%
Rate of compensation increase 5.00% 5.00%
PAGE 38
Net pension cost includes the following:
(Dollars in thousands) 1998 1997 1996
Service cost - benefits earned
during the year $ 30,497 $ 23,664 $ 22,544
Interest cost on projected benefit obligation 25,338 21,818 18,214
Expected return on plan assets (29,386) (25,511) (20,465)
Net amortization and deferral 56 (200) (88)
Net pension cost $ 26,505 $ 19,771 $ 20,205
The Company also has a supplemental retirement program that
provides additional benefits for compensation excluded from
the basic Plan. The annual provision for these programs is
based on independent actuarial computations using
assumptions consistent with the Plan. At December 31, 1998
and 1997, the accrued benefit cost was $14,174,000 and
$11,915,000, respectively, and the net periodic pension cost
was $4,036,000 in 1998, $2,462,000 in 1997 and $2,274,000 in
1996.
Also included in Employee Benefits in the Balance Sheet at
December 31, 1998, was the minimum pension liability for the
unfunded supplemental program. The non-cash adjustment for
the minimum pension liability of $10,370,000 was offset by
an intangible asset of $2,375,000 and a $7,995,000 reduction
of comprehensive income.
Post Retirement Plans - The Company has a retiree health plan
that 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 sets forth the change in accumulated benefit
obligation and the determination of the accrued benefit cost
included in Employee Benefits in the Consolidated Balance
Sheets at December 31:
(Dollars in thousands) 1998 1997
Change in benefit obligation:
Accumulated benefit obligation at
beginning of year $79,898 $71,704
Service cost - benefits earned during
the year 2,228 2,043
Interest cost on accumulated
benefit obligation 6,046 5,697
Benefit payments (3,966) (3,752)
Actuarial loss 5,741 4,206
Accumulated benefit obligation
at end of year 89,947 79,898
Unrecognized net actuarial gain 2,177 7,918
Unrecognized prior service benefit 389 444
Accrued benefit cost $92,513 $88,260
Assumptions as of December 31:
Weighted-average discount rate 7.00% 7.25%
Average health care cost trend rate
First year 5.5% 6.5%
Declining to (Year 1999) 5.5% 5.5%
Net periodic post retirement benefit cost includes the
following:
(Dollars in thousands) 1998 1997 1996
Service cost - benefits earned
during the year $2,228 $2,043 $2,422
Interest cost on accumulated
benefit obligation 6,046 5,697 5,256
Net amortization and deferral (55) (244) (131)
Net periodic post retirement benefit cost $8,219 $7,496 $7,547
PAGE 39
A one-percentage-point change in assumed health care cost
trend rates would change the aggregate service and interest
cost by $210,000 and the accumulated benefit obligation by
approximately $3,200,000.
Other Compensation Plans - The Company and each of its
subsidiaries have adopted various plans relating to the
achievement of specific goals to provide incentive
compensation for designated employees. Total compensation
earned by salaried participants of those plans was
$34,929,000, $51,900,000 and $23,210,000 in 1998, 1997 and
1996, respectively, and by hourly participants was
$36,500,000, $38,100,000 and $12,200,000 in 1998, 1997 and
1996, respectively.
10. Thrift and Stock Plan
The Company sponsors the CNF Thrift and Stock Plan (TASP), a
voluntary defined contribution plan with a leveraged ESOP
feature, for non-contractual U.S. employees. In 1989, the
TASP borrowed $150,000,000 to purchase 986,259 shares of the
Company's Series B Cumulative Convertible Preferred Stock.
This stock is only issuable to the TASP trustee. The TASP
satisfies the Company's contribution requirement by matching
up to 50% of the first 3% percent of a participant's basic
compensation. Company contributions to the TASP were
$10,491,000 in 1998, $9,921,000 in 1997 and $8,589,000 in
1996, in the form of common and preferred stock.
The Series B Preferred Stock earns a dividend of $12.93 per
share and is used to repay the TASP debt. Any shortfall is
paid in cash by the Company. Dividends on these preferred
shares are deductible for income tax purposes and,
accordingly, are reflected net of their tax benefits in the
Statements of Consolidated Income. Allocation of preferred
stock to participants' accounts is based upon the ratio of
the current year's principal and interest payments to the
total TASP debt. Since the Company guarantees the debt, it
is reflected in Long-term Debt and Guarantees in the
Consolidated Balance Sheets. The TASP guarantees are reduced
as principal is paid.
