-----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, EXUbzsypwjzMOF96B0W/11XIzEsTGPoyFA0jKlAi9wGiVjOb4RHIi1fU5HV5KhVZ GsjuCagnkV5ZJVLU275udA== /in/edgar/work/20000811/0000023675-00-000006/0000023675-00-000006.txt : 20000921 0000023675-00-000006.hdr.sgml : 20000921 ACCESSION NUMBER: 0000023675-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNF TRANSPORTATION INC CENTRAL INDEX KEY: 0000023675 STANDARD INDUSTRIAL CLASSIFICATION: [4213 ] IRS NUMBER: 941444798 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05046 FILM NUMBER: 692207 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-Q 1 0001.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR ___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes xx No Number of shares of Common Stock, $.625 par value, outstanding as of July 31, 2000: 48,559,626 PAGE 2 CNF TRANSPORTATION INC. FORM 10-Q Quarter Ended June 30, 2000 ____________________________________________________________________________ ____________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3 Statements of Consolidated Income - Three and Six Months Ended June 30, 2000 and 1999 5 Statements of Consolidated Cash Flows - Six Months Ended June 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 23 PAGE 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 2000 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 136,442 $ 146,263 Trade accounts receivable, net of allowances (Note 1) 1,043,180 914,307 Other accounts receivable 39,309 25,419 Operating supplies, at lower of average cost or market 41,156 46,019 Prepaid expenses 54,528 41,971 Deferred income taxes 28,569 26,254 Total Current Assets 1,343,184 1,200,233 PROPERTY, PLANT AND EQUIPMENT, NET Land 120,734 119,403 Buildings and leasehold improvements 630,032 573,688 Revenue equipment 861,940 854,519 Other equipment 479,094 447,962 2,091,800 1,995,572 Accumulated depreciation and amortization (939,919) (864,538) 1,151,881 1,131,034 OTHER ASSETS Deferred charges and other assets 172,154 200,739 Capitalized software, net 91,112 88,157 Unamortized aircraft maintenance (Note 1) 251,237 226,629 Goodwill, net 260,364 265,896 774,867 781,421 TOTAL ASSETS $3,269,932 $3,112,688 The accompanying notes are an integral part of these statements. PAGE 4 CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 2000 1999 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 322,642 $ 305,954 Accrued liabilities 460,448 524,121 Accrued claims costs 119,791 99,940 Current maturities of long-term debt and capital leases 7,553 6,452 Short-term borrowings - 40,000 Income taxes payable 103,019 53,455 Total Current Liabilities 1,013,453 1,029,922 LONG-TERM LIABILITIES Long-term debt and guarantees (Note 2) 424,076 322,800 Long-term obligations under capital leases 110,591 110,646 Accrued claims costs 55,501 81,978 Employee benefits 234,383 217,519 Other liabilities and deferred credits 45,360 45,450 Aircraft lease return provision (Note 1) 81,819 82,910 Deferred income taxes 142,989 128,515 Total Liabilities 2,108,172 2,019,740 COMMITMENTS AND CONTINGENCIES (Note 7) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY CONVERTIBLE DEBENTURES OF THE COMPANY (Note 6) 125,000 125,000 SHAREHOLDERS' EQUITY 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 831,520 and 840,407 shares, respectively 8 8 Additional paid-in capital, preferred stock 126,466 127,817 Deferred compensation, Thrift and Stock Plan (83,982) (87,600) Total Preferred Shareholders' Equity 42,492 40,225 Common stock, $.625 par value; authorized 100,000,000 shares; issued 55,373,548 and 55,306,947 shares, respectively 34,608 34,567 Additional paid-in capital, common stock 330,288 328,721 Retained earnings 819,446 747,936 Deferred compensation, restricted stock (1,805) (2,010) Cost of repurchased common stock (6,810,369 and 6,856,567 shares, respectively) (167,918) (169,057) 1,014,619 940,157 Accumulated foreign currency translation adjustment (15,956) (8,039) Minimum pension liability adjustment (4,395) (4,395) Accumulated Other Comprehensive Loss (20,351) (12,434) Total Common Shareholders' Equity 994,268 927,723 Total Shareholders' Equity 1,036,760 967,948 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,269,932 $3,112,688 The accompanying notes are an integral part of these statements. PAGE 5 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED INCOME (Dollars in thousands except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 REVENUES $ 1,529,203 $ 1,361,637 $ 2,991,956 $ 2,616,960 Costs and Expenses Operating expenses 1,263,506 1,105,296 2,475,071 2,134,446 General and administrative 133,639 129,718 266,216 250,800 Depreciation 44,541 41,401 89,735 80,363 Net gain on sale of assets of parts distribution operation (10,112) (10,112) Net gain on legal settlement - (16,466) 1,441,686 1,266,303 2,831,022 2,439,031 OPERATING