-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfnAiww7LyrWUinnlw1Jt8MsWg6gbrABcmARJSBRSeMs71RzhoH7QFwUlVDxSEEp 7CmJfcV0kP5Vl4jiXi6XDw== 0000023675-00-000002.txt : 20000329 0000023675-00-000002.hdr.sgml : 20000329 ACCESSION NUMBER: 0000023675-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNF TRANSPORTATION INC CENTRAL INDEX KEY: 0000023675 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 941444798 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05046 FILM NUMBER: 581222 BUSINESS ADDRESS: STREET 1: 3240 HILLVIEW AVE CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 6504942900 MAIL ADDRESS: STREET 1: 1717 NW 21ST AVE CITY: PORTLAND STATE: OR ZIP: 97209 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED FREIGHTWAYS INC DATE OF NAME CHANGE: 19920703 10-K 1 10K DOCUMENT 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, 1999 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 Title of Each Class on Which Registered ------------------------------ ---------------------- Common Stock ($.625 par value) New York Stock Exchange Pacific Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: 7.35% Notes Due 2005 8 7/8% Notes Due 2010 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, 2000: $1,258,097,931 Number of shares of Common Stock outstanding as of February 29,2000: 48,493,099 - PAGE 1 - DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV CNF Transportation Inc. 1999 Annual Report to Shareholders (only those portions referenced herein are incorporated in this Form 10- K). Part III Proxy Statement dated March 20, 2000 (only those portions referenced herein are incorporated in this Form 10-K). - PAGE 2 - CNF TRANSPORTATION INC. FORM 10-K Year Ended December 31, 1999 ------------------------------ 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...........................16 6. Selected Financial Data.............................16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............16 7A. Quantitative and Qualitative Discussions about Market Risk.......................................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..............................19 12. Security Ownership of Certain Beneficial Owners and Management....................................19 13. Certain Relationships and Related Transactions......19 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................19 - PAGE 3 - CNF TRANSPORTATION INC. FORM 10-K Year Ended December 31, 1999 ---------------------------- PART I ------ ITEM 1. BUSINESS CNF Transportation Inc. and subsidiaries (collectively the Registrant or the Company) is a management company of global supply-chain services with businesses in regional less-than- truckload trucking, multi-modal full truckload, multi-client warehousing and expedited ground transport (Con-Way Transportation Services); domestic and international airfreight, ocean freight, customs brokerage and logistics services (Emery Worldwide); full-service logistics management (Menlo Logistics); postal sortation and transportation services (Emery Worldwide Airlines), and trailer manufacturing (Road Systems). In compliance with Statement of Financial Accounting Standards (SFAS) 131, "Disclosures about Segments of an Enterprise and Related Information", the Company discloses segment information in the manner in which the components are organized for making operating decisions, assessing performance and allocating resources. The Company's four segments, which are discussed below, include Con-Way Transportation Services, Emery Worldwide, Menlo Logistics and Other. The Other segment consists primarily of the operations under a Priority Mail contract with the U.S. Postal Service, and includes Road Systems and, prior to the sale of its assets in May 1999, VantageParts. For financial information concerning the Company's business segments, refer to Note 13 of the Notes to Consolidated Financial Statements contained in the Company's 1999 Annual Report to Shareholders, which 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 foreign countries. For geographic group information, also refer to Note 13 of the Notes to Consolidated Financial Statements contained in the 1999 Annual Report to Shareholders. 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 less-than-truckload (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 were owned on November 15, 1996. Following the Spin-off, the Company changed its name to CNF Transportation Inc. The Company, formerly Consolidated Freightways, Inc., was incorporated in Delaware in 1958. - PAGE 4 - CON-WAY TRANSPORTATION SERVICES SEGMENT - -------------------------------------- The Con-Way reporting segment consists of Con-Way Transportation Services Inc. and its subsidiaries. Con-Way Regional Carriers Con-Way's primary business units are three regional LTL motor carriers that operate dedicated regional trucking networks. These regional LTL carriers principally serve core geographic territories with next-day and second-day service to manufacturing, industrial, commercial and retail business-to- business customers. Con-Way's regional carriers include Con-Way Central Express (CCX), which serves 25 states of the central and northeast U.S., Ontario and Quebec, Canada and Puerto Rico; Con-Way Southern Express (CSE), which serves a 12-state southern market from Texas to Virginia and Florida, and also operates in Puerto Rico and parts of Mexico; and Con-Way Western Express (CWX), which operates in 13 western states and serves parts of Canada and Mexico. In 1998, Con-Way began offering coast-to-coast service in all 50 states by fully linking its three regional carriers. The expansion of Con-Way's joint service offerings permits Con-Way's regional carriers to provide full service throughout the U.S. and to major cities in Canada. By offering joint services, the regional carriers can provide next-day and second-day freight delivery between their respective core territories utilizing existing infrastructure. The joint service allows each carrier to provide coverage of inter-regional market lanes that were not previously serviced as part of its core territory. In February 1999, Con-Way began offering customers a new guaranteed delivery service option. The new service offers an automatic 100% delivery guarantee for an additional charge to the customer. Con-Way Truckload Services, Con-Way NOW and Con-Way Integrated Services Con-Way Truckload Services (CWT) is a full-service, multi-modal truckload company that 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 is a subcontractor for the Priority Mail operation, which is discussed below in the "Other" segment. 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 has delivery service in 48 states and parts of Canada. - PAGE 5 - In 1998, Con-Way created a new business, Con-Way Integrated Services (CIS), to provide logistics solutions to customers. CIS offers integrated supply chain services for shippers, using its own multi-client warehouses, its multi-modal carrier relationships, and alliances with leading supply chain software firms to bring semi-customized solutions configured to its customers' needs. Con-Way - Competitive Conditions The trucking industry is intensely competitive. Principal competitors of Con-Way include regional and national LTL companies. Competition in the trucking industry is based on freight rates, service, reliability, transit times and scope of operations. EMERY WORLDWIDE SEGMENT - ----------------------- The Emery Worldwide reporting segment includes the combined accounts of Emery Air Freight Corporation and its subsidiaries (EAFC), a portion of the operations of Emery Worldwide Airlines, Inc. (EWA), and Emery Expedite!, Inc. The Registrant is the owner of 100% of the outstanding shares of these companies. EWA primarily provides nightly air delivery services for EAFC and Express Mail (a next-day delivery service) under a contract awarded by the U.S. Postal Service (USPS). The operations of the Express Mail contract are reported in the Emery Worldwide business segment. In 1997, EWA was awarded a 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 reported in the Other business segment. - PAGE 6 - Emery Air Freight Corporation Emery Air Freight Corporation (EAFC) provides both domestic and international air freight services. In North America, EAFC relies principally on the dedicated aircraft of EWA and EAFC's 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 over 200 countries. Emery Air Freight Corporation - North America EAFC's hub-and-spoke system is centered 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. 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). The operation of the Hub in conjunction with EWA's airlift system contributes to EAFC's ability to maintain service reliability. As of December 31, 1999, EAFC had substantially completed a $75 million redesign and expansion of the Hub that is expected to increase freight handling capacity 30% in the year 2000. 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. EAFC provides services in North America through a system of sales offices and service centers. EAFC's door-to-door service within North America relies on the airlift system of EWA, supplemented with commercial airlines. Customers are typically concerned with timely deliveries rather than the mode of transportation. Because the average cost of ground transportation is considerably less than air transportation, EAFC 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. Emery Air Freight Corporation - International Internationally, EAFC operates primarily as an air freight forwarder using commercial airlines, while utilizing controlled lift only on a limited basis. (International business is defined as shipments that either originate or terminate outside of the United States). EAFC provides services internationally through foreign subsidiaries, branches, service centers and agents. In 1997, EAFC opened new distribution centers in Singapore and Miami to serve Asia and Latin America, respectively. 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 variable-cost based international operations. From 1995 to 1999, EAFC's international air freight revenue increased 37.5%, compared with a 13.8% increase in North American air freight revenue for the same period. Emery's fastest-growing regions internationally have been Latin America and Asia. In 1998, however, business in Asia declined as a result of a severe regional economic downturn that also adversely impacted other international regions. - PAGE 7 - Emery Worldwide Airlines In addition to providing aircraft for EAFC's commercial air freight operations, EWA uses its aircraft to provide charter services and also to provide air delivery services for Express Mail (a next-day delivery service) under a ten-year contract with the USPS. The current Express Mail contract was awarded to EWA in 1993. In addition, EWA has also received separate contracts to carry peak-season Christmas and other mail for the USPS. Emery recognized approximately $253 million, $214 million and $163 million of revenue in 1999, 1998 and 1997, respectively, from Express Mail and other contracts for the USPS, excluding Priority Mail revenue that is reported in the "Other" segment. Emery Expedite!, Emery Global Logistics and Emery Customs Brokerage To enhance the range of services it can offer to its customers and to provide further avenues for growth, Emery has established several variable-cost based "strategic business units." These units include Emery Expedite!, a rapid response freight handling subsidiary providing door-to-door delivery of shipments in North America and overseas. Emery Global Logistics operates North American and international warehouses and distribution centers for a variety of customers. 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. Emery - Competition 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. Competition in the air freight industry is intense and is based on, among other things, freight rates, quality of service, reliability, transit times and scope of operations. Emery - Strategic Initiatives Management will continue to focus on positioning Emery as a premium service provider. In North America, management intends to continue developing an infrastructure capable of servicing a higher volume of premium and guaranteed delivery services and will seek to reduce the costs associated with its infrastructure. Key initiatives include replacing older and less reliable aircraft with newer aircraft having lower maintenance costs and the recent reconfiguration of its Hub sortation center. - PAGE 8 - Internationally, Emery's management will focus on expanding its variable-cost-based operations and will continue its efforts to increase international revenue as a percentage of total revenue. For 1999, total international revenue of $1.09 billion comprised 45% of Emery's total revenue. An important element in providing premium service is the ability to track freight information, 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. Emery's management expects the Emcon 2000 system to be implemented in 2000 in its North American operations and in 2001 for its international operations. MENLO LOGISTICS SEGMENT - ----------------------- The Menlo reporting segment consists of Menlo Logistics, Inc., which was founded in 1990, and its subsidiaries (Menlo). Menlo 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 with each other and with its customers' internal systems. The Company believes that Menlo's technology skills, operations processes and design expertise with 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. The Company believes that three industry trends have driven Menlo's 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 has helped Menlo to secure new projects and expand services for existing customers. In 1998, Menlo secured six new significant contracts. In 1999, Menlo began new projects with Delphi, Williams-Sonoma, The North Face, and a major tool manufacturer. Also in 1999, Menlo agreed to expand certain projects for Hewlett-Packard. Compensation from Menlo's customers takes different forms, including cost-plus, gain-sharing, per-piece, fixed-dollar and consulting fees. In most cases, customers reimburse start-up and development costs. - PAGE 9 - 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, few customer relationships have been ended by either Menlo or its customers. 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. Menlo - Competition Menlo operates in the relatively new but intensely competitive third-party logistics (3PL) industry. Competition is based largely on computer system skills and the ability to rapidly implement logistics solutions. Competitors in the 3PL industry are numerous and include domestic and foreign logistics companies and the logistics arms of integrated transportation companies; however, Menlo primarily competes against a limited number of major competitors that have resources sufficient to service large logistics contracts. OTHER SEGMENT - ------------- The Other segment consists primarily of the operations under a Priority Mail contract with the USPS, and includes Road Systems, a trailer manufacturer, and prior to the sale of its assets in May 1999, VantageParts, a wholesale distributor of truck parts and supplies. 