Each share of preferred stock is convertible into common
stock, upon an employee ceasing participation in the plan,
at a rate generally equal to that number of shares of common
stock that could be purchased for $152.10, but not less than
the minimum conversion rate of 4.71 shares of common stock
for each share of Series B preferred stock.
Deferred compensation expense is recognized as the preferred
shares are allocated to participants and is equivalent to
the cost of the preferred shares allocated and the TASP
interest expense for the year, reduced by the dividends paid
to the TASP. During 1998, 1997 and 1996, $6,983,000,
$6,649,000 and $6,250,000, respectively, of deferred
compensation expense was recognized.
At December 31, 1998, the TASP owned 854,191 shares of
Series B preferred stock, of which 236,247 shares have been
allocated to employees. At December 31, 1998, the Company
has reserved, authorized and unissued common stock adequate
to satisfy the conversion feature of the Series B preferred
stock.
11. Stock-Based Compensation
Stock Options - Officers and non-employee directors have been
granted options under the Company's stock option plans to
purchase common stock of the Company at prices equal to the
market value of the stock on the date of grant. Options
granted prior to June 30, 1998 generally are exercisable one
year from the date of grant. Stock option grants awarded
subsequent to June 30, 1998 vest ratably over four years
following the grant date. The options generally expire 10
years from the dates of grant.
The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Had
compensation cost for the Company's stock-based compensation
plans been determined in accordance with SFAS 123,
"Accounting for Stock-Based Compensation," pro forma net
income from continuing operations as reported net of
preferred dividends would have been $123.6 million, $109.3
million, and $68.6 million for the years 1998, 1997 and
1996, respectively. Diluted earnings per share would have
been $2.32, $2.12 and $1.42 per share for the years 1998,
1997 and 1996, respectively. These pro forma effects of
applying SFAS 123 are not indicative of future amounts. The
weighted-average grant-date fair value of options granted in
1998, 1997 and 1996 was
PAGE 40
$17.22, $12.28 and $8.54 per share, respectively.
The following assumptions were used with the
Black-Scholes options pricing model to calculate the option
values: risk free, weighted-average rate, 4.8%-5.9%;
expected life, 5.9 years; dividend yield, 1.1%; and
volatility, 45.0%.
The following is a summary of stock option data:
Number of Wtd. Avg.
Options Exercise
Price
Outstanding at December 31, 1995 3,758,195 $19.11
Granted 537,500 21.53
Exercised (138,027) 14.30
Expired or canceled (24,319) 27.10
Adjustment for Spin-off 773,139 -
Outstanding at December 31, 1996 4,906,488 16.46
Granted 492,500 32.47
Exercised (2,688,824) 15.42
Expired or canceled (122,566) 26.77
Outstanding at December 31, 1997 2,587,598 20.12
Granted 711,350 38.29
Exercised (321,079) 17.07
Expired or canceled (46,850) 38.24
Outstanding at December 31, 1998 2,931,019 $24.60
Options exercisable as of December 31:
1998 2,194,975 $20.66
1997 2,051,347 17.35
1996 4,366,040 16.26
The following is a summary of the stock options outstanding
and exercisable at December 31, 1998:
Outstanding Options Exercisable Options
Range of Number Remaining Wtd. Avg. Number Wtd. Avg.
Exercise of Life in Exercise of Exercise
Prices Options Years Price Options Price
$11.08-$16.26 624,244 4.1 $13.55 565,033 $13.30
18.05- 22.75 1,166,775 6.5 19.38 1,166,775 19.38
29.63- 43.63 1,140,000 9.3 35.98 463,167 32.88
Restricted Stock: Under terms of the Company's stock-based
compensation plans, shares of the Company's common stock are
awarded to executive officers and, to a lesser extent,
directors. Restrictions on the shares generally expire one-
third per year dependent on the achievement of certain
market prices of the Company's common stock. Shares are
valued at the market price of the Company's common stock at
the date of award.