INCOME 87,517 95,334 160,934 177,929 Other Income (Expense) Interest expense (7,881) (7,352) (14,281) (14,478) Dividend requirement on preferred securities of subsidiary trust (Note 6) (1,563) (1,563) (3,126) (3,126) Miscellaneous, net 1,902 (76) 4,852 879 (7,542) (8,991) (12,555) (16,725) Income before Income Taxes 79,975 86,343 148,379 161,204 Income Taxes 33,989 37,559 63,061 70,124 Net Income 45,986 48,784 85,318 91,080 Preferred Stock Dividends 2,072 2,061 4,106 4,088 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 43,914 $ 46,723 $ 81,212 $ 86,992 Weighted-Average Common Shares Outstanding (Note 5) Basic 48,463,040 48,158,898 48,440,350 48,042,740 Diluted 56,361,884 55,951,658 56,377,108 55,897,549 Earnings per Common Share (Note 5) Basic $ 0.91 $ 0.97 $ 1.68 $ 1.81 Diluted $ 0.80 $ 0.86 $ 1.49 $ 1.60 The accompanying notes are an integral part of these statements.
PAGE 6 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in thousands) Six Months Ended June 30, 2000 1999 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 146,263 $ 73,897 OPERATING ACTIVITIES Net income 85,318 91,080 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 104,191 91,832 Increase in deferred income taxes 12,159 13,904 Amortization of deferred compensation 3,961 5,923 Provision for uncollectable accounts 7,964 5,665 Gain on sale of equity securities, net (2,619) - Gains from sales of property, net (644) (317) Net gain on sale of assets of parts distribution operation - (10,112) Changes in assets and liabilities: Receivables (150,727) 11,995 Prepaid expenses (12,557) (15,851) Accounts payable 16,725 (11,674) Accrued liabilities (63,673) 14,226 Accrued claims costs (6,626) 17,701 Income taxes 49,564 26,884 Employee benefits 16,864 15,879 Deferred charges and credits 7,502 (23,706) Other (6,493) (15,098) Net Cash Provided by Operating Activities 60,909 218,331 INVESTING ACTIVITIES Capital expenditures (115,089) (143,274) Software expenditures (11,021) (21,633) Proceeds from sale of equity securities 2,619 - Proceeds from sales of property 6,229 3,922 Proceeds from sale of assets of parts distribution operation - 27,961 Net Cash Used in Investing Activities (117,262) (133,024) FINANCING ACTIVITIES Proceeds from issuance of long-term debt 198,752 - Payments for issuance costs of long-term debt (1,300) - Repayment of long-term debt, guarantees and capital lease obligations (96,455) (5,247) Repayment of short-term borrowings, net (40,000) (37,000) Proceeds from exercise of stock options 707 6,707 Payments of common dividends (9,702) (9,637) Payments of preferred dividends (5,470) (5,556) Net Cash Provided by (Used in) Financing Activities 46,532 (50,733) Increase (Decrease) in Cash and Cash Equivalents (9,821) 34,574 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 136,442 $ 108,471 The accompanying notes are an integral part of these statements. PAGE 7 CNF TRANSPORTATION INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Principal Accounting Policies Basis of Presentation The accompanying consolidated financial statements of CNF Transportation Inc. and its wholly owned subsidiaries (the Company) have been prepared by the Company, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the consolidated financial statements included in the Company's 1999 Annual Report to Shareholders. Recognition of Revenues 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 related to the Company's Priority Mail contract recognized in Trade Accounts Receivable in the Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 was $173.4 million and $123.7 million, respectively. Reclassification In March 2000, the Securities and Exchange Commission (SEC) communicated its interpretation of certain accounting issues related to major maintenance expenditures. As a result of the SEC's comments, the Company reclassified Emery's aircraft lease return provision. Accordingly, the aircraft lease return provision is reported separately as a liability rather than being shown as a reduction of Unamortized Aircraft Maintenance. Prior periods have been reclassified. Certain other amounts in prior year financial statements have been reclassified to conform to current year presentation. PAGE 8 2. Long-Term Debt In August 1999, the aggregate principal amount of $117.7 million of the Company's unsecured 9 1/8% Notes was paid in full at maturity. The redemption of these notes was made in part with $90.0 million of borrowings under lines of credit. In March 2000, the Company issued $200 million in notes with a coupon rate of 8 7/8% and a maturity date of May 1, 2010. Interest on the notes is payable semi-annually on May 1 and November 1 of each year, commencing May 1, 2000, and principal is payable at maturity. The notes contain a covenant that limits the incurrence of liens. A portion of the proceeds was used to repay a total of $152 million of short-term and long-term borrowings outstanding under lines of credit. 