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 expires in February 2002 and may be renewed, at the option of the USPS, for two additional terms of three years. The Company recognized $555.5 million, $410.8 million, and $51.6 million of revenue from the Priority Mail contract in 1999, 1998, and 1997, respectively. Among other things, the Priority Mail contract calls for EWA to lease or acquire, 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. EWA also provides air transportation under the contract 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 line-haul transportation between PMPCs. - PAGE 10 - Issues arising from the Priority Mail contract, including an ongoing dispute as to pricing terms under the contract, are discussed in Management's Discussion and Analysis - Other Segment contained in the Company's 1999 Annual Report to Shareholders, which is incorporated herein by reference. The Company has had discussions with the USPS on a range of possibilities for restructuring the activities under the Priority Mail contract. Although the Company cannot predict whether these discussions will in fact result in additional payments to the Company or a modification to the contract, the wide range of alternatives discussed has included both increasing and decreasing the scope of the Company's activities under the contract and both partial and total termination of the contract. In addition, both the Company and the USPS have notified each other of alleged breaches under the contract. If the Company's activities under the contract are curtailed or terminated, the costs could be material. Likewise, it is possible that the USPS could assert claims against the Company for breach of the contract or other matters, which could be significant. In March 2000, the Company filed a claim with the USPS related to the Priority Mail contract to recover actual and expected reductions to EWA's contract pricing. This claim was filed in response to a reduction by the USPS in contract pricing for both prior and future periods. The claim is in addition to the previously reported 1999 pricing claim and substantially covers the remaining initial term of the contract. Road Systems and VantageParts A majority of the revenue from Road Systems and, prior to the sale of its assets in May 1999, VantageParts, was from sales to other subsidiaries of the Company and to CFC. Road Systems primarily manufactures and rebuilds trailers, converter dollies and other transportation equipment. Prior to the sale of its assets in May 1999, VantageParts served 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 - ------- Employees At December 31, 1999, the Company had approximately 34,400 regular employees of which 30,800 were regular full-time employees. The 34,400 regular part-time and full-time employees by segment were as follows: Con-Way, 15,100; Emery Worldwide, 11,900; Menlo, 2,200; Other segment, 4,300. Approximately 900 regular employees were employed by CNF in executive, administrative and technology positions to support the Company's operating subsidiaries. - PAGE 11 - 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 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. Regulation - Ground Transportation 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 Interstate Commerce Commission (ICC) relating chiefly to motor carrier registration, cargo and liability insurance, extension of credit to motor carrier customers, leasing of equipment by motor carriers from owner-operators and enforces comprehensive trucking safety regulations. 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. Regulation - Air Transportation The air transportation industry is subject to extensive regulation by various federal, state and foreign governmental entities. The industry is subject to federal regulation under the Federal Aviation Act of 1958, as amended (Aviation Act) and regulations issued by the 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. - PAGE 12 - 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 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. Regulation - Environmental 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 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. - PAGE 13 - ITEM 2. PROPERTIES CON-WAY TRANSPORTATION SERVICES SEGMENT - --------------------------------------- As of December 31, 1999, Con-Way operated 318 freight service centers, of which 86 were owned and 232 were leased. The service centers, which are strategically located to cover the geographic area served by Con-Way, represent physical buildings and real property with dock, office and/or shop space ranging in size from approximately 1,000 to 96,000 square feet. These facilities do not include meet-and-turn points, which generally represent small owned or leased real property with no physical structures. In addition to freight service centers operated by Con-Way's regional carriers, Con-Way Integrated Services leases 3 warehouses near Los Angeles, California; Chicago, Illinois; and Jersey City, New Jersey. The warehouses range in size from approximately 103,000 to 171,000 square feet. The total number of trucks, tractors and trailers utilized in the Con-Way operations at December 31, 1999 was approximately 27,700. EMERY WORLDWIDE SEGMENT - ----------------------- Emery's hub system is centered at the Dayton, Ohio International Airport (the Hub), where its leased air cargo facility and related support facilities are located. The Hub, which encompasses approximately 800,000 square feet, was financed by City of Dayton, Ohio revenue bonds. The Hub and related property secures the principal amount of the industrial revenue bonds. As of December 31, 1999, EAFC operated 232 freight service centers, of which 11 were owned. The service centers are strategically located to cover the geographic areas served by Emery. These facilities range in size from approximately 1,000 to 112,000 square feet of office, dock and/or shop space. In addition to the freight service centers operated by EAFC, Emery also leases various customer-dedicated warehouses and 4 large multi- user warehouses in Dayton, Ohio; Miami, Florida; the Netherlands, and Singapore. The multi-user warehouses range from approximately 104,000 to 136,000 square feet. At December 31, 1999, Emery operated 74 aircraft, of which 26 were owned and 48 were leased. In addition to owned and leased aircraft, Emery "wet leases" aircraft on a short-term basis to supplement nightly capacity and to provide feeder services. The wet lease agreements call for the owner-lessor to provide flight crews, insurance, maintenance, fuel and other supplies required to operate the aircraft. Although aircraft under wet leases can vary depending on seasonal demand, 17 aircraft were used in connection with these agreements as of December 31, 1999. At December 31, 1999, EWA had entered into commitments for operating leases for 9 new aircraft to be delivered in 2000. - PAGE 14 - As of December 31, 1999, 1 aircraft was dedicated for exclusive use in the Priority Mail operations and 19 of the aircraft reported above were designated for shared use with the Priority Mail operation. These aircraft, which are used primarily at night in EWA's commercial non-Priority Mail freight operations, are also used in "daylight turns" of aircraft for the transportation of Priority Mail. As of December 31, 1999, 26 aircraft were dedicated to service the Express Mail contract with the USPS. Operations related to the Express Mail contract are included in the Emery Worldwide segment and the Priority Mail operations are included in the Other segment. At December 31, 1999, EAFC operated approximately 1,700 trucks, tractors and trailers, as well as equipment provided by its agents. MENLO LOGISTICS SEGMENT - ----------------------- As of December 31, 1999, Menlo operated 35 warehouses. Of these warehouses operated by Menlo, 25 were leased by Menlo and 9 were leased or owned by Menlo's clients. The 25 facilities leased by Menlo ranged in size from approximately 16,000 to 366,000 square feet. At December 31, 1999, Menlo operated approximately 400 trucks, tractors and trailers. OTHER SEGMENT - ------------- The principal operating properties of the Other segment are comprised primarily of 10 Priority Mail Processing Centers (PMPCs) and related sortation and transportation equipment. The PMPCs, which are large warehouses modified for efficient sortation of mail, range in size from approximately 120,000 to 300,000 square feet. The 10 PMPCs are located in the eastern United States in Newark and Bridgeport, New Jersey; Bethpage and Rochester, New York; Nashua, New Hampshire; Pittsburgh, Pennsylvania; Springfield, Massachusetts; and Jacksonville, Miami and Orlando, Florida. As discussed above under "Emery Worldwide Segment", as of December 31, 1999, 1 aircraft in EWA's fleet was used exclusively in the Priority Mail operations and 19 of the aircraft that are dedicated to Emery's operations were designated for shared use with the Priority Mail operation. These aircraft, which are used primarily at night in EWA's commercial non-Priority Mail freight operations, are also used in "daylight turns" of aircraft for the transportation of Priority Mail. At December 31, 1999, approximately 900 trucks, tractors and trailers were operated by EWA in the Priority Mail operation. - PAGE 15 - ITEM 3. LEGAL PROCEEDINGS The legal proceedings of the Company are summarized in Note 12 of the Notes to Consolidated Financial Statements contained in the 1999 Annual Report to Shareholders and is incorporated herein by reference. Discussion of environmental matters is presented in Item 1. The Department of Transportation, through its Office of Inspector General, and the Federal Aviation Administration are conducting an investigation relating to the handling of hazardous materials by Emery. The investigation is ongoing and Emery is cooperating fully. Because the investigation is at a preliminary stage, we are unable to predict the outcome of this investigation. On February 16, 2000, a DC-8 cargo aircraft operated by EWA crashed shortly after take-off from Mather Field, near Sacramento, California. The crew of three was killed. There were no reported injuries on the ground. The cause of the crash has not been determined. The National Transportation Safety Board has begun an investigation. We are currently unable to predict the outcome of this matter or the effect it may have on the Company. We may be subject to claims and proceedings relating to the crash, which could include private lawsuits seeking monetary damages and governmental proceedings. Although EWA maintains insurance that is intended to cover claims that may arise in connection with an airplane crash, the Company cannot assure that the insurance will in fact be adequate to cover all possible types of claims. In particular, any claims for punitive damages or any impact of possible government proceedings or other sanctions would not be covered by insurance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. - PAGE 16 - PART II ------- Information for Items 5 through 8 of Part II of this Report appears in the Company's 1999 Annual Report to Shareholders as indicated below and is incorporated herein by reference. 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". Page Number of Annual Report to Shareholders ---------------------- Range of common stock prices for each of the quarters in 1999 and 1998 32 Common shareholders of record at December 31, 1999 34 Dividends paid on common stock for each of the quarters in 1999 and 1998 32 ITEM 6. SELECTED FINANCIAL DATA Selected Consolidated Financial Data 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12 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, particularly in light of recent fuel price increases; uncertainty regarding the Company's Priority Mail contract with the USPS, including uncertainties regarding the Company's claims under the contract described herein or incorporated by reference; 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 - PAGE 17 - claims made by the Internal Revenue Service with respect to 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, including the tax matters discussed in documents incorporated by reference. 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 successfully contesting their obligation to reimburse the Company 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Number of Annual Report to Shareholders ---------------------- Consolidated Balance Sheets 14 Statements of Consolidated Income 16 Statements of Consolidated Cash Flows 17 Statements of Consolidated Shareholders' Equity 18 Notes to Consolidated Financial Statements 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III -------- Information for Items 10 through 12 of Part III of this Report appears in the Proxy Statement for the Company's 1999 Annual Meeting of Shareholders to be held on April 25, 2000, as indicated below and is incorporated by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The Executive Officers of the Company, their ages at December 31, 1999, and their applicable business experience are as follows: Gregory L. Quesnel, 51, 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. - PAGE 18 - Gerald L. Detter, 55, 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. Roger Piazza, 60, 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 1999, Mr. Piazza was named to his current position. Chutta Ratnathicam, 52, 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, 56, 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, 43, 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. - PAGE 19 - Information regarding members of the Company's Board of Directors is presented on pages 3 through 9, inclusive, of the Company's Proxy Statement dated March 20, 2000 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Page Number of Proxy Statement --------------- Compensation Information 13 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Stock Ownership - Directors and Executive Officers 10 Stock Ownership - Significant shareholders 32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The consolidated financial statements of the Company, together with the Notes to Consolidated Financial Statements, and the report thereon of Arthur Andersen LLP, dated January 28, 2000, are presented on pages 14 through 33 of the Company's 1999 Annual Report to Shareholders and are incorporated herein by reference. With the exception of the information incorporated by reference in Items 1, 3, 5, 6, 7, 7A, 8 and 14 hereof, the Company's 1999 Annual Report to Shareholders is not to be deemed as filed as part of this Report. 2. FINANCIAL STATEMENT SCHEDULE Page Number in Form 10-K ------------ Report of Independent Public Accountants on Financial Statement Schedule S-1 Schedule II - Valuation and Qualifying Accounts S-2 All other financial statement schedules have been omitted because they are not applicable or the required information is included in the consolidated financial statements, or the notes thereto, contained in the Company's 1999 Annual Report to Shareholders and incorporated herein by reference. - PAGE 20 - 3. EXHIBITS Exhibits are being filed in connection with this Report and are incorporated herein by reference. The Exhibit Index on pages E-1 through E-6 is incorporated herein by reference. (b) REPORTS ON FORM 8-K On March 8, 2000, the Registrant filed a Report on Form 8-K in connection with the issuance of $200 million aggregate principal amount of its 8 7/8% Notes due 2010 (the "Notes") under the Company's shelf registration statement on Form S-3 (File No. 333-56667). In the Report on Form 8-K, the Company filed an Underwriting Agreement, Indenture and form of Note executed in connection with the previously announced public offering of the Notes. - PAGE 21 - 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 27, 2000 /s/ Gregory L. Quesnel -------------------------------- President and Chief Executive Officer March 27, 2000 /s/ Chutta Ratnathicam --------------------------------- Chutta Ratnathicam Senior Vice President and Chief Financial Officer March 27, 2000 /s/ Gary D. Taliaferro --------------------------------- Gary D. Taliaferro Corporate Controller - PAGE 22 - 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 27, 2000 /s/ Donald E. Moffitt --------------------------------- Donald E. Moffitt Chairman of the Board March 27, 2000 /s/ Gregory L. Quesnel --------------------------------- Gregory L. Quesnel President, Chief Executive Officer and Director March 27, 2000 /s/ Robert Alpert --------------------------------- Robert Alpert, Director March 27, 2000 /s/ Richard A. Clarke --------------------------------- Richard A. Clarke, Director March 27, 2000 /s/ Margaret G. Gill --------------------------------- Margaret G. Gill, Director March 27, 2000 --------------------------------- Robert Jaunich II, Director March 27, 2000 /s/ W. Keith Kennedy, Jr. --------------------------------- W. Keith Kennedy, Jr., Director - PAGE 23 - SIGNATURES March 27, 2000 /s/ Richard B. Madden -------------------------------- Richard B. Madden, Director March 27, 2000 /s/ Michael J. Murray -------------------------------- Michael J. Murray, Director March 27, 2000 /s/ Robert D. Rogers -------------------------------- Robert D. Rogers, Director March 27, 2000 -------------------------------- William J. Schroeder, Director March 27, 2000 /s/ Robert P. Wayman -------------------------------- Robert P. Wayman, Director - S-1 - 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, 333-56667, and 333-92399 /s/Arthur Andersen LLP ---------------------- ARTHUR ANDERSEN LLP San Francisco, California March 24, 2000 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 1999 Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 28, 2000. 