The following table summarizes information about restricted
stock awards for the years ended December 31:
1998 1997 1996
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Fair Fair Fair
Shares Value Shares Value Shares Value
Awarded 112,113 $38.51 85,531 $33.02 6,310 $25.67
Forfeited 5,667 34.41 - - - -
Total compensation expense recognized for restricted stock
in 1998, 1997 and 1996 was $2,781,000, $483,000, and
$153,000, respectively.
At December 31, 1998, the Company had 1,084,500 common
shares available for the grant of stock options, restricted
stock, or other stock-based incentive compensation.
PAGE 41
12. Financial Instruments
The Company has several interest rate swap agreements,
including certain swaps entered into in 1998. These
agreements, which expire through 2005, effectively convert
$156.3 million of variable rate lease obligations to fixed
rate obligations. Interest rate differentials to be paid or
received are recognized over the life of each agreement as
adjustments to operating expense. The Company is exposed to
credit loss on the interest rate swaps, but the Company does
not anticipate any loss due to the creditworthiness of its
swap counter parties. The fair values of the interest rate
swaps, as presented below, reflect the estimated amounts
that the Company would receive or pay to terminate the
contracts at the reported date.
The following table presents the carrying amounts and
estimated fair values of the Company's financial instruments
at December 31:
(Dollars in thousands) 1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Receivable (payable) for
interest rate swaps $ - $ 700 $ - $ (900)
Short-term borrowings 43,000 43,000 - -
Long-term debt 362,105 385,000 367,484 396,000
13. Contingencies and Other Commitments
In connection with the Spin-off, the Company agreed to
indemnify certain states, insurance companies and sureties
against the failure of CFC to pay certain worker's
compensation and public liability claims that were pending
as of September 30, 1996. In some cases, these indemnities
are supported by letters of credit under which the Company
is liable to the issuing bank and by bonds issued by surety
companies. In order to secure CFC's obligation to reimburse
and indemnify the Company against liability with respect to
these claims, CFC has provided the Company with
approximately $13.5 million of letters of credit and $22.0
million of real property collateral.
In addition to letters of credit outstanding under its $350
million unsecured credit facility, the Company at December
31, 1998 had $51.5 million of letters of credit outstanding
under several other unsecured letter of credit facilities.
The Company has entered into an agreement to provide CFC
with certain information systems, data processing and other
administrative services and will administer CFC's retirement
and benefits plans. The agreement has a three-year term,
which expires December 2, 1999, although CFC may terminate
any or all services with six months notice. The Company may
terminate all services other than the telecommunications and
data processing services at any time, with six months
notice. Services performed by the Company under the
agreement shall be paid by CFC on an arm's-length negotiated
basis.
The Internal Revenue Service (the IRS) has proposed
adjustments that would require Emery Worldwide to 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 excise taxes for
the 1990 through 1995 tax period. In addition, it is
possible that the IRS may seek to increase the amount of the
aviation excise tax payable by Emery Worldwide 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.
The Company has received notices from the Environmental
Protection Agency and others that it has been identified as
a potentially responsible party (PRP) under the
Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) or other Federal and state
environmental statutes at several hazardous waste sites.
Under CERCLA, PRPs are jointly and severally liable for all
site remediation and expenses. After
PAGE 42
investigating the Company's involvement at such sites,
the Company has either agreed to de minimis
settlements or, based upon cost studies
performed by independent third parties, believes its
obligations with respect to such sites would not have a
material adverse effect on the Company's financial position
or results of operations.
In addition to the matters discussed above, the Company and
its subsidiaries are defendants in various lawsuits
incidental to their businesses. It is the opinion of
management that the ultimate outcome of these actions will
not have a material impact on the Company's financial
position or results of operations.
14. Subsequent Event
In January 1999, the Company settled a lawsuit. The net
proceeds to the Company from the settlement are expected to
be approximately $16 million and will be recognized as a
gain in the first quarter of 1999.
15. Segment Reporting
In the fourth quarter of 1998, the Company adopted SFAS 131,
"Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the method of disclosing
segment information to the manner in which the Company's
chief operating decision maker organizes the components for
making operating decisions, assessing performance and
allocating resources. The Company has organized the segments
based on the type of transportation services provided, which
are described in Note 1. As required by SFAS 131, all prior
years' segment data has been restated.