3. Comprehensive Income Comprehensive Income, which is a measure of all changes in equity except those resulting from investments by owners and distributions to owners, was as follows: Three Months Ended Six Months Ended (Dollars in thousands) June 30, June 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net income $ 45,986 $ 48,784 $ 85,318 $ 91,080 Foreign currency translation adjustment (3,297) 854 (7,917) 694 ---------- ---------- ---------- ---------- $ 42,689 $ 49,638 $ 77,401 $ 91,774 ========== ========== ========== ========== PAGE 9 4. Business Segments Selected financial information about the Company's operating segments was as follows: Three Months Ended Six Months Ended (Dollars in thousands) June 30, June 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenues Con-Way Transportation $ 533,027 $ 469,100 $1,048,540 $ 907,611 Emery Worldwide 638,221 588,808 1,245,708 1,121,635 Menlo Logistics 241,819 184,850 455,371 347,837 Other 144,374 139,463 298,067 283,591 ---------- ---------- ---------- ---------- 1,557,441 1,382,221 3,047,686 2,660,674 Intercompany Eliminations Con-Way Transportation (4,433) (5,553) (9,430) (10,685) Emery Worldwide (7,516) (2,954) (13,765) (6,360) Menlo Logistics (3,268) (3,247) (6,917) (5,675) Other (13,021) (8,830) (25,618) (20,994) ---------- ---------- ---------- ---------- (28,238) (20,584) (55,730) (43,714) External Revenues Con-Way Transportation 528,594 463,547 1,039,110 896,926 Emery Worldwide 630,705 585,854 1,231,943 1,115,275 Menlo Logistics 238,551 181,603 448,454 342,162 Other 131,353 130,633 272,449 262,597 ---------- ---------- ---------- ---------- $1,529,203 $1,361,637 $2,991,956 $2,616,960 ========== ========== ========== ========== Operating Income Con-Way Transportation $ 65,675 $ 60,830 $ 123,791 $ 114,777 Emery Worldwide 13,024 17,425 20,376 20,976 Menlo Logistics 8,473 5,273 16,111 9,829 Other (1) 345 11,806 656 32,347 ---------- ---------- ---------- ---------- $ 87,517 $ 95,334 $ 160,934 $ 177,929 ========== ========== ========== ========== (1) 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. For the three and six months ended June 30, 1999, the Other segment included a $10.1 million net gain recognized in May 1999 from the sale of the assets of VantageParts, the Company's wholesale parts distribution operation. For the six months ended June 30, 1999, the Other segment included the net gain on the VantageParts asset sale and a $16.5 million net gain on a lawsuit settled in January 1999. PAGE 10 5. Earnings Per Share Basic earnings per share was computed by dividing net income available to common shareholders by the weighted-average common shares outstanding. Diluted earnings per share was calculated as follows: Three Months Ended Six Months Ended (Dollars in thousands except June 30, June 30, per share data) 2000 1999 2000 1999 ---------- ---------- --------- ---------- Earnings: Net Income Available to Common Shareholders $ 43,914 $ 46,723 $ 81,212 $ 86,992 Add-backs: Dividends on Series B preferred stock, net of replacement funding 377 339 706 671 Dividends on preferred securities of subsidiary trust, net of tax 954 954 1,908 1,908 ---------- ---------- ---------- ---------- $ 45,245 $ 48,016 $ 83,826 $ 89,571 ---------- ---------- ---------- ---------- Shares: Basic shares (weighted- average common shares outstanding) 48,463,040 48,158,898 48,440,350 48,042,740 Stock option and restricted stock dilution 320,860 684,627 358,774 746,676 Series B preferred stock 4,452,984 3,983,133 4,452,984 3,983,133 Preferred securities of subsidiary trust 3,125,000 3,125,000 3,125,000 3,125,000 ---------- ---------- ---------- ---------- 56,361,884 55,951,658 56,377,108 55,897,549 ---------- ---------- ---------- ---------- Diluted Earnings Per Share $ 0.80 $ 0.86 $ 1.49 $ 1.60 ========== ========== ========== ========== 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. PAGE 11 The Debentures are redeemable for cash, at the option of the Company, in whole or in part, on or after June 1, 2000, at a price equal to 103.125% of the principal amount, declining annually to par if redeemed on or after June 1, 2005, plus accrued and unpaid interest. In certain circumstances relating to federal income tax matters, the Debentures may be redeemed by the Company at 100% of the principal plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of TECONS will be redeemed. The TECONS do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 1, 2012, or upon earlier redemption. Each TECONS is convertible at any time prior to the close of business on June 1, 2012, at the option of the holder into shares of the Company's common stock at a conversion rate of 1.25 shares of the Company's common stock for each TECONS, subject to adjustment in certain circumstances. 