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 S-2 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 28, 2000 - S-2 - SCHEDULE II CNF TRANSPORTATION INC. VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1999 (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 --------- -------- -------- ---------- ------- 1999 $21,098 $15,229 $ - $(10,164)(a) $26,163 1998 $20,155 $11,050 $ - $(10,107)(a) $21,098 1997 $18,712 $12,528 $ - $(11,085)(a) $20,155 (a) Accounts written off net of recoveries. - E-1 - 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 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*) 4.4 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*) 4.5 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*) 4.6 Declaration of Trust of the Trust (Exhibit 4(k) to the Company's Amendment 1 to Form S-3 dated May 30, 1997*) 4.7 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*) 4.8 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*) - E-2 - 4.9 Form of Indenture between CNF Transportation Inc. and Bank One Trust Company, National Association (Exhibit 4(d)(i) to the Company's Form 8-K dated March 3, 2000*). 4.10 Form of Security for 8 7/8% Notes due 2010 issued by CNF Transportation Inc. (Exhibit 4(i) to the Company's Form 8-K dated March 3, 2000*). 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**) 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**) - E-3 - 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*). 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*). - E-4 - 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.*#) - E-5 - 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 as of January 31, 2000. (Exhibit A to the Company's Proxy Statement dated March 20, 2000. *#) 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. Executive Severance Plan. (Exhibit 10.32 to the Company's Form 10-K for the year ended December 31, 1998.*#) 10.32 CNF Transportation Inc. Summary of Incentive Compensation plans for 2000. # 10.33 Value Management Plan dated June 28, 1999.# (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. 1999 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 - E-6 - (99) Additional documents: 99.1 CNF Transportation Inc. 1999 Notice of Annual Meeting and Proxy Statement dated March 20, 2000 and filed on Form DEF 14A. (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. Footnotes to Exhibit Index --------------------------- * 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. EX-10 2 EXHIBIT 10.32 Exhibit 10.32 CNF TRANSPORTATION INC. SUMMARY OF INCENTIVE COMPENSATION PLANS FOR 2000 For 2000, 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 2000 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, 2000. 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 2000 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, 2000 but leaves that employment or otherwise becomes ineligible after December 31, 2000 but before the final payment is made relating to 2000, 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, 2000 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, 2000 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, 2000, or (4) to a Plan participant who is transferred to another CNF Company and who remains an employee through December 31, 2000. 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, 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 2000. The final payment to participants, less any previous partial payment, is to be made on or before March 15, 2001. 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. For certain Plans, the annualized salary is based on the last pay period of the calendar year. 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 2000 only. EX-10 3 EXHIBIT 10.33 Exhibit 10.33 CNF TRANSPORTATION INC. VALUE MANAGEMENT PLAN 1 . Purpose; Effective Date; Administration 1.1 Purpose The purpose of the CNF Transportation Inc. Value Management Plan (the "Plan") is to provide eligible employees of CNF Transportation Inc. (the "Company") and its subsidiaries or affiliates with long term compensation that is linked to both the Company's mission of creating long-term shareholder value and to the "Total Business Return" (as defined in Section 3.1) of (i) the Company, (ii) a specified subsidiary of the Company, (iii) a business unit or division of the Company or a subsidiary of the Company, or (iv) a combination of the foregoing, thereby providing them with an incentive to maximize financial results for shareholders. This Plan is adopted pursuant to the Company's 1997 Equity and Incentive Plan, as amended (the "1997 Plan") in order to provide for the grant of "Other Cash-Based Awards" (as defined in the 1997 Plan), and is subject to all of the applicable terms and provisions of the 1997 Plan. 1.2 Effective Date The Plan shall be effective December 1, 1999. 1.3 Administration The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee shall interpret the Plan and determine the amount, time and form of award payments for eligible employees. Decisions by the Committee are final and binding on all parties. 2 . Award Cycles; Eligibility; Vesting 2.1 Award Cycles "Award Cycle" means a period of three consecutive calendar years. Each Award Cycle shall be identified by its first calendar year. For example, the 2000 Award Cycle runs from January 1, 2000 to December 31, 2002. 2.2 Award Payout "Award Payout" means, for any Award Cycle, the cash award that a Participant is eligible to receive under the Plan for that Award Cycle. 2.3 Eligibility The Committee shall designate the employees eligible to participate in an Award Cycle. A "Participant" must be an employee of the Company or one of its subsidiaries or affiliates as designated by the Committee, and must be designated as eligible as of the beginning of each Award Cycle. The Company shall maintain in its records a list of Participants for each Award Cycle. The Committee shall also designate, for each Participant during each Award Cycle, whether such Participant's Award Payout is to be based upon the Total Business Return of (i) the Company, (ii) a subsidiary of the Company, (iii) a business unit or division of the Company or a subsidiary, or (iv) a combination of the foregoing. Any entity upon whose Total Business Return an Award Payout is based, in whole or in part, whether such entity is the Company, a subsidiary of the Company, or a business unit or division of the Company or a subsidiary, is referred to herein as a "Business Unit." 2.4 Vesting A Participant shall become vested in his or her right to receive an Award Payout if the employee is continuously employed by the Company or one of its Business Units throughout the entire applicable Award Cycle or until the occurrence of one of the events described below. An employee who terminates from the Company before the last day of an Award Cycle shall forfeit his or her right to receive an Award Payout unless the departure coincides with one of the following (in which case the Participant's right to receive an Award Payout shall vest): (a) The Participant's death. (b) The Participant's disability as defined in the Company's Long Term Disability Plan or a successor to that plan. (c) The Participant's (i) early retirement under the Company's tax qualified Retirement Plan if the Participant elects within 60 days from the last day of regular employment to receive monthly pension benefits under such Retirement Plan starting on the first day of the month following the last day of employment, or (ii) normal or deferred retirement under such Retirement Plan. In addition, a Participant's right to receive an Award Payout shall vest upon the occurrence of a Change in Control. Award Payouts that vest pursuant to this Section 2.4 shall be payable as provided in Section 3.3. 2.5 Change in Control "Change in Control" means a change in control of the Company, which will be deemed to have occurred if: (a) 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 shareholders of the Company in substantially the same proportions as their ownership of the common stock, par value $0.625 per share, of the Company), 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; (b) 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; (c) 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 after 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 defined above), 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 (d) 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. "Board" means the Board of Directors of the Company or any successor thereto. "Effective Date" has the meaning given to such term in Section 1.2. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. 3 . Awards 3.1 Award Payouts Subject to Section 3.4 and the other terms and provisions of this Plan, a Participant shall be entitled to receive an Award Payout, payable as provided in Section 3.2, in an amount equal to (i) the Participant's Beginning Base Salary ("BBS") times (ii) the Award Opportunity ("AO") times (iii) the TBR Performance Multiple ("PM") times (iv) the Relative TSR Performance Adjustment ("RPA"). Award Payout = BBS x AO x PM x RPA In the event that the Committee designates that a Participant's Award Payout is to be based upon the Total Business Return of more than one Business Unit, the Committee shall designate the weighting of such Participant's Award Payout that is to be based upon the Total Business Return of each such Business Unit. At the end of the applicable Award Cycle, an Award Payout shall be calculated utilizing the formula stated above based upon the Total Business Return of each such Business Unit and the applicable Award Opportunity and TBR Performance Multiple; and the total Award Payout payable to such Participant shall be the sum of the weighted Award Payouts so calculated. "Annualized TBR" means, for each Business Unit during each Award Cycle, the compound annual change in Total Business Return (expressed as a percent) of such Business Unit during such Award Cycle. Example: Assume that the Total Business Return for a Business Unit during a three-year Award Cycle is 60%. In order to produce a 60% return over a three-year period, the compound annual rate of return required to produce such Total Business Return is 17%. [(1.17) x (1.17) x (1.17) = 1.60]. "Award Opportunity" means the percentage of a Participant's Beginning Base Salary that the Participant is eligible to receive as a cash award at the end of an Award Cycle. The Committee shall determine each Participant's Award Opportunity for an Award Cycle prior to the commencement of such Award Cycle and shall inform such Participant in writing of such determination. "Beginning Base Salary" means a Participant's annual base salary in effect during the first full payroll week of an Award Cycle. "Business Unit" has the meaning given to that term in Section 2.3. "Factor" means, for each Business Unit during each Award Cycle, a factor specified by the Committee for such Award Cycle for purposes of calculating the Total Business Return of such Business Unit for such Award Cycle. In the event that the Committee fails to specify a Factor for any Business Unit for any Award Cycle, the Factor shall be deemed to be the same as the Factor applicable to such Business Unit for the immediately preceding Award Cycle, or, if no Factor was specified for such Business Unit during the preceding Award Cycle, the factor applicable to the Company for such previous Award Cycle. "Relative TSR Performance Adjustment" means, for any Award Cycle, either 1.15, 0.85 or 1 (i.e., the Award Payout at the end of any Award Cycle will be increased by 15%, decreased by 15% or not changed), depending on whether the Company's Total Shareholder Return during such Award Cycle (a) is in the top quartile relative to the companies (other than the Company) (1) that comprise the Dow Jones Transportation Average ("DJTA") as of the end of such Award Cycle and (2) the common stock of which has been publicly traded at all times during the period commencing 60 trading days prior to the commencement of such Award Cycle and ending on the last day of such Award Cycle, (b) is below the median relative to such companies or (c) is below the top quartile but above the median relative to such companies for the period covered by the Award Cycle. "TBR Performance Multiple" means, for each Business Unit, a number from 0 to 2, depending on the Annualized TBR attained by such Business Unit during such Award Cycle. The Committee shall set a Target Annualized TBR, a Superior Annualized TBR and a Threshold Annualized TBR for each Business Unit for each Award Cycle, and shall also set the TBR Performance Multiple that shall apply when the Threshold Annualized TBR is attained. If the Target Annualized TBR is attained, the TBR Performance Multiple shall be equal to 1; if the Superior Annualized TBR is attained, the TBR Performance Multiple shall be equal to 2; and if the Annualized TBR is less than the Threshold Annualized TBR, the TBR Performance Multiple shall be equal to 0. If the Annualized TBR is between the Threshold Annualized TBR and the Target Annualized TBR, or if the Annualized TBR is between the Target Annualized TBR and the Superior Annualized TBR then the TBR Performance Multiple shall be determined by interpolation. "Total Business Return" ("TBR") is a method of simulating the return shareholders would earn from investing in a Business Unit. It shall be determined for each Award Cycle for each Business Unit. The Total Business Return is determined by dividing (a) the sum of (i) the cumulative increase in net cash earnings ("Increase in NCE") of the Business Unit from the beginning of an Award Cycle to the end of an Award Cycle, multiplied by the applicable Factor ("F") and (ii) the free cash flow ("FCF") of such Business Unit, by (b) the excess of (i) the net cash earnings ("NCE") of such Business Unit, determined as of December 31 of the year prior to the first year of the applicable Award Cycle, multiplied by the applicable Factor ("F"), over (ii) the outstanding Debt of such Business Unit at the beginning of the Award Cycle, and adding to the amount so determined the adjustment factor ("AF"). TBR =[((Increase in NCE x F) + FCF) / ((NCE x F) - Debt)] + AF For purposes of determining TBR, (i) the term "net cash earnings" shall mean, for any Business Unit for any period, the net income plus depreciation plus amortization of such Business Unit for such period; (ii) the term "free cash flow" shall mean, for any Business Unit for any period, the net cash earnings minus capital expenditures minus increase in working capital of such Business Unit for such period; (iii) the term "working capital" shall mean, for any Business Unit, the currents assets minus the non-Debt liabilities of such Business Unit; (iv) the term "Debt" shall mean, for any Business Unit on any date, the debt as shown on the books of such Business Unit as of such date plus an allocated portion of the debt of the Company on such date; and (v) the term "adjustment factor" shall mean, for any Business Unit for any Award Cycle, an adjustment factor specified by the Committee for such Award Cycle. "Total Shareholder Return" shall mean, for any company whose common stock is publicly traded, for any period, the percentage (expressed as a decimal) obtained by dividing (i) the sum of (a) the appreciation in the value of a share of common stock of such company during such period, as measured by the difference between the market price of such share of stock at the beginning and end of such period, plus (b) the dividends payable on such share of common stock during such period, divided by (ii) the market price of such share of stock at the beginning of such period. For purposes of determining "Total Shareholder Return," (x) the term "market price" shall mean, for any share of publicly-traded stock on any date, the average closing price of such share of stock for the sixty (60) trading days immediately preceding such date, and (y) appropriate adjustments shall be made to reflect stock splits, reverse stock splits, spinoffs, recapitalizations and other similar transactions to the extent that they materially alter the equity value of a share of common stock. 