The Company accounts for its segments under the same
policies as described in the principal accounting policies
footnote. Intersegment revenues and related earnings have
been eliminated to reconcile to consolidated revenue and
operating income. Management evaluates segment performance
primarily based on revenue and operating income; therefore,
other items included in pretax income, consisting primarily
of interest income or expense, are not reported in segment
results. Operating income is net of all corporate expenses,
which are allocated based on measurable services provided
each segment or for general corporate expenses allocated on
a revenue and capital basis.
Identifiable corporate assets consist primarily of deferred
charges and other assets, property and equipment and
deferred taxes. Certain corporate assets that are used to
provide shared data processing and other administrative
services are not allocated to individual segments.
For geographic information, revenues are allocated between
the United States and international, depending on whether
the shipments are between locations within the United States
or between locations where one or both are outside the
United States. Long-lived assets outside the United States
were immaterial for all periods presented.
Geographic Information
(Dollars in thousands) 1998 1997 1996
Revenues
United States $3,963,862 $3,275,173 $2,805,135
Canada 154,899 158,884 134,484
North America 4,118,761 3,434,057 2,939,619
International 822,729 832,744 722,564
Total $4,941,490 $4,266,801 $3,662,183
PAGE 43
<TABLE>
<CAPTION>
OPERATING SEGMENTS
Adjustments, Con-Way
Eliminations Transportation Emery Menlo
(Dollars in thousands) Consolidated and the Parent Services Worldwide Logistics Other
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Revenues $ 4,941,490 $ (103,292) $1,710,345 $2,232,815 $ 598,750 $502,872
Inter-company eliminations - 103,292 (26,354) (29,341) (11,915) (35,682)
Net revenues 4,941,490 - 1,683,991 2,203,474 586,835 467,190
Operating income (loss) 290,518 - 206,945 64,299 19,459 (185)
Depreciation and amortization 163,382 6,601 77,269 55,025 6,138 18,349
Capital expenditures 267,668 6,052 102,290 101,935 7,115 50,276
Identifiable assets 2,689,412 196,980 825,615 1,278,228 125,728 262,861
Year Ended December 31, 1997 (a)
Revenues 4,266,801 (100,712) 1,480,364 2,278,755 473,379 135,015
Inter-company eliminations - 100,712 (7,176) (29,161) (17,487) (46,888)
Net revenues 4,266,801 - 1,473,188 2,249,594 455,892 88,127
Operating income (loss) 264,867 - 147,155 113,963 17,178 (13,429)
Depreciation and amortization 123,391 6,262 65,560 45,483 4,331 1,755
Capital expenditures 242,343 2,896 109,328 58,795 11,504 59,820
Identifiable assets 2,421,496 166,840 736,449 1,320,411 171,144 26,652
Year Ended December 31, 1996 (a)
Revenues 3,662,183 (209,696) 1,430,629 1,982,238 372,100 86,912
Inter-company eliminations - 209,696 (138,547) (14,180) (12,723) (44,246)
Net revenues 3,662,183 - 1,292,082 1,968,058 359,377 42,666
Operating income 192,148 - 101,049 78,415 10,918 1,766
Depreciation and amortization 95,746 2,746 52,707 37,288 2,402 603
Capital expenditures 200,835 434 146,377 46,939 3,427 3,658
Identifiable assets 2,081,866 172,969 687,821 1,137,631 59,491 23,954
<FN>
(a) Prior years have been retated for the adoption of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
</TABLE>
PAGE 44
<TABLE>
16. Quarterly Financial Data (Unaudited)
(Dollars in thousands
except per share data)
<CAPTION>
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1998 - Quarter Ended
Revenues $1,089,866 $1,199,654 $1,282,510 $1,369,460
Operating income 44,805 84,003 89,043 72,667(a)
Income before income
taxes 34,077 74,533 79,227 62,574
Income taxes 15,164 33,167 35,257 27,845
Net income 18,913 41,366 43,970 34,729
Net income available
to common shareholders 16,906 39,326 41,939 32,638
Per share:
Basic earnings 0.36 0.83 0.88 0.68
Diluted earnings 0.33 0.73 0.78 0.61
Market price range $34.81-$49.94 $35.00-$44.50 $26.81-$47.94 $21.63-$38.94
Common dividends paid 0.10 0.10 0.10 0.10
March 31 June 30 September 30 December 31
1997 - Quarter Ended
Revenues $ 942,628 $1,002,563 $1,127,362 $1,194,248
Operating income 50,367 66,867 81,847 65,786(b)
Income before income taxes 40,172 55,027 72,743 53,872
Income taxes 18,228 25,038 33,098 24,561
Net income 21,944 29,989 39,645 29,311
Net income available
to common shareholders 20,005 28,018 37,694 27,286
Per share:
Basic earnings 0.44 0.61 0.81 0.58
Diluted earnings 0.40 0.55 0.70 0.51
Market price range $20.25-$28.13 $26.38-$36.38 $32.13-$45.38 $37.06-$50.88
Common dividends paid 0.10 0.10 0.10 0.10
<FN>
(a) Includes $5.1 million of income ($.06 per share basic
and $.05 per share diluted) for the recovery of a portion of
costs charged in 1997 from the discontinuance of the rail
container service and certain other unusual items.