7. Contingencies 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 certain 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 June 30, 2000, CFC had provided the Company with approximately $6.0 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 proposed adjustments for tax years 1987 through 1990. The Company filed a protest concerning the proposed adjustments for tax years 1987 through 1990 and was engaged in discussions with the Appeals Office of the IRS. After those discussions failed to produce a settlement, in March 2000 the IRS issued a Notice of Deficiency (the Notice) for the years 1987 through 1990 with respect to various issues, including aircraft maintenance and matters related to CFC for years prior to the spin-off, which are described below. Based upon the Notice, the total amount of the deficiency for items in years 1987 through 1990, including taxes and interest, is $211 million. Under the Notice, the IRS has assessed a substantial adjustment for tax years 1989 and 1990 based on the IRS' position that certain aircraft maintenance costs should have been capitalized rather than expensed for federal income tax purposes. The Company believes that its practice of expensing these types of aircraft maintenance costs is consistent with industry practice. As described below, the IRS has proposed an additional adjustment, based on the same IRS position with respect to aircraft maintenance, for subsequent tax years not included under the Notice. PAGE 12 Under the Notice, the IRS is also 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 provided 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. In May 2000, the Company and CFC settled certain federal tax matters relating to CFC on issues for tax years 1984 through 1990. Under the settlement agreement, the Company received from CFC cash of $16.7 million, a $20.0 million note due in 2004, and a commitment to transfer to the Company land and buildings valued at $21.2 million. As discussed above, the IRS is seeking to recover $211 million under the Notice. In addition to the issues covered under the Notice for tax years 1987 through 1990, the IRS in May 2000 proposed additional adjustments for tax years 1991 through 1996 with respect to various issues, including aviation excise taxes and aircraft maintenance costs. The Company settled the tax issue relating to the manner in which Emery Worldwide calculated and paid aviation excise taxes. In June 2000, the Company paid $29.6 million to the IRS in settlement of proposed excise tax adjustments for tax years 1990 through 1999, which approximated the amount previously accrued by the Company for the excise tax issue. In the third quarter of 2000, the Company paid $93.4 million to the IRS to stop the accrual of interest on amounts due under the Notice for tax years 1987 through 1990 and under proposed adjustments for tax years 1991 through 1996 for all issues except aircraft maintenance costs. The Company intends to vigorously contest the Notice and the proposed adjustments as they pertain to the aircraft maintenance issue, and is evaluating courses of action for the other items covered under the Notice and proposed adjustments. However, there can be no assurance that the Company will not be liable for all of the amounts due under the Notice and proposed adjustments. 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 financial condition or results of operations. In addition to the matters discussed above, the Company and its subsidiaries are defendants in various lawsuits incidental to their businesses. It is the opinion of management that the ultimate outcome of these actions will not have a material impact on the Company's financial condition or results of operations. PAGE 13 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- Consolidated Results Net income available to common shareholders for the second quarter of 2000 was $43.9 million ($0.91 per basic share and $0.80 per diluted share) compared to $46.7 million ($0.97 per basic share and $0.86 per diluted share) in the same quarter of last year. The second quarter of last year benefited from a $10.1 million non-recurring net gain ($0.12 per basic share and $0.10 per diluted share) on the sale of assets of VantageParts, the Company's former wholesale parts distribution operation. Excluding that sale, net income available to common shareholders in the second quarter of 2000 increased 7.1% over the same quarter last year. Net income available to common shareholders for the first half of 2000 was $81.2 million ($1.68 per basic share and $1.49 per diluted share) compared to $87.0 million ($1.81 per basic share and $1.60 per diluted share) in the same period last year. The first half of 2000 included a $2.6 million non-recurring net gain ($0.03 per