3.2 Payment of Award Except as otherwise provided in Section 3.3, the Company shall pay a Participant's award for an Award Cycle to the Participant in a lump sum of cash within 60 days after the end of such Award Cycle, unless the Participant has made a valid election to defer payment under the CNF Transportation Inc. Deferred Compensation Plan for Executives. 3.3 Payments Upon Early Vesting In the event that, pursuant to Section 2.4, a Participant shall become vested in his or her right to receive an Award Payout prior to the end of an Award Cycle, then (i) the Award Cycle applicable to such Participant shall be deemed to have ended (A) in the case of a Change in Control, as of the end of the month immediately preceding such Change in Control and (B) in all other cases, as of the end of the calendar year in which such vesting occurs, (ii) the Award Payout shall be determined pursuant to Section 3.1 based upon the Total Business Return of the applicable Business Unit(s) for such Award Cycle, and (iii) such Award Payout shall be paid to such Participant within sixty (60) days after the end of such Award Cycle or, in the event of a Participant's death, as provided in the next paragraph. In the event of a Participant's death, the Award Payout payable to the Participant for an Award Cycle shall be paid to the Participant's Beneficiary. "Beneficiary" means the person or persons designated by the Participant pursuant to a beneficiary designation form properly completed and delivered to the Corporate Secretary. If no such beneficiary designation is made, then the award shall be paid to the Participant's estate. Payment to the Beneficiary shall be made within 60 days after the end of the applicable Award Cycle; provided, however, that if the Participant had elected deferral of the Award Payout under the Company's Deferred Compensation Plan for Executives with payment in installments, the Committee may choose, in its sole discretion upon application by the Beneficiary, to make payment to the Beneficiary in accordance with the elected installment schedule as though the date of death was the date of retirement. 3.4 Adjustments Subject to the terms of the 1997 Plan, in the event that the Committee determines (i) that the Award Payout payable to one or more Participants for an Award Cycle has been materially affected as a result of events or circumstances that were unanticipated at the beginning of the Award Cycle and/or extraordinary in nature and (ii) that the goals of the Plan would be frustrated if adjustments were not made to such Award Payouts, then the Committee, in its sole discretion, may make such adjustments to such Award Payouts as it deems appropriate, which adjustments may have the effect of increasing or decreasing the amount of the Award Payouts otherwise payable pursuant to this Plan. 4 . Amendment; Termination 4.1 Amendment The Committee may amend the Plan at any time by notice to the Participants, except that no amendment shall reduce the award determined for an Award Cycle that has ended before the date of the amendment. 4.2 Termination The Committee may terminate the Plan at any time. Notwithstanding the termination of the Plan, the Award Payouts for each Award Cycle then in progress shall be calculated, and be payable, following the completion of each such Award Cycle, in accordance with the provisions of Sections 3.1 through 3.4. 5 . Claims Procedure 5.1 Submission of Claims Any person claiming an award or requesting an interpretation, ruling or information under the Plan shall present the request in writing to the Committee, which shall respond in writing. 5.2 Initial Denial Notice of an initial denial shall normally be given within 90 days of receipt of the claim or request or no later than 180 days if special circumstances require an extension of time. The written notice of denial shall state the following: (a) The reasons for the denial, with specific reference to the Plan provisions on which the denial is based. (b) A description of any additional materials or information required and an explanation of why it is necessary. 5.3 Review of Denied Claim Any person whose claim or request is denied or who has not received a response within the time period described above may request review by notice to the Committee. The original decision shall be reviewed by the Committee, which may, but shall not be required to, grant the claimant a hearing. On review, whether or not there is a hearing, the claimant may have representation, examine pertinent documents and submit issues and comments in writing. 5.4 Decision on Review The decision on review shall ordinarily be made within 60 days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be so notified and the time limit shall be 120 days. The decision shall be in writing and shall state the reasons and the relevant plan provisions. All decisions on review shall be final and bind all parties concerned. 6 . General Provisions 6.1 Attorneys Fees If suit or action is instituted to enforce any rights under this Plan, the prevailing party may recover from the other party reasonable attorneys' fees at trial and on any appeal. 6.2 Applicable Law This Plan shall be governed by and construed in accordance with the laws of the State of California, except as preempted by federal law. 6.3 Notice Any notice under this Plan shall be in writing and shall be effective when actually delivered or, if mailed, when deposited as first class mail postage prepaid. Mail to the Company shall be directed to 3240 Hillview Avenue, Palo Alto, CA 94304, or to such other address as the Company may specify by notice to all Participants. Mailed notices to a Participant shall be directed to the Participant's last known home address shown in the Company's records. Notices to the Committee shall be sent to the Company's address. 6.4 No Assignment or Alienation The rights of a Participant or Beneficiary under this Plan are personal. No interest of a Participant or Beneficiary may be directly or indirectly assigned, transferred, or encumbered. A Participant's or Beneficiary's rights to awards payable under this Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, or encumbrance. Such rights shall not be subject to the debts, contracts, liabilities, engagement or torts of the Participant of Beneficiary. 6.5 Tax Withholding The Company shall make any required withholding of income taxes and of the employee's share of FICA and any other applicable payroll taxes from payments made under this Plan. If such withholding is required before the date of payment of amounts deferred under this Plan, the Company shall pay the required amount and withhold it from other compensation payable to the Participant. 6.6 Payment to Impaired Person The Committee may decide that because of the mental or physical condition of a person entitled to payments, or because of other relevant factors, it is in the best interest to make payments to others for the benefit of the person entitled to payment. In that event, the Committee may, in its discretion, direct that payments be made to any of the following: (a) To a parent or spouse or a child of legal age. (b) To a legal guardian. (c) To one furnishing maintenance, support, or hospitalization. CNF TRANSPORTATION INC. By: /s/Eberhard G.H. Schmoller Name: Eberhard G. H. Schmoller Title: Senior Vice President, General Counsel and Secretary Executed: June 28, 1999 EX-12 4 EX-12A Exhibit 12(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Year Ended December 31, 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------- ------------- (dollars in thousands) Fixed Charges: Interest expense $ 25,972 $ 32,627 $ 39,553 $ 39,766 $ 33,407 Capitalized interest 5,864 2,342 2,077 2,092 731 Dividend requirement on Series B Preferred Stock(1) 10,992 12,133 12,377 12,645 12,419 Interest component of rental expense (2) 41,363 40,750 35,607 28,521 29,210 ------------- ------------- ------------- ------------- ------------- Fixed Charges $ 84,191 $ 87,852 $ 89,614 $ 83,024 $ 75,767 ============= ============= ============= ============= ============= Earnings: Income from continuing operations before taxes $ 337,122 $ 250,411 $ 221,814 $ 147,132 $ 152,942 Fixed charges 84,191 87,852 89,614 83,024 75,767 Capitalized interest (5,864) (2,342) (2,077) (2,092) (731) Preferred dividend requirements(3) (10,992) (12,133) (12,377) (12,645) (12,419) ------------- ------------- ------------- ------------- ------------- $ 404,457 $ 323,788 $ 296,974 $ 215,419 $ 215,559 ============= ============= ============= ============= ============= Ratio 4.8 x 3.7 x 3.3 x 2.6 x 2.8 x (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 Fixed Charges but not deducted in the determination of Income from Continuing Operations Before Income Taxes.
EX-12 5 EX-12B Exhibit 12(b) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Year Ended December 31, 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------- ------------- (dollars in thousands) Combined Fixed Charges and Preferred Stock Dividends: Interest expense $ 25,972 $ 32,627 $ 39,553 $ 39,766 $ 33,407 Capitalized interest 5,864 2,342 2,077 2,092 731 Dividend requirement on Series B Preferred Stock(1) 10,992 12,133 12,377 12,645 12,419 Dividend requirement on Series C Preferred Stock (1) - - - - 2,207 Dividend requirement on preferred securities of subsidiary trust 6,250 6,250 3,471 - - Interest component of rental expense (2) 41,363 40,750 35,607 28,521 29,210 ------------- ------------- ------------- ------------- ------------- Fixed Charges $ 90,441 $ 94,102 $ 93,085 $ 83,024 $ 77,974 ============= ============= ============= ============= ============= Earnings: Income from continuing operations before taxes $ 337,122 $ 250,411 $ 221,814 $ 147,132 $ 152,942 Fixed charges: 90,441 94,102 93,085 83,024 77,974 Capitalized interest (5,864) (2,342) (2,077) (2,092) (731) Preferred dividend requirements(3) (10,992) (12,133) (12,377) (12,645) (14,626) ------------- ------------- ------------- ------------- ------------- $ 410,707 $ 330,038 $ 300,445 $ 215,419 $ 215,559 ============= ============= ============= ============= ============= Ratio 4.5 x 3.5 x 3.2 x 2.6 x 2.8 x (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.
EX-13 6 EX-13 Exhibit 13 PAGE 8 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Consolidated Results Net income available to common shareholders for 1999 increased 39.3% over 1998 to a record $182.3 million ($3.78 per basic share and $3.35 per diluted share) due primarily to higher operating income, a decline in other net expense, and a lower effective tax rate. Operating income of $359.1 million increased 23.6% over 1998 on double-digit percentage growth at all of our reporting segments. Higher operating income in 1999 was largely attributable to a 13.2% increase in revenue to $5.59 billion. Higher consolidated revenue in 1999 was comprised of increases from all of our reporting segments and was aided by improved international economic conditions and continued strength in the domestic economy. Results of operations in 1999 included three unusual gains. Operating income benefited from a $16.5 million net gain ($0.19 per basic share and $0.17 per diluted share) on the settlement of a lawsuit in January 1999. In May 1999, another non-recurring net gain of $10.1 million ($0.12 per basic share and $0.10 per diluted share) was recognized in operating income on the sale of the assets of VantageParts, our wholesale distributor of truck parts and supplies. Also, other net expense in 1999 included a $9.6 million net gain from the sale of equity securities in December 1999 ($0.11 per basic share and $0.10 per diluted share). Excluding the unusual gains, net income available to common shareholders for 1999 would have been $161.8 million ($3.36 per basic share and $2.98 per diluted share). Net income available to common shareholders for 1998 increased 15.8% over 1997 to $130.8 million ($2.74 per basic share and $2.45 per diluted share) due primarily to higher operating income, a decrease in other net expense, and a lower effective tax rate. The increase in 1998 operating income was primarily the result of significantly higher income from Con-Way Transportation Services, increased income from Menlo Logistics and a reduction in loss from the Other segment, which consists mostly of the operations under the Priority Mail contract with the U.S. Postal Service. Revenue in 1998 of $4.94 billion increased 15.8% over 1997 due primarily to higher revenue from Con-Way, Menlo and the Other segment. The Other segment's revenue in 1998 benefited from higher revenue from the Priority Mail operations, which were fully implemented late in the second quarter of 1998. Con-Way Transportation Services Con-Way's revenue in 1999 increased to a record $1.88 billion, an 11.5% increase over 1998. Higher revenue was primarily the result of increased tonnage (weight) and revenue per hundredweight (yield). Total weight transported by the Con-Way regional carriers increased 7.0% and less-than- truckload (LTL) weight increased 7.1% over 1998. Yield in 1999 was 5.7% higher than in 1998 due primarily to higher rates earned on Con-Way's core premium services and a larger percentage of inter-regional joint services, which command higher rates on longer lengths of haul. We believe that closures of two of Con-Way's competitors in the second quarter of 1999 created additional demand for Con-Way's services in the last half of 1999. Revenue in 1998 was 14.3% higher than in 1997 as Con-Way's regional carriers increased total weight by 6.2%, LTL weight by 6.6%, and yield by approximately 10%. Con-Way's operating income in 1999 grew 10.6% over 1998 to a record $228.8 million. Increased operating income in 1999 was due primarily to higher revenue, better capacity utilization, increased load factor, and other operating efficiencies. Start-up costs incurred during the first year of operations for Con-Way's new multi-client warehousing and logistics business negatively affected operating income in 1999. Con-Way's 1998 operating income of $206.9 million increased 40.6% over 1997 due primarily to expansion of core premium services, growth in inter-regional joint services, lower fuel costs and productivity improvements, including better capacity utilization, increased load factor, and freight handling efficiencies. Emery Worldwide In 1999, Emery increased revenue 9.3% over 1998 to a record $2.41 billion. Increases in international airfreight revenue and revenue from an Express Mail contract with the U.S. Postal Service were partially offset by slightly lower North American airfreight revenue. Growth in international revenue was accomplished primarily with a 10.2% increase in pounds transported (weight or freight volume) and 2.4% higher revenue per pound (yield). Freight volume and yield were favorably affected by improved economic conditions in the international markets served by Emery. The small 0.7% decline in North American airfreight revenue was primarily the result of a 5.7% drop in weight partially offset by a 5.3% increase in yield. PAGE 9 Improved yield in North America was achieved in part from an increase in the percentage of higher yielding guaranteed service, which was introduced in January 1999, and Emery's yield management program, which is designed to eliminate or reprice low-margin business. Although Emery's yield management program in North America was a factor in achieving higher yield, it also contributed to lower weight transported. Emery's