(b) Includes $5.0 million charge ($.06 per share basic and
$.05 per share diluted) for costs related to the
discontinuance of the rail container service.
</TABLE>
PAGE 45
Management Report on Responsibility
for Financial Reporting
The management of CNF Transportation Inc. has prepared the
accompanying financial statements and is responsible for
their integrity. The statements were prepared in accordance
with generally accepted accounting principles, after giving
consideration to materiality, and are based on management's
best estimates and judgments. The other financial
information in the annual report is consistent with the
financial statements.
Management has established and maintains a system of
internal control. Limitations exist in any control structure
based on the recognition that the cost of such system should
not exceed the benefits derived. Management believes its
control system provides reasonable assurance as to the
integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition,
and the prevention and detection of fraudulent financial
reporting. The system of internal control is documented by
written policies and procedures that are communicated to
employees. The Company's internal audit staff independently
assesses the adequacy and the effectiveness of the internal
controls which are also tested by the Company's independent
public accountants.
The Board of Directors, through its audit committee
consisting of five independent directors, is responsible for
engaging the independent accountants and assuring that
management fulfills its responsibilities in the preparation
of the financial statements. The Company's financial
statements have been audited by Arthur Andersen LLP,
independent public accountants. Both the internal auditors
and Arthur Andersen LLP have access
to the audit committee without the presence of management to
discuss internal accounting controls, auditing and financial
reporting matters.
/s/Gregory L. Quesnel
Gregory L. Quesnel
President and Chief Executive Officer
/s/Chutta Ratnathicam
Chutta Ratnathicam
Senior Vice President and Chief Financial Officer
/s/Gary D. Taliaferro
Gary D. Taliaferro
Controller
Report of Independent
Public Accountants
To the Shareholders and Board of Directors of CNF
Transportation Inc.
We have audited the accompanying consolidated balance sheets
of CNF Transportation Inc. (a Delaware Corporation) and
subsidiaries as of December 31, 1998 and 1997, and the
related statements of consolidated income, cash flows and
shareholders' equity for each of the three years in the
period ended December 31, 1998. 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 referred to above
present fairly, in all material respects, the financial
position of CNF Transportation Inc. and subsidiaries as of
December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
As explained in Note 1 to the consolidated financial
statements, effective January 1, 1998, the Company changed
its method of accounting for the costs of internal use
software to reflect the adoption of Statement of Position 98-
1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use."
/s/Arthur Andersen LLP
San Francisco, California
January 22, 1999
PAGE 46
<TABLE>
CNF Transportation Inc.