basic and diluted share) on the sale of securities. The first half of last year included both the net gain on the VantageParts asset sale and a $16.5 million non-recurring net gain ($0.19 per basic share and $0.17 per diluted share) on the settlement of a lawsuit. The non-recurring gains in the first half of 1999 were recognized in operating income. Excluding these non-recurring gains in the first half of 2000 and 1999, net income available to common shareholders for the first half of 2000 increased 10.7% over the first half of 1999. Revenue for the second quarter and first half of 2000 increased 12.3% and 14.3%, respectively, over the second quarter and first half of last year due to higher revenue from all reporting segments. Operating income of $87.5 million for the second quarter and $160.9 million for the first six months of 2000 decreased 8.2% and 9.6%, respectively, from the comparable periods last year. Excluding non- recurring gains, operating income for the second quarter and first six months of 2000 increased 2.7% and 6.3%, respectively. Record operating income earned by Con-Way and Menlo in the second quarter and first half of 2000 was partially offset by lower operating income from Emery and the Other segment. The Other segment, which includes the Priority Mail operations, also included the non-recurring gains recognized in the first half of 1999. Other net expenses in the second quarter of 2000 decreased 16.1% from the same quarter last year due primarily to interest income earned on cash- equivalent investments and on a state tax refund, partially offset by a 7.2% increase in interest expense. Long-term debt transactions discussed in Note 2 of the Notes to Consolidated Financial Statements resulted in higher interest expense on long-term borrowings in the second quarter of 2000 compared to last year's second quarter. Other net expenses in the first half of 2000 fell 24.9% due primarily to a $2.6 million net gain from the sale of securities in March 2000 and higher income on cash-equivalent investments. The effective tax rate during 2000 was 42.5% compared to 43.5% in 1999. The reduction was due primarily to resolution of certain tax issues and tax planning strategies in 2000. PAGE 14 Con-Way Transportation Services Con-Way's revenue in the second quarter and first six months of 2000, increased 14.0% and 15.9%, respectively, over the same periods last year due primarily to higher tonnage (weight) and revenue per hundredweight (yield), and to a lesser extent, fuel surcharges. In the second quarter of 2000, total and less-than-truckload (LTL) weight for Con-Way's regional carriers increased 7.5% and 7.0%, respectively, over the second quarter of 1999. Total and LTL weight for the regional carriers in the first six months of 2000 increased 8.4% and 8.1%, respectively, over the same period last year. The increased weight reflects continued growth in core regional service and inter-regional joint services. In the second quarter of 2000, revenue per hundredweight for the regional carriers increased 5.6% over the second quarter of last year and the regional carriers' revenue per hundredweight for the first half of 2000 was 6.4% higher than the first half of 1999. The increases in yield were due primarily to higher rates obtained for Con-Way's core premium services and a larger percentage of inter-regional joint services, which command higher rates on longer lengths of haul. Con-Way's operating income in the second quarter and first half of 2000 grew 8.0% and 7.9%, respectively, over the same periods last year. The increases were due primarily to higher revenue, increased load factor, and continued emphasis on operating efficiencies. Higher diesel fuel costs in the first half of 2000 were substantially mitigated by a fuel surcharge implemented by Con-Way in August 1999. Both the first half of 2000 and the first half of 1999 were negatively affected by operating losses from Con- Way's new multi-client warehousing and logistics business, which was formed in the fourth quarter of 1998. Emery Worldwide Emery's revenue for the second quarter and first six months of 2000 increased 7.7% and 10.5%, respectively, over the same periods last year due primarily to higher international airfreight revenue and, to a lesser extent, fuel surcharges. International airfreight revenue for the second quarter and first half of 2000, excluding fuel surcharges, increased 14.0% and 19.1% over the second quarter and first half of 1999 due primarily to increases in pounds transported (weight) and revenue per pound (yield). Weight and yield for the second quarter of 2000 increased 10.0% and 3.7%, respectively, over the second quarter last year. In the first half of 2000, weight and yield rose 15.1% and 3.5%, respectively, over the first half of 1999. Weight and yield in the second quarter