revenue in 1998 decreased 2.1% from 1997 due primarily to lower North American and international airfreight revenue partially offset by higher revenue from other transportation services, including the Express Mail contract. North American airfreight revenue in 1998 declined 9.6% from 1997 due primarily to an 8.2% decrease in weight with essentially no change in yield. Airfreight volume in North America fell in 1998 from 1997 due largely to lower demand from certain industries served by Emery, increased ground-based transportation and Emery's yield management program. International airfreight revenue was down 5.0% on a weight decline of 0.8% and a 3.4% decrease in yield. International freight volume and yield were negatively affected by adverse economic conditions in the international markets served by Emery. Emery's operating income in 1999 increased 17.4% from 1998 due primarily to higher airfreight revenue and revenue from the Express Mail contract. Higher operating income on airfreight revenue in 1999 was achieved primarily with a strong 1999 fourth quarter in which international airfreight revenue increased 25.8%. Operating income in 1998 declined 43.6% from 1997 due primarily to higher incremental costs of implementing service initiatives and lower revenue. Initiatives intended to improve Emery's domestic premium service mix included increases in short-term airlift costs and modification of other freight handling processes. With lower revenue in 1998, the additional costs of the service initiatives contributed to a more dramatic margin decline. Management will continue to focus on positioning Emery as a premium service provider. In North America, management intends to continue to develop an infrastructure capable of servicing a higher volume of premium and guaranteed delivery services and to reduce costs. Key initiatives include replacing older aircraft with newer aircraft having lower maintenance costs, including wide-body aircraft, and the recent reconfiguration of its hub sortation center. Internationally, Emery's management will focus on expanding its variable-cost-based operations and will continue its efforts to increase international revenue as a percentage of total revenue. Menlo Logistics Menlo's 1999 record revenue of $716.0 million exceeded 1998 revenue by 22.0% due in part to a full year of revenue from several large logistics contracts secured in the second quarter of 1998 and higher revenue from other contracts secured prior to 1999. Several additional large contracts were also secured in the fourth quarter of 1999. Menlo's revenue in 1998 of $586.8 million was 28.7% higher than 1997 due in part to the addition of the new contracts secured in the second quarter of 1998 and an increase in revenue from contracts existing prior to 1998. Menlo's operating income of $22.3 million in 1999 increased 14.4% from 1998 due primarily to increased revenue. Higher business development and information systems costs incurred during 1999 contributed to lower operating income as a percentage of revenue than in 1998. In 1998, Menlo increased operating income to $19.5 million, a 13.3% improvement over 1997. Higher revenue and better margins from existing contracts in 1998 were partially offset by the costs of implementing several large new contracts in the second quarter of 1998. Other Operations The Other segment consists primarily of the operations under a Priority Mail contract with the U.S. Postal Service, and includes the operating results of Road Systems and, prior to the sale of its assets in May 1999, VantageParts. Also included in the Other segment's operating income for 1999 were net gains on the settlement of a lawsuit in January 1999 and on the VantageParts asset sale. The Other segment's revenue of $590.2 million in 1999 increased 26.3% over 1998 due primarily to revenue of $555.5 million from the Priority Mail operation, a 35.2% increase over 1998. The Priority Mail operation was not fully implemented until late in the second quarter of 1998. Higher Priority Mail revenue was partially offset by loss of revenue from VantageParts following the sale of its assets in May 1999. PAGE 10 Revenue for the Other segment in 1998 increased to $467.2 million from $88.1 million in 1997 due to an increase in Priority Mail revenue to $410.8 million in 1998 from $51.6 million in 1997. Revenue in 1998 benefited from the operation of 10 Priority Mail Processing Centers, which were not fully implemented until late in the second quarter of 1998. In 1999, operating income of $32.5 million for the Other segment increased from essentially break-even results in 1998 due primarily to a $16.5 million net gain from a lawsuit settled in January 1999 and a $10.1 million net gain on the sale of the assets of VantageParts. In addition, the Priority Mail operation in 1999 generated operating income of $4.8 million compared with an operating loss of $3.0 million incurred during the start- up phase of the Priority Mail contract in 1998. As discussed below, all Priority Mail operating income in 1999 was recognized in the first six months and break-even results were recognized in the second half. The near break-even results of the Other segment in 1998 increased from the $13.4 million operating loss recorded in 1997. The improvement in 1998 operating income was primarily the result of a reduction in the Priority Mail operating loss to $3.0 million in 1998 from $13.0 million in 1997. The 1998 operating loss for Priority Mail reflected costs incurred during completion of the start-up phase in the first half of 1998 and the costs of maintaining service levels and making required system modifications for the December 1998 holiday season. The Priority Mail operating loss in 1997 included higher cost levels during the start-up phase of operations. In accordance with the Priority Mail contract, in February 1999, Emery Worldwide Airlines (EWA), our subsidiary that operates the contract, submitted a proposal to the U.S. Postal Service (USPS) for 1999 pricing. We believe that our proposal was reasonably determined and justifiable based upon EWA's experience of operating under the Priority Mail contract. EWA did not receive a counter-proposal from the USPS. Consequently, EWA in the third quarter of 1999 filed a claim with the USPS for proposed higher prices. Through the second quarter of 1999, Priority Mail contract revenue was billed at a provisional rate set by the USPS, pending a final price determination. The USPS responded to the EWA claim with unilateral price reductions for both prior and future periods. The current rate is below EWA's cost to service this contract. Unless the rate is increased or until negotiation or litigation results in favorable pricing or contract changes, EWA will be compensated below its cost of operating the contract. Also, in August 1999, the USPS denied EWA's previously filed claim for reimbursement of additional costs incurred during the 1998 holiday season. Consistent with our accounting policies described in Note 1 of the Notes to Consolidated Financial Statements, unbilled revenue from the Priority Mail contract is recognized in our financial statements. In accordance with generally accepted accounting principles, EWA recognizes unbilled revenue related to claims sufficient only to recover costs of operating under the contract. Accordingly, no operating profit was recognized in connection with the Priority Mail contract in the last half of 1999. As a result of the claims discussed above and the USPS's decision to assert price reductions, EWA recognized $123.7 million of revenue through December 31, 1999 that is now in dispute and attributable to claims made by EWA under the contract. Until the dispute is resolved, we expect that any shortfall between EWA's billed revenue from the Priority Mail contract and its costs of operating under the contract will be recognized as unbilled revenue and as a result, we will generally continue to record break-even operating results under the Priority Mail contract in our financial statements. If we determine that the unbilled revenue is not collectable, the uncollectable amount will be charged as expense to operations in the period when and if that determination is made. We are in active negotiations with the USPS to resolve the pricing and operational issues involving the Priority Mail contract. We disagree with the USPS's actions and intend to vigorously contest our claim for price determination and denial of the 1998 holiday claim by appropriate action. While every attempt is being made to conclude the negotiations in a beneficial manner, we intend to pursue litigation should negotiations fail. We believe our position is reasonable and well founded; however, there can be no assurance as to the outcome. Likewise, if determined adversely to us, there can be no assurance that this matter will not have a material adverse effect on our results of operations. PAGE 11 Other Net Expense Other net expense in 1999 decreased 45.2% from 1998 due primarily to a $9.6 million net gain from the sale of equity securities and lower interest expense. The decline in interest expense was partially due to the July 1998 refinancing of a capital lease obligation at a lower interest rate and the repayment of the 91/8% Notes at maturity. The repayment of $117.7 million of 91/8% Notes in August 1999 was funded in part with $90.0 million of lower-interest rate long-term borrowings under unsecured lines of credit. Partially offsetting lower interest expense in 1999 was increased interest expense on higher average short-term borrowings. Capitalized interest on construction projects in 1999 also contributed to lower interest expense compared to 1998. Other net expense for 1998 was down 6.8% compared to 1997 from the beneficial refinancing of debt obligations in 1998 and 1997. Lower interest expense on lower average short-term borrowings in 1998 was partially offset by dividend requirements on preferred securities of a subsidiary trust (TECONs) issued in June 1997. The net gain from the sale of equity securities discussed above resulted from the sale by Emery in December 1999 of 34% of its holdings in Equant N.V., an international data network services provider. As discussed in Note 11 of the Notes to Consolidated Financial Statements, the remaining shares held by Emery are carried at essentially no cost and are subject to transferability restrictions. Income Taxes The effective tax rate for 1999 decreased to 43.5% from 44.5% in 1998 due primarily to higher income in 1999. The effective tax rate for 1998 was 44.5% compared to a rate of 45.5% for 1997. The decline in the 1998 tax rate was primarily attributable to higher income, the implementation of tax planning strategies and lower non-deductible expenses. LIQUIDITY AND CAPITAL RESOURCES In 1999, cash and cash equivalents increased $72.4 million to $146.3 million. Cash from operations of $445.1 million provided funding for $369.7 million of capital and software expenditures, $36.0 million of net debt reduction and $30.4 million of dividend payments. The $72.4 million increase in cash during 1999 included three unusual gains. Operating activities included a $16.5 million net gain on a settlement of a lawsuit and investing activities included $29.3 million of proceeds on the sale of the assets of VantageParts and $9.6 million of net proceeds on the sale of equity securities. In 1998, net capital and software expenditures of $303.2 million and dividend payments of $30.3 million exceeded the $266.8 million of cash flow provided by operating activities. These requirements were funded with a $23.7 million decline in cash and cash equivalents and a $43.0 million increase in short-term borrowings. Cash from operations in 1999 increased $178.3 million over 1998 and was provided primarily by net income before depreciation, amortization and deferred taxes. Cash from operations in 1998, which declined $21.4 million from 1997, was generated primarily from net income before depreciation, amortization and deferred taxes. Investing activities in 1999 used $10.6 million more cash than in 1998. Capital expenditures of $335.0 million in 1999 increased $67.3 million from 1998 due primarily to a $109.7 million increase in Con-Way's capital expenditures, partially offset by a $39.5 million decline in capital expenditures for the Priority Mail contract. During 1999, Con-Way spent $212.0 million, primarily on revenue equipment and infrastructure in connection with its capital reinvestment program. Partially offsetting the increased capital expenditures in 1999 was a $16.7 million decline in software expenditures from 1998 and $38.9 million of proceeds on the sale of the assets of VantageParts and equity securities. Cash used in investing activities in 1998 was $54.9 million higher than in 1997 due primarily to a $25.3 million increase in capital expenditures and a $40.4 million increase in software expenditures. Higher capital expenditures by Emery were partially offset by lower expenditures for the Priority Mail operation. Capital expenditures related to the Priority Mail contract during 1998 declined compared to 1997 given required capital expenditures in 1997 related to the start-up phase of the Priority Mail contract. Financing activities in 1999 used $58.9 million compared to $12.7 million provided by financing activities in 1998 due primarily to fluctuations in borrowings. As discussed in Note 3 of the Notes to Consolidated Financial Statements, $72.4 million of Thrift and Stock Plan notes guaranteed by CNF were refinanced at a lower rate in July 1999. Financing activities provided PAGE 12 $12.7 million in 1998 compared to $24.4 million used in 1997, reflecting increased short-term borrowings in 1998. In October 1998, we refinanced $46.0 million of Series A revenue bonds. As discussed above under "Results of Operations" for the "Other" segment, the rate currently being paid to EWA by the USPS under the Priority Mail contract is below EWA's cost to service the contract. Until the dispute over pricing is resolved, our liquidity will be negatively affected by the shortfall between EWA's compensation from the contract and its cost of operation. In addition to the $350 million unsecured credit facility, we entered into a supplemental $100 million unsecured credit facility in September 1999. This supplemental credit facility was to provide additional liquidity until designated long-term borrowings under lines of credit are refinanced with a longer-term instrument, as discussed below. At December 31, 1999, we had $130.0 million of borrowings outstanding under these unsecured credit facilities. Of the $130.0 million outstanding under the unsecured credit facilities, $90.0 million were classified as long-term debt based on our ability and intent to refinance the borrowings on a long-term basis. The $90.0 million of long-term borrowings under lines of credit were used to partially fund the repayment of $117.7 million of 91/8% Notes, which matured in August 1999. The $350 million facility is also available for issuance of letters of credit. Under that facility, outstanding letters of credit totaled $59.8 million at December 31, 1999. Available capacity under the $350 million facility and the supplemental line of credit was $260.2 million at December 31, 1999. At December 31, 1999, we also had $150.0 million of uncommitted lines with $12.3 million in letters of credit outstanding, leaving $137.7 million of additional short-term borrowing availability. Under other unsecured facilities, $50.4 million in letters of credit were outstanding at December 31, 1999. We 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. In February 2000, we intend to issue $200.0 million of debentures with a 30- year term. The proceeds from this offering are intended to be used primarily to repay borrowings under the unsecured credit facilities and for other general corporate purposes. Our ratio of total debt to capital decreased to 30.5% at December 31, 1999, from 36.4% at December 31, 1998, primarily due to lower borrowings and higher shareholders' equity from net income. Our 36.4% debt-to-capital ratio at December 31, 1998 declined from 37.9% at December 31, 1997 due to higher shareholders' equity from net income. CYCLICALITY AND SEASONALITY Our businesses operate 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 airfreight 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 Our 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, we used derivative financial instruments to mitigate potential volatility in interest rates. At December 31, 1999, 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, 1999, we estimate 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 our financial position or results of operations. We may also be exposed to the effect of interest rate fluctuations in the fair value of our long-term debt and capital lease obligations, as described in Notes 3 and 4 of the Notes to Consolidated Financial Statements. The change in the fair value of our long-term obligations given a hypothetical 10% change in interest rates would be approximately $14 million at December 31, 1999. PAGE 13 During 1999, we entered into fuel purchase contracts to hedge our market exposure to fuel prices. At December 31, 1999, we estimate that a change in the fair value of these contracts given a hypothetical 10% change in the price of the hedged fuel would not have a material effect on our financial position or results of operations. At December 31, 1999, we had not entered into any derivative contracts to hedge our foreign currency exchange exposure. ACCOUNTING STANDARDS 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, we elected to adopt the pronouncement early and applied the new provisions prospectively as of January 1, 1998. Prior to adoption of SOP 98-1, it was our policy to capitalize purchased software costs and to expense all internally developed internal-use software costs. For the years ended December 31, 1999 and 1998, costs of $27.3 million and $35.9 million, respectively, were capitalized as internally developed internal-use software. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137). SFAS 137 delays by one year the effective date of FASB Statement 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 will now be effective January 1, 2001. We do not expect the adoption of SFAS 133 to have a material impact on our financial position or results of operations and we plan to adopt the statement in the first quarter of 2001. YEAR 2000 State of Readiness As of January 31, 2000, we have not experienced any significant adverse effects related to Y2K compliance issues. Additionally, we are not aware of any problems experienced by third parties with which we transact business. Costs to Address Y2K Compliance In 1996, we began assessing and correcting potential Y2K information systems problems for our mission-critical business systems. Since that time, we expensed $38.1 million on Y2K compliance through December 31, 1999. All Y2K costs have been funded from operations. We expensed $14.9 million and $19.7 million for the years ended December 31, 1999 and 1998, respectively. For the year ended December 31, 1999, we capitalized $7.4 million of purchased software costs and $27.3 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 replaced non-compliant systems. Risks & Contingency Plans We believe our efforts to address Y2K issues have been successful in avoiding any material adverse effect on our financial position or results of operations. We do not expect any material adverse effect on our financial position and results of operations but will continue to monitor for Y2K-related problems. Should problems arise, we will implement the Y2K business resumption contingency plans we previously established. FORWARD LOOKING STATEMENTS Certain statements in this annual report, including statements regarding anticipated earnings, constitute "forward-looking statements" and are subject to a number of risks and uncertainties, and should not be relied upon as predictions of future events. The factors included in this report and in Item 7 of our 1999 Annual Report on Form 10-K as well as other filings with the Securities and Exchange Commission, could cause actual results and other matters to differ materially from those in such forward- looking statements. As a result, no assurance can be given as to future financial position or results of operations. PAGE 14 CNF TRANSPORTATION INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31 (Dollars in thousands)
1999 1998 ASSETS Current Assets Cash and cash equivalents $ 146,263 $ 73,897 Trade accounts receivable, net of allowance (Note 1) 914,307 810,550 Other accounts receivable 25,419 51,865 Operating supplies, at lower of average cost or market 46,019 41,764 Prepaid expenses 41,971 32,741 Deferred income taxes (Note 5) 26,254 89,544 Total Current Assets 1,200,233 1,100,361 Property, Plant and Equipment, at Cost Land 119,403 114,146 Buildings and leasehold improvements 573,688 468,123 Revenue equipment 854,519 714,195 Other equipment 447,962 425,476 1,995,572 1,721,940 Accumulated depreciation and amortization (864,538) (737,464) 1,131,034 984,476 Other Assets Deferred charges and other assets (Note 12) 200,739 128,627 Capitalized software, net (Note 1) 88,157 64,285 Unamortized aircraft maintenance, net (Note 1) 162,951 143,349 Goodwill, net (Note 1) 265,896 268,314 717,743 604,575 Total Assets $3,049,010 $2,689,412 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
PAGE 15 CNF TRANSPORTATION INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31 (Dollars in thousands except per share data)
1999 1998 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 305,954 $ 285,832 Accrued liabilities (Note 2) 543,353 446,171 Accrued claims costs 99,940 108,028 Current maturities of long-term debt and capital leases (Notes 3 and 4) 6,452 5,259 Short-term borrowings (Note 3) 40,000 43,000 Income taxes payable (Notes 5 and 12) 53,455 12,340 Total Current Liabilities 1,049,154 900,630 Long-Term Liabilities Long-term debt and guarantees (Note 3) 322,800 356,905 Long-term obligations under capital leases (Note 4) 110,646 110,730 Accrued claims costs 81,978 58,388 Employee benefits (Note 8) 217,519 190,268 Other liabilities and deferred credits 45,450 55,268 Deferred income taxes (Note 5) 128,515 115,868 Total Liabilities 1,956,062 1,788,057 Commitments and Contingencies (Notes 3, 4 and 12) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Convertible Debentures of the Company (Note 6) 125,000 125,000 Shareholders' Equity (Note 7) 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 840,407 and 854,191 respectively 8 9 Additional paid-in capital, preferred stock 127,817 129,914 Deferred compensation, Thrift and Stock Plan (Note 9) (87,600) (94,836) Total Preferred Shareholders' Equity 40,225 35,087 Common stock, $.625 par value; authorized 100,000,000 shares; issued 55,306,947 and 54,797,707 shares, respectively 34,567 34,249 Additional paid-in capital, common stock 328,721 314,440 Retained earnings 747,936 584,991 Deferred compensation, restricted stock (Note 10) (2,010) (4,599) Cost of repurchased common stock (6,856,567 and 6,922,285 shares, respectively) (169,057) (170,678) 940,157 758,403 Accumulated foreign currency translation adjustments (8,039) (9,140) Minimum pension liability adjustment (Note 8) (4,395) (7,995) Accumulated Other Comprehensive Loss (12,434) (17,135) Total Common Shareholders' Equity 927,723 741,268 Total Shareholders' Equity 967,948 776,355 Total Liabilities and Shareholders' Equity $3,049,010 $2,689,412 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
PAGE 16 CNF TRANSPORTATION INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME YEARS ENDED DECEMBER 31 (Dollars in thousands except per share data)
1999 1998 1997 REVENUES $ 5,592,810 $ 4,941,490 $ 4,266,801 Costs and Expenses Operating expenses 4,576,967 4,045,047 3,474,447 General and administrative expenses 516,326 461,230 416,391 Depreciation 166,995 144,695 111,096 Net gain on sale of assets of parts distribution operation (10,112) - - Net gain on legal settlement (16,466) - - 5,233,710 4,650,972 4,001,934 OPERATING INCOME 359,100 290,518 264,867 Other Income (Expense) Interest expense (25,972) (32,627) (39,553) Dividend requirement on preferred securities of subsidiary trust (Note 6) (6,250) (6,250) (3,471) Miscellaneous, net (Note 11) 10,244 (1,230) (29) (21,978) (40,107) (43,053) Income before income taxes 337,122 250,411 221,814 Income taxes (Note 5) 146,648 111,433 100,925 NET INCOME 190,474 138,978 120,889 Preferred stock dividends 8,218 8,169 7,886 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 182,256 $ 130,809 $ 113,003 Average Shares Outstanding (Note 1) Basic 48,189,618 47,659,745 46,236,688 Diluted 56,019,317 55,514,318 53,077,468 Earnings Per Share (Note 1) Basic $ 3.78 $ 2.74 $ 2.44 Diluted $ 3.35 $ 2.45 $ 2.19 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
PAGE 17 CNF TRANSPORTATION INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS YEARS ENDED DECEMBER 31 (Dollars in thousands)
1999 1998 1997 Cash and Cash Equivalents, Beginning of Year $ 73,897 $ 97,617 $ 82,094 Operating Activities Net income 190,474 138,978 120,889 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 190,461 163,382 123,391 Increase in deferred income taxes 75,937 40,022 31,840 Amortization of deferred compensation 11,858 9,764 7,132 Provision for uncollectible accounts 15,229 11,050 12,528 Losses (gains) from property disposals, net 3,038 (1,309) 927 Gain on sale of assets of parts distribution operation, net (10,112) - - Gain on sale of equity securities (9,625) - - Changes in assets and liabilities: Receivables (97,853) (137,613) (156,721) Prepaid expenses (9,287) 2,941 (4,433) Accounts payable 20,900 17,768 57,663 Accrued liabilities 96,403 22,934 73,740 Accrued claims costs 14,082 18,390 9,626 Income taxes (11,885) 2,226 17,564 Employee benefits 30,851 34,070 25,881 Deferred charges and credits (52,338) (40,937) (25,783) Other (13,014) (14,873) (6,034) Net Cash Provided by Operating Activities 445,119 266,793 288,210 Investing Activities Capital expenditures (335,008) (267,668) (242,343) Software expenditures (34,705) (51,415) (11,022) Proceeds from sale of equity securities 9,625 - - Proceeds from sale of assets of parts distribution operation 29,260 - - Proceeds from sales of properties 16,986 15,836 5,043 Net Cash Used in Investing Activities (313,842) (303,247) (248,322) Financing Activities Proceeds from issuance of long-term debt 162,400 46,000 1,997 Repayment of long-term debt, guarantees and capital leases (195,396) (51,469) (4,020) Proceeds from (repayment of) net short-term borrowings (3,000) 43,000 (155,000) Proceeds from issuance of subsidiary preferred securities, net of costs of issuance - - 121,431 Proceeds from exercise of stock options 7,474 5,483 41,500 Payments of common dividends (19,311) (19,068) (18,497) Payments of preferred dividends (11,078) (11,212) (11,776) Net Cash Provided by (Used in) Financing Activities (58,911) 12,734 (24,365) Increase (Decrease) in Cash and Cash Equivalents 72,366 (23,720) 15,523 Cash and Cash Equivalents, End of Year $ 146,263 $ 73,897 $ 97,617 Supplemental Disclosure Cash paid for income taxes, net of refunds $ 63,207 $ 67,955 $ 38,568 Cash paid for interest, net of amounts capitalized 35,833 33,141 47,948 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
PAGE 18 CNF TRANSPORTATION INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (Dollars in thousands except per share data)
Preferred Stock Series B Common Stock Additional Number of Number of Paid-in Shares Amount Shares Amount Capital Balance, December 31, 1996 875,191 $ 9 51,595,827 $ 32,247 $ 375,987 Net income - - - - - Other comprehensive loss: Foreign currency translation adjustment - - - - - Comprehensive income - - - - - Exercise of stock options including tax benefits of $16,612 - - 2,688,824 1,681 56,431 Issuance of restricted stock - - 85,531 53 2,771 Recognition of deferred compensation - - - - - Repurchased common stock issued for conversion of preferred stock (9,589) - - - (1,284) Common dividends declared ($.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 Net income - - - - - Other comprehensive loss: Foreign currency translation adjustment - - - - - Minimum pension liability adjustment - - - - - Comprehensive income - - - - - Exercise of stock options including tax benefits of $2,576 - - 321,079 201 7,858 Issuance of restricted stock, net of forfeitures - - 106,446 67 3,935 Issuance of employee stock awards - - - - 13 Recognition of deferred compensation - - - - - Repurchased common stock issued for conversion of preferred stock (11,411) - - (1,357) Common dividends declared ($.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 Net income - - - - - Other comprehensive income: Foreign currency translation adjustment - - - - - Minimum pension liability adjustment - - - - - Comprehensive income - - - - - Exercise of stock options including tax benefits of $4,198 - - 446,128 279 11,393 Issuance of restricted stock, net of forfeitures - - 63,112 39 2,387 Issuance of employee stock awards - - - - 12 Recognition of deferred compensation - - - - - Repurchased common stock issued for conversion of preferred stock (13,784) (1) - - (1,608) Common dividends declared ($.40 per share) - - - - - Series B, Preferred dividends ($12.93 per share) net of tax benefits of $2,774 - - - - - Balance, December 31, 1999 840,407 $ 8 55,306,947 $ 34,567 $ 456,538 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
PAGE 19 CNF TRANSPORTATION INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (Dollars in thousands except per share data)
Cost of Accumulated Repurchased Other Deferred Retained Common Comprehensive Comprehensive Compensation Earnings Stock Income (Loss) Income Balance, December 31, 1996 $ (108,655) $ 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 $16,612 - - - - Issuance of restricted stock (2,824) - - - Recognition of deferred compensation 7,132 - - - Repurchased common stock issued for conversion of preferred stock - - 1,284 - Common dividends declared ($.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 (104,347) 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 - - - (7,995) (7,995) Comprehensive income - - - $ 128,490 Exercise of stock options including tax benefits of $2,576 - - - - Issuance of restricted stock, net of forfeitures (4,852) - - - Issuance of employee stock awards - - 13 - Recognition of deferred compensation 9,764 - - - Repurchased common stock issued for conversion of preferred stock - - 1,357 - Common dividends declared ($.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 (99,435) 584,991 (170,678) (17,135) Net income - 190,474 - - $ 190,474 Other comprehensive income: Foreign currency translation adjustment - - - 1,101 1,101 Minimum pension liability adjustment - - - 3,600 3,600 Comprehensive income - - - - $ 195,175 Exercise of stock options including tax benefits of $4,198 - - - - Issuance of restricted stock, net of forfeitures (2,033) - - - Issuance of employee stock awards - - 13 - Recognition of deferred compensation 11,858 - - - Repurchased common stock issued for conversion of preferred stock - - 1,608 - Common dividends declared ($.40 per share) - (19,311) - - Series B, Preferred dividends ($12.93 per share) net of tax benefits of $2,774 - (8,218) - - Balance, December 31, 1999 $ (89,610) $ 747,936 $(169,057) $ (12,434) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