Five Year Financial Summary
<CAPTION>
(Dollars in thousands except per share data) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Revenues (a) $ 4,941,490 $ 4,266,801 $ 3,662,183 $ 3,290,077 $ 2,799,935
Con-Way Transportation Services 1,683,991 1,473,188 1,292,082 1,152,164 1,018,544
Emery Worldwide 2,203,474 2,249,594 1,968,058 1,766,301 1,567,854
Menlo Logistics 586,835 455,892 359,377 287,652 167,655
Other 467,190 88,127 42,666 83,960 45,882
Operating income (loss) (a) 290,518 264,867 192,148 186,687 189,977
Con-Way Transportation Services 206,945 147,155 101,049 96,573 111,220
Emery Worldwide 64,299 113,963 78,415 81,734 77,616
Menlo Logistics 19,459 17,178 10,918 6,325 (1,909)
Other (185) (13,429) 1,766 2,055 3,050
Interest expense 32,627 39,553 39,766 33,407 27,065
Net income from continuing operations before
income taxes 250,411 221,814 147,132 152,942 165,129
Income taxes 111,433 100,925 66,951 66,723 69,304
Income from continuing operations (b) 130,809 113,003 71,589 75,420 76,762
Loss from discontinued operations (c) - - (52,633) (28,854) (37,442)
Net Income available to common shareholders 130,809 113,003 18,956 46,566 35,710 (d)
PER SHARE
Net income from continuing operations, basic $ 2.74 $ 2.44 $ 1.63 $ 1.79 $ 2.12 (d)
Loss from discontinued operations: (c) - - (1.20) (0.68) (1.03)(d)
Net income available to
common shareholders, basic 2.74 2.44 0.43 1.11 1.09 (d)
Net income from continuing operations, diluted 2.45 2.19 1.48 1.64 1.81
Dividends paid on common stock 0.40 0.40 0.40 0.40 -
Common shareholders' equity 15.48 13.26 10.86 15.76 14.58
STATISTICS
Total Assets $2,689,412 $ 2,421,496 $ 2,081,866 $ 2,084,958 $ 1,833,742
Long-term obligations 467,635 473,488 477,201 480,410 382,757
Capital expenditures 267,668 242,343 200,835 167,253 149,808
Effective income tax rate 44.5% 45.5% 45.5% 43.6% 42.0%
Basic average shares 47,659,745 46,236,688 44,041,159 42,067,842 36,183,020
Market price range $21.63-$49.94 $20.25-$50.88 $17.25-$29.38 $20.25-$27.88 $18.00-$29.25
Number of shareholders 9,870 15,560 16,090 15,980 16,015
Number of regular full-time employees 33,700 26,300 25,100 21,400 18,500
<FN>
(a) Prior years have been restated for the adoption of SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information."
(b) Includes preferred stock dividends.
(c) Reflects the results of CFC as described in Note 2 of the Notes to the Consolidated Financial Statements.
(d) Continuing operations include $3.6 million extraordinary charge ($.10 per share basic and $.07 per share diluted),
and discontinued operations $1.9 million ($.05 per share basic and $.04 per share diluted), net of related tax
benefits, for the write-off of intrastate operating rights.
</TABLE>
EXHIBIT 21
CNF TRANSPORTATION INC.
SIGNIFICANT SUBSIDIARIES OF THE COMPANY
December 31, 1998
The Company and its significant subsidiaries were:
State,
Percent of Province or
Stock Owned Country of
Parent and Significant Subsidiaries by Company Incorporation
CNF Transportation Inc. Delaware
Significant Subsidiaries of CNF Transportation Inc.
Con-Way Transportation Services, Inc. 100 Delaware
Con-Way Truckload Services, Inc. 100 Delaware
Emery Air Freight Corporation 100 Delaware
Emery Worldwide Airlines, Inc. 100 Nevada
Menlo Logistics, Inc. 100 California
Road Systems, Inc. 100 California
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 73897
<SECURITIES> 0
<RECEIVABLES> 831648
<ALLOWANCES> (21098)
<INVENTORY> 41764
<CURRENT-ASSETS> 1100361
<PP&E> 1721940
<DEPRECIATION> (737464)
<TOTAL-ASSETS> 2689412
<CURRENT-LIABILITIES> 907482
<BONDS> 467635
125000
129923
<COMMON> 348689
<OTHER-SE> 314878
<TOTAL-LIABILITY-AND-EQUITY> 2689412
<SALES> 0
<TOTAL-REVENUES> 4941490
<CGS> 0
<TOTAL-COSTS> 4650972
<OTHER-EXPENSES> 40107
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32627
<INCOME-PRETAX> 250411
<INCOME-TAX> 111433
<INCOME-CONTINUING> 138978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 130809
<EPS-PRIMARY> 2.74
<EPS-DILUTED> 2.45
</TABLE>