and first half of 2000 were favorably affected by improved economic conditions in the international markets served by Emery. North American airfreight revenue for the second quarter and first half of 2000, excluding fuel surcharges, fell 3.3% and 1.4%, respectively, from the comparable periods last year. Including fuel surcharges, North American airfreight revenue for the second quarter was essentially flat when compared to the second quarter of last year and North American airfreight revenue in the first half of 2000 increased 2.0% over the first half of 1999. In the second quarter of 2000, a 5.4% decline in North American airfreight weight was partially offset by a 2.3% increase in yield (excluding fuel surcharges). In the first six months of 2000, a 4.9% reduction in North American airfreight weight was partially offset by a 3.7% increase in revenue per pound (excluding fuel surcharges). Improved revenue per pound in the second quarter and first half of 2000 was due in part to an increase in the percentage of higher yielding guaranteed delivery service and Emery's ongoing yield management program, which is designed to eliminate or reprice certain low margin business. PAGE 15 Emery's second-quarter 2000 operating income declined 25.3% from last year's second quarter and 2000 first-half operating income was down 2.9% from last year's first half. Operating income for the second quarter and first half of 2000 declined from the comparable periods last year due primarily to higher aircraft maintenance costs on aircraft during the implementation of the service initiatives discussed below. Higher jet fuel costs in the second quarter and first half of 2000 were substantially mitigated by a fuel surcharge implemented by Emery in September 1999. We will continue to focus on positioning Emery as a premium service provider. In North America, we intend 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 and more efficient aircraft having lower maintenance costs, and the reconfiguration of Emery's sortation hub in Dayton, Ohio. Internationally, we will focus on expanding Emery's variable-cost-based operations and will continue our efforts to increase Emery's international revenue as a percentage of its total revenue. In July 2000, the Air Line Pilots Association (ALPA), the union representing Emery's pilots, issued a press release stating that Emery's pilots voted to authorize ALPA's management to determine whether or not the union will strike. According to federal law, before the issue could escalate into a strike, the National Mediation Board (NMB) would first have to declare an impasse and recommend that the parties submit their differences to an arbitrator for binding resolution. If either party should reject the offer for an arbitrated settlement, the NMB would then launch a 30-day period of continued negotiations, after which economic actions such as a strike or lockout could occur. 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 financial condition or results of operations. Menlo Logistics Menlo's revenue in the second quarter and first six months of 2000 exceeded the comparable periods last year by 31.4% and 31.1%, respectively. Higher revenue was due in part to existing contracts and consulting fees earned on contracts entered into in the first quarter and first half of 2000. A portion of Menlo's revenue is attributable to logistics contracts for which Menlo manages the transportation of freight but subcontracts the actual transportation and delivery of products to third parties. We refer to this as purchased transportation. Menlo's revenue in the second quarter, net of purchased transportation, increased 37.1% from the same quarter last year to $65.1 million. For the second half of 2000, Menlo's revenue, net of purchased transportation, increased 34.1% from the first half of last year to $130.1 million. Operating income for Menlo in the second quarter and first half of 2000 increased 60.7% and 63.9%, respectively, over the second quarter and first half of 1999. Higher operating income was primarily attributable to increased revenue and an increase in the percentage of revenue from higher- margin consulting fees. PAGE 16 Other Segment 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 our sale of its assets in May 1999, VantageParts. Also included in the Other segment for 1999 were net gains on the VantageParts asset sale and settlement of a lawsuit in January 1999. The Other segment's revenue for the second quarter and first half of 2000 increased 0.6% and 3.8%, respectively, over the same periods last year due primarily to higher revenue from the Priority Mail operation. Second- quarter revenue from the Priority Mail operation increased to $126.8 million, a 7.3% increase from the second quarter of 1999. Priority Mail revenue of $262.0 million in the