PAGE 20 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. and its wholly owned subsidiaries (the Company or CNF). Organization: CNF is a management company of global supply chain services with businesses in regional less-than-truckload (LTL) trucking, domestic and international air freight, full service logistics management, postal sortation and transportation services, and trailer manufacturing. See Note 13 "Segment Reporting" for further discussion of the Company's operating segments, markets and product lines. Recognition of Revenues: Freight transportation revenue is recognized 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-determination that give rise to unbilled revenue. Unbilled revenue representing contract change orders or claims is included in revenue only when it is probable that the change order or claim will result in additional contract revenue and if the amount can be reliably estimated. The Company recognizes unbilled revenue related to claims sufficient only to recover costs. 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 in Trade Accounts Receivable in the Consolidated Balance Sheets at December 31, 1999 and 1998 was $106.2 million and $11.0 million, respectively. In addition, as a result of the U.S. Postal Service's unilateral price reductions discussed under "Other" segment in "Management's Discussion and Analysis," $17.5 million of revenue actually collected by the Company is now in dispute. 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: Trade accounts receivable are net of allowances of $26,163,000 and $21,098,000 at December 31, 1999 and 1998, 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 estimated 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. Capitalized Software: Capitalized Software, net, consists of costs to purchase and develop internal-use 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, was effective for fiscal years beginning after December 15, 1998. As provided by SOP 98-1, the Company elected to adopt the pronouncement early and 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 years ended December 31, 1999 and 1998, costs of $27.3 million ($0.32 per basic share and $0.28 per diluted share) and $35.9 million ($0.42 per basic share and $0.36 per diluted share) 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 10 years, depending on the estimated useful life of the software. PAGE 21 Unamortized Aircraft Maintenance: 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 Company has recorded unamortized maintenance of $226,629,000 and $198,973,000 at December 31, 1999 and 1998, 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 $63,678,000 and $55,624,000 at December 31, 1999 and 1998, 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. 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 the 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, 1999 and 1998 was $105,887,000 and $95,194,000, 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 (EPS): Basic EPS is computed by dividing reported Net Income Available to Common Shareholders by the weighted-average shares outstanding. Diluted EPS is calculated as follows: (Dollars in thousands except per share data) 1999 1998 1997 Earnings: Net income available to common shareholders $182,256 $130,809 $113,003 Add-backs Dividends on preferred stock, net of replacement funding 1,337 1,274 1,231 Dividends on preferred securities of subsidiary trust, net of tax 3,816 3,816 2,118 $187,409 $135,899 $116,352 Shares: Weighted-average shares Outstanding 48,189,618 47,659,745 46,236,688 Stock option and restricted stock dilution 695,099 708,042 1,029,415 Series B preferred stock 4,009,600 4,021,531 4,075,254 Preferred securities of subsidiary trust 3,125,000 3,125,000 1,736,111 56,019,317 55,514,318 53,077,468 Diluted earnings per share $3.35 $2.45 $2.19 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. Recent Pronouncements: In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101 (SAB 101). In addition to providing guidance on the recognition and disclosure of revenue in financial statements, SAB 101 also addresses the income statement presentation of revenue for certain business activities. SAB 101 clarifies issues to be considered in assessing whether revenue for certain transactions should be reported gross, with a separate display of costs of services to arrive at gross profit, or on a net basis. The Company is PAGE 22 currently evaluating SAB 101 to determine the effect, if any, on the income statement presentation of its revenue. Reclassification: Certain amounts in prior years' financial statements have been reclassified to conform to the current year presentation. 2. Accrued Liabilities Accrued liabilities consisted of the following as of December 31: (Dollars in thousands) 1999 1998 Other accrued liabilities $187,172 $113,397 Purchased transportation 101,651 83,446 Taxes other than income taxes 70,830 56,840 Holiday and vacation pay 66,232 59,237 Wages and salaries 39,086 40,550 Incentive compensation 36,382 34,587 Estimated revenue adjustments 33,546 39,799 Interest 8,454 18,315 Total accrued liabilities $543,353 $446,171 3. Debt and Guarantees As of December 31, long-term debt and guarantees consisted of the following: (Dollars in thousands) 1999 1998 Long-term borrowings under lines of credit $ 90,000 $ - 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, 6.00% to 8.54%, due through 2009 (interest payable semi-annually) 134,400 139,600 91/8% Notes due 1999 (interest payable semi-annually) - 117,705 329,200 362,105 Less current maturities (6,400) (5,200) Total long-term debt and guarantees $322,800 $356,905 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 December 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, 1999 and 1998, the Company had $50.0 million and $28.0 million, respectively, of borrowings and $59.8 million and $66.6 million, respectively, of letters of credit outstanding under this agreement. In September 1999, the Company obtained an additional $100 million unsecured credit facility with a one- year term to supplement the $350 million credit facility described above. At December 31, 1999, $80.0 million was outstanding under the supplemental unsecured facility. At December 31, 1999, the Company had $150.0 million of other uncommitted lines of credit with $12.3 million issued under letters of credit and no borrowings, leaving $137.7 million available for additional short-term borrowings. At December 31, 1998, $150.0 million of uncommitted lines of credit had $11.2 million in letters of credit outstanding and $15.0 million of short-term borrowings. At December 31, 1999, $40.0 million of the $130.0 million outstanding under the unsecured credit lines were classified as short term with the remaining $90.0 million classified as long term based on the Company's ability and intent to refinance this amount on a long-term basis. At December 31, 1998, all borrowings under lines of credit were classified as short term. The weighted-average interest rate of borrowings under lines of credit outstanding at December 31, 1999 and 1998, was 7.2% and 7.1%, respectively. The aggregate principal amount of $117.7 million of the Company's unsecured 91/8% Notes was paid in full on the August 15, 1999 maturity date. The redemption of these notes was made in part with $90.0 million of borrowings under lines of credit. The Company guarantees the notes issued by the Company's Thrift and Stock Plan (TASP). On July 1, 1999, the Company refinanced $45.25 million of Series A and $27.15 million of Series A Restructured TASP Notes. These notes, with respective interest rates of 8.42% and 9.04%, were replaced with $72.4 million of new TASP notes with an interest rate of 6.0% and a maturity date of January 1, 2006. These refinanced notes contain financial covenants that require the Company to maintain minimum amounts of net worth and fixed charge coverage. The remaining $62.0 million of TASP notes PAGE 23 outstanding at December 31, 1999 are subject to redemption at the option of the holders should a designated event occur or ratings by both Moody's and Standard & Poors of senior unsecured indebtedness decline below investment grade. The 7.35% Notes due in 2005 contain covenants limiting the incurrence of additional liens. The Company's interest expense as presented on the Statements of Consolidated Income is net of capitalized interest of $5,864,000 in 1999, $2,342,000 in 1998 and $2,077,000 in 1997. The aggregate annual maturities of Long-Term Debt and Guarantees for the next five years ending December 31 are $6.4 million in 2000, $97.5 million in 2001, $8.7 million in 2002, $10.1 million in 2003, and $12.0 million in 2004. 4. Leases The Company and its subsidiaries are obligated under 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. These bonds consist of $46.0 million of Series A bonds due in February 2018 with an interest rate of 5.625%. The remaining $62.0 million are due in 2009 and bear rates of interest between 6.05% and 6.20%, and have call provisions. Included in property, plant and equipment is $33,215,000 of equipment and leasehold improvements, net, related to the Hub. Future minimum lease payments with initial or remaining non-cancelable lease terms in excess of one year, at December 31, 1999, are as follows: Capital Operating (Dollars in thousands) Leases Leases Year ending December 31 2000 $ 6,819 $187,825 2001 6,819 123,889 2002 6,819 79,920 2003 6,819 53,551 2004 6,819 33,435 Thereafter (through 2018) 163,389 36,570 Total minimum lease payments 197,484 $515,190 Amount representing interest (86,786) Present value of minimum lease Payments 110,698 Current maturities of obligations under capital leases (52) Long-term obligations under capital leases $110,646 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. The Company has entered into commitments for operating leases for nine new aircraft to be delivered in 2000. Subject to delivery, the total amount of these operating lease commitments will be approximately $9.4 million in 2000, $20.2 million in 2001 through 2003, $15.3 million in 2004, and $36.0 million thereafter. Rental expense for operating leases is comprised of the following: (Dollars in thousands) 1999 1998 1997 Minimum rentals $253,425 $232,008 $203,521 Sublease rentals (7,436) (4,001) (5,087) Amortization of deferred Gains (1,639) (4,012) (4,487) $244,350 $223,995 $193,947 5. Income Taxes The components of pretax income and income taxes are as follows: (Dollars in thousands) 1999 1998 1997 Pretax income U.S. corporations $324,320 $240,838 $206,055 Foreign corporations 12,802 9,573 15,759 Total pretax income $337,122 $250,411 $221,814 Income taxes Current U.S. federal $ 50,348 $ 59,429 $ 49,187 State and local 13,211 7,829 12,109 Foreign 7,152 4,153 7,789 $ 70,711 $ 71,411 $ 69,085 Deferred U.S. federal $ 73,474 $ 37,284 $ 31,162 State and local 2,463 2,738 678 75,937 40,022 31,840 Total income taxes $146,648 $111,433 $100,925 PAGE 24 The components of deferred tax assets and liabilities at December 31, relate to the following: (Dollars in thousands) 1999 1998 Deferred tax assets Reserves for accrued claims costs $ 44,034 $ 44,400 Reserves for post retirement health benefits 42,417 39,452 Reserves for employee benefits 82,438 66,916 Other reserves not currently deductible 44,195 45,904 213,084 196,672 Deferred tax liabilities Depreciation and amortization 218,700 194,691 Unbilled revenue 57,239 4,601 Other 39,406 23,704 315,345 222,996 Net deferred tax liability $(102,261) $(26,324) 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: 1999 1998 1997 U.S. statutory tax rate 35.0% 35.0% 35.0% State income taxes (net of federal income tax benefit) 3.3 3.8 4.3 Foreign taxes in excess of U.S. statutory rate 0.8 0.9 1.0 Non-deductible operating expenses 0.9 1.1 1.2 Amortization of goodwill 0.9 1.2 1.4 Foreign tax credits, net (0.4) (1.6) (1.1) Other, net 3.0 4.1 3.7 Effective income tax rate 43.5% 44.5% 45.5% The cumulative undistributed earnings of the Company's foreign subsidiaries (approximately $24.4 million at December 31, 1999), 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 $3.1 million. Certain contingencies related to income taxes are discussed in Note 12 "Contingencies and Other Commitments." 6. 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. PAGE 25 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. 7. 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 9 "Thrift and Stock Plan," at the rate of 4.71 shares for each share of preferred stock subject to anti-dilution 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 1.3 multiplied by 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. Comprehensive Income In 1998, the Company adopted Statement of Financial Accounting Standards (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. 8. Employee Benefit Plans 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 92% 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) 1999 1998 Change in benefit obligation Projected benefit obligation at beginning of year $390,867 $330,658 Service cost-benefits earned during the year 37,733 30,497 Interest cost on projected benefit obligation 30,525 25,338 Actuarial loss (gain) (51,645) 10,712 Benefits paid (10,359) (6,338) Projected benefit obligation at end of year 397,121 390,867 Change in plan assets Fair value of plan assets at beginning of year 354,550 312,818 Actual return on plan assets 88,878 46,136 Transfers from defined contribution plan 1,278 1,934 Benefits paid (10,359) (6,338) Fair value of plan assets at end of year 434,347 354,550 Funded status 37,226 (36,317) Unrecognized actuarial gain (135,214) (26,745) Unrecognized prior service costs 6,632 7,816 Unrecognized net asset at transition (4,517) (5,646) Accrued benefit cost $ (95,873) $(60,892) Weighted-average assumptions as of December 31 Discount rate 8.00% 7.00% Expected long-term rate of return on assets 9.50% 9.50% Rate of compensation increase 5.00% 5.00% PAGE 26 Net pension cost included the following: (Dollars in thousands) 1999 1998 1997 Service cost-benefits earned during the year $37,733 $30,497 $23,664 Interest cost on projected benefit obligation 30,525 25,338 21,818 Expected return on plan assets (33,298) (29,386) (25,511) Net amortization and deferral 21 56 (200) Net pension cost $34,981 $26,505 $19,771 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, 1999 and 1998, the accrued benefit cost was $16,706,000 and $14,174,000, respectively, and the net periodic pension cost was $4,290,000 in 1999, $4,036,000 in 1998 and $2,462,000 in 1997. Also included in Employee Benefits in the Consolidated Balance Sheets at December 31, 1999 and 1998 was a minimum pension liability for the unfunded supplemental program. At December 31, 1999, the non-cash adjustment for the minimum pension liability of $6,111,000 was offset by an intangible asset of $1,716,000 and accumulated other comprehensive loss of $4,395,000. 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) 1999 1998 Change in benefit obligation Accumulated benefit obligation at beginning of year $89,947 $79,898 Service cost-benefits earned during the year 1,558 2,228 Interest cost on accumulated benefit obligation 6,289 6,046 Benefit payments (4,343) (3,966) Actuarial loss (gain) (8,677) 5,741 Accumulated benefit obligation at end of year 84,774 89,947 Unrecognized net actuarial gain 10,854 2,177 Unrecognized prior service benefit 334 389 Accrued benefit cost $95,962 $92,513 Weighted-average discount rate at December 31 8.00% 7.00% At December 31, 1999, a 6.5% annual rate of increase in the per capita cost of covered medical benefits was assumed for 2000 and was assumed to decrease gradually to 5.5% for 2002 and remain at that level thereafter. A 5.5% annual rate of increase in the per capita cost of dental and vision benefits was assumed for 2000 and was assumed to remain at that level thereafter. Net periodic post retirement benefit cost included the following: (Dollars in thousands) 1999 1998 1997 Service cost-benefits earned during the year $1,558 $2,228 $2,043 Interest cost on accumulated benefit obligation 6,289 6,046 5,697 Net amortization and deferral (55) (55) (244) Net periodic post retirement benefit cost $7,792 $8,219 $7,496 A one-percentage-point change in assumed health care cost trend rates would change the aggregate service and interest cost by $693,000 and the accumulated benefit obligation by approximately $8,474,000. 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 $47,799,000, $34,929,000 and $51,900,000 in 1999, 1998 and 1997, respectively, and by hourly participants was $26,220,000, $36,500,000 and $38,100,000 in 1999, 1998 and 1997, respectively. PAGE 27 9. Thrift and Stock Plan The Company sponsors the CNF Thrift and Stock Plan (TASP), a voluntary defined contribution plan with a leveraged employee stock ownership plan 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% of a participant's basic compensation. Company contributions to the TASP were $13,735,000 in 1999, $10,491,000 in 1998 and $9,921,000 in 1997, 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 principal and interest serviced. 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 TASP, 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. In 1999, 1998 and 1997, $7,236,000, $6,983,000 and $6,649,000, respectively, of deferred compensation expense was recognized. At December 31, 1999, the TASP owned 840,407 shares of Series B preferred stock, of which 267,494 shares have been allocated to employees. At December 31, 1999, the Company has reserved, authorized and unissued common stock adequate to satisfy the conversion feature of the Series B preferred stock. 10. 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 options granted subsequent to June 30, 1998 generally 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 as reported net of preferred dividends would have been $175.1 million, $123.6 million and $109.3 million in 1999, 1998 and 1997, respectively. Diluted earnings per share would have been $3.22, $2.32 and $2.12 per share in 1999, 1998 and 1997, respectively. These pro forma effects of applying SFAS 123 are PAGE 28 not indicative of future amounts. The weighted-average grant-date fair value of options granted in 1999, 1998 and 1997 was $15.65, $17.22 and $12.28 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, 5.0%-6.5%; expected life, 5.8 years; dividend yield, 1.0%; and volatility, 50.0%. The following is a summary of stock option data: Wtd. Avg. Number of Exercise Options Price 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 Granted 751,100 30.92 Exercised (446,128) 16.75 Expired or canceled (10,995) 30.78 Outstanding at December 31, 1999 3,224,996 $27.13 Options exercisable as of December 31 1999 2,020,646 $23.66 1998 2,194,975 20.66 1997 2,051,347 17.35 The following is a summary of the stock options outstanding and exercisable at December 31, 1999: Outstanding Options Exercisable Options Remaining Wtd. Avg. Wtd. Avg. Range of Number Life in Exercise Number Exercise Exercise Prices of Options Years Price of Options Price $11.08-$16.26 428,109 3.5 $13.93 428,109 $13.93 $18.05-$22.75 922,637 5.6 19.37 922,637 19.37 $29.63-$43.63 1,874,250 8.9 33.97 669,900 35.77 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 goals. Shares are initially 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: 1999 1998 1997 Wtd. Avg. Wtd. Avg. Wtd. Avg. Shares Fair Value Shares Fair Value Shares Fair Value Awarded 63,112 $33.08 112,113 $38.51 85,531 $33.02 Forfeited - - 5,667 34.41 - - Total compensation expense recognized for restricted stock in 1999, 1998 and 1997 was $4,622,000, $2,781,000 and $483,000, respectively. At December 31, 1999, the Company had 281,159 common shares available for the grant of stock options, restricted stock, or other stock-based compensation. 11. Financial Instruments The Company has several interest rate swap agreements, including swaps entered into in 1999. These agreements, which expire through 2005, effectively convert $119.9 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. At December 31, 1999, the Company had fuel purchase contracts to hedge the market price fluctuations of 4.5 million gallons of jet fuel. The Company is exposed to credit loss on the interest rate swaps and fuel purchase contracts, but does not anticipate any loss due to the credit- worthiness of its counterparties. The fair values of the interest rate swaps and fuel purchase contracts, as presented below, reflect the estimated amounts that the Company would receive upon the termination of 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: 1999 1998 Carrying Fair Carrying Fair (Dollars in thousands) Amount Value Amount Value Short-term borrowings $ 40,000 $ 40,000 $ 43,000 $ 43,000 Long-term debt and guarantees 329,200 315,000 362,105 385,000 Off-balance sheet receivables Interest rate swaps - 7,600 - 700 Fuel purchase contracts - 1,100 - - PAGE 29 In December 1999, the Company recognized a $9.6 million net gain on the sale of Emery's holdings in the equity securities of Equant N.V., an international data network service provider. Approximately 34% of Emery's holdings in the securities were sold in December 1999 and the resulting gain was recognized in Miscellaneous, net in the Statements of Consolidated Income. The remaining shares held by Emery are carried at essentially no cost at December 31, 1999, and are subject to transferability restrictions that only allow the Company to sell the securities when and if certain secondary offerings are made. The transferability restrictions lapse in June 2000. 12. Contingencies and Other Commitments In addition to letters of credit outstanding under its $350 million unsecured credit facility and other uncommitted lines of credit discussed in Note 3 "Debt and Guarantees," the Company, at December 31, 1999, had $50.4 million of letters of credit outstanding under other unsecured letter of credit facilities. In connection with the December 2, 1996 spin-off of Consolidated Freightways Corporation (CFC), the Company's former long-haul LTL segment, the Company agreed to indemnify certain states, insurance companies and sureties against the failure of CFC to pay a number of worker's compensation, tax 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, as of December 31, 1999, CFC had provided the Company with approximately $11.0 million of letters of credit and $7.5 million of real property collateral. However, the letters of credit and collateral provided by CFC are less than the Company's maximum contingent liability under these indemnities. The Company is currently under examination by the Internal Revenue Service (IRS) for tax years 1987 through 1996 on various issues. In connection with that examination, the IRS is seeking additional taxes, plus interest, for certain matters relating to CFC for those periods. As part of the spin-off, the Company and CFC entered into a tax sharing agreement that provides a mechanism for the allocation of any additional tax liability and related interest that arise due to adjustments by the IRS for years prior to the spin-off. The Company believes it is entitled to and will pursue reimbursement from CFC under the tax sharing agreement for any payments that the Company makes to the IRS with respect to these additional taxes. Any failure to receive reimbursement for a significant portion of those payments, whether due to CFC successfully contesting their obligation to reimburse us or for any other reason, could have a material adverse effect on the Company's results of operations. At December 31, 1999, the Company has recognized approximately $53 million in Deferred Charges and Other Assets in the Consolidated Balance Sheets for amounts receivable from CFC and a corresponding payable for amounts due the IRS. The IRS has proposed a substantial adjustment for tax years 1987 through 1990 based on the IRS' position that some of our 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 has filed a protest concerning the proposed adjustment for tax years 1987 through 1990 and is engaged in discussions with the Appeals Office of the IRS. The Company is unable to predict whether or not it will be able to resolve this issue with the Appeals Office. The Company expects that, if it is unable to resolve this issue with the Appeals Office, it will receive a statutory notice of assessment from the IRS during 2000. If this occurs, the Company intends to contest the assessment by appropriate legal proceedings. PAGE 30 The Company believes that its practice of expensing these types of aircraft maintenance costs is consistent with industry practice and intends to continue to vigorously contest the proposed adjustment. However, if this matter is determined adversely to the Company, there can be no assurance that the Company will not be liable for substantial additional taxes, plus accrued interest. As a result, the Company is unable to predict the ultimate outcome of this matter and there can be no assurance that this matter will not have a material adverse effect on the Company's results of operations. The IRS has also 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 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 be liable for a substantial amount of additional aviation excise taxes for the 1990 through 1995 tax period, plus interest. 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's 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. 13. Segment Reporting In 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. The operations of the Company are comprised of 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, expedited and guaranteed ground transportation, and integrated supply chain services. 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 segment consists primarily of the operations under a Priority Mail contract with the U.S. Postal Service, and includes Road Systems, a trailer manufacturer, and prior to the sale of its assets in May 1999, VantageParts, a wholesale distributor of truck parts and supplies. Intersegment revenues and related operating income 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. PAGE 31 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 (except Canada), depending on whether the shipments are between locations within the United States or between locations where one or both are outside the United States. Canada, which operates as an integrated part of the North American operation, includes 50 percent of the revenue where one of the locations is in the United States or an international location. Long-lived assets outside the United States were immaterial for all periods presented. Geographic Information (Dollars in thousands) 1999 1998 1997 Revenues United States $4,365,686 $3,870,722 $3,177,792 Canada 132,190 112,721 114,001 North America 4,497,876 3,983,443 3,291,793 International 1,094,934 958,047 975,008 Total $5,592,810 $4,941,490 $4,266,801 Operating Segments (Dollars in thousands) Adjustments, Con-Way Eliminations Transportation Emery Menlo Consolidated and the Parent Services Worldwide Logistics Other Year Ended December 31, 1999 Revenues $5,592,810 $ (93,970) $1,903,056 $2,420,220 $727,593 $635,911 Inter-company eliminations - 93,970 (24,840) (11,804) (11,585) (45,741) Net revenues 5,592,810 - 1,878,216 2,408,416 716,008 590,170 Operating income 359,100 - 228,820 75,514 22,255 32,511(a) Depreciation and amortization 190,461 10,241 85,418 61,781 6,842 26,179 Capital expenditures 335,008 6,359 211,971 100,219 5,642 10,817 Identifiable assets 3,049,010 219,243 968,507 1,459,189 141,184 260,887 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 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 1,257,140 109,291 151,776 (a) Includes a $16.5 million net gain on a lawsuit settled in January 1999, and a $10.1 million net gain on the VantageParts asset sale in May 1999.
PAGE 32 Note 14. Quarterly Financial Data (Unaudited) (Dollars in thousands except per share data) 1999-Quarter Ended March 31 June 30 September 30 December 31 Revenues $1,255,323 $1,361,637 $1,408,391 $1,567,459 Operating income 82,595(a) 95,334(b) 85,768 95,403 Income before income taxes 74,861 86,343 78,202 97,716(c) Income taxes 32,565 37,559 34,018 42,506 Net income 42,296 48,784 44,184 55,210 Net income available to common shareholders 40,269 46,723 42,147 53,117 Per share Basic earnings 0.84(a) 0.97(b) 0.87 1.10(c) Diluted earnings 0.74(a) 0.86(b) 0.77 0.97(c) Market price range 34.15-44.55 32.56-45.52 34.64-45.19 28.28-38.38 Common dividends paid 0.10 0.10 0.10 0.10 1998-Quarter Ended March 31 June 30 September 30 December 31 Revenues $1,089,866 $1,199,654 $1,282,510 $1,369,460 Operating income 44,805 84,003 89,043 72,667(d) 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(d) Diluted earnings 0.33 0.73 0.78 0.61(d) 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 (a) Includes a $16.5 million net gain ($0.19 per basic share and $0.16 per diluted share) on a lawsuit settled in January 1999. (b) Includes a $10.1 million net gain ($0.12 per basic share and $0.10 per diluted share) on the VantageParts asset sale in May 1999. (c) Includes a $9.6 million net gain ($0.11 per basic share and $0.09 per diluted share) on the sale of equity securities in December 1999. (d) Includes $5.1 million of income ($0.06 per basic share and $0.05 per diluted share) for the recovery of a portion of costs charged in 1997 from the discontinuance of rail container service and other unusual items.
PAGE 33 Reports 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, 1999 and 1998, and the related statements of consolidated income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, 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 28, 2000 PAGE 34 Five Year Financial Summary (Dollars in thousands except per share data) 1999 1998 1997 1996 1995 Summary of Operations Revenues(a) $5,592,810 $4,941,490 $4,266,801 $3,662,183 $3,290,077 Con-Way Transportation Services 1,878,216 1,683,991 1,473,188 1,292,082 1,152,164 Emery Worldwide 2,408,416 2,203,474 2,249,594 1,968,058 1,766,301 Menlo Logistics 716,008 586,835 455,892 359,377 287,652 Other 590,170 467,190 88,127 42,666 83,960 Operating income (loss)(a) 359,100 290,518 264,867 192,148 186,687 Con-Way Transportation Services 228,820 206,945 147,155 101,049 96,573 Emery Worldwide 75,514 64,299 113,963 78,415 81,734 Menlo Logistics 22,255 19,459 17,178 10,918 6,325 Other 32,511(d) (185) (13,429) 1,766 2,055 Interest expense 25,972 32,627 39,553 39,766 33,407 Income from continuing operations before income taxes 337,122(e) 250,411 221,814 147,132 152,942 Income taxes 146,648 111,433 100,925 66,951 66,723 Income from continuing operations(b) 182,256 130,809 113,003 71,589 75,420 Loss from discontinued operations(c) - - - (52,633) (28,854) Net income available to common shareholders 182,256 130,809 113,003 18,956 46,566 Per Share Net income from continuing operations, basic $ 3.78(d,e) $ 2.74 $ 2.44 $ 1.63 $ 1.79 Loss from discontinued operations(c) - - - (1.20) (0.68) Net income available to common shareholders, basic 3.78 2.74 2.44 0.43 1.11 Net income from continuing operations, diluted 3.35(d,e) 2.45 2.19 1.48 1.64 Dividends paid on common stock 0.40 0.40 0.40 0.40 0.40 Common shareholders' equity 19.15 15.48 13.26 10.86 15.76 Statistics Total Assets $3,049,010 $2,689,412 $2,421,496 $2,081,866 $2,084,958 Long-term obligations 433,446 467,635 473,488 477,201 480,410 Capital expenditures 335,008 267,668 242,343 200,835 167,253 Effective income tax rate 43.5% 44.5% 45.5% 45.5% 43.6% Basic average shares 48,189,618 47,659,745 46,236,688 44,041,159 42,067,842 Market price range $28.28-$45.52 $21.63-$49.94 $20.25-$50.88 $17.25-$29.38 $20.25-$27.88 Number of shareholders 9,520 9,870 15,560 16,090 15,980 Number of regular full-time employees(f) 30,800 29,200 26,300 25,100 21,400 (a) In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." As required by SFAS 131, 1995 through 1997 figures have been restated. (b) Includes preferred stock dividends. (c) Reflects the results of Consolidated Freightways Corporation, the Company's former long-haul LTL segment, that was spun off in December 1996. (d) Includes a $16.5 million net gain ($0.19 per basic share and $0.17 per diluted share) on a lawsuit settled in January 1999, and a $10.1 million net gain ($0.12 per basic share and $0.10 per diluted share) on the VantageParts asset sale in May 1999. (e) Includes a $9.6 million net gain ($0.11 per basic share and $0.10 per diluted share) on the sale of equity securities in December 1999. (f) Excludes supplemental and regular part-time employees.
EX-21 7 Exhibit 21 CNF TRANSPORTATION INC. SIGNIFICANT SUBSIDIARIES OF THE COMPANY December 31, 1999 The Company and its significant subsidiaries were: State or 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 Emery Air Freight Corporation 100 Delaware Emery Worldwide Airlines, Inc. 100 Nevada Menlo Logistics, Inc. 100 California Road Systems, Inc. 100 California EX-27 8
5 1000 YEAR DEC-31-1999 DEC-31-1999 146,263 0 940,470 (26,163) 46,019 1,200,233 1,131,034 (864,538) 3,049,010 1,049,154 433,446 125,000 127,825 363,721 476,835 3,049,010 0 5,592,810 0 5,233,710 21,978 0 25,972 337,122 146,648 190,474 0 0 0 182,256 3.78 3.35
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