first half of 2000 was 10.9% higher than the first half of 1999. Higher Priority Mail revenue was partially offset by loss of revenue from VantageParts following the sale of its assets in May 1999. The Other segment's second-quarter operating income of $345,000 declined from $11.8 million in the second quarter of 1999. The second quarter of last year included the $10.1 million net gain on the VantageParts asset sale and $1.3 million of operating income from the Priority Mail operations. The Other segment's first-half operating income of $656,000 decreased from $32.3 million in the first half of 1999. Last year's first-half operating income included a $16.5 million net gain on the settlement of a lawsuit in January 1999, the $10.1 million net gain on the VantageParts asset sale, and $4.8 million of operating income from the Priority Mail operations. As discussed below, Priority Mail operating income was recognized in the first six months of 1999 and break-even results on Priority Mail operations have been recognized thereafter. 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 satisfactory response 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. In March 2000, EWA 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 the reduction by the USPS in contract pricing for both prior and future periods as discussed above. The claim is in addition to EWA's previous claim for 1999 pricing as discussed above and substantially covers the remaining initial term of the contract. In April 2000, EWA filed a complaint in the United States Court of Federal Claims in Washington, D.C. that requests a declaration of contract rights under the Priority Mail contract and a ruling that the USPS is in breach of contractual payment obligations. PAGE 17 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 has been recognized in connection with the Priority Mail contract since the first half of 1999. As a result of the claims discussed above and the USPS's decision to assert price reductions, EWA recognized $29.3 million and $49.6 million of unbilled revenue in the second quarter and first half of 2000, respectively, and has recognized $173.4 million in unbilled revenue since the beginning of the Priority Mail contract, which amounts are in dispute. 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 have had discussions with the USPS on a range of possibilities for restructuring the activities under the Priority Mail contract. Although we cannot predict whether these discussions will in fact result in additional payments to us or a modification to the contract, the wide range of alternatives discussed has included both increasing and decreasing the scope of our activities under the contract and both partial and total termination of the contract. In addition, both we and the USPS have notified each other of alleged breaches under the contract. If our activities under the contract are curtailed or terminated, the costs could be material. Likewise, it is possible that the USPS could assert claims against us for breach of the contract or other matters, which could be significant. We believe our position with respect to the Priority Mail contract is reasonable and well founded; however, there can be no assurance as to the outcome. Accordingly, we can give no assurance that matters relating to the Priority Mail contract with the USPS will not have a material adverse effect on our financial condition or results of operations. PAGE 18 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- In the first half of 2000, cash and cash equivalents decreased $9.8 million to $136.4 million. Net capital expenditures of $117.3 million were funded with $60.9 million of cash provided by operating activities, $46.5 million provided by financing activities and a reduction in cash. Operating activities in the first half of 2000 generated net cash of $60.9 million. Net income of $85.3 million, depreciation and amortization of $104.2 million, and a $49.6 million increase in accrued income taxes were partially offset by a $150.7 million increase in receivables and a $63.7 million decline in accrued liabilities. The increase in receivables was due in part to higher revenue and an increase in the amount of unbilled revenue from the Priority Mail contract, as described above. Other operating activities in the first half of 2000 generated net cash of $36.2 million. As discussed in Note 7 of the Notes to Consolidated Financial Statements, the decline in accrued liabilities was due in part to a $29.6 million payment to the IRS in settlement of a proposed IRS adjustment related to excise taxes. Investing activities in the first half of 2000 used $117.3 million of cash, $15.8 million less than the first half of 1999. Capital expenditures of $115.1 million in the first six months of 2000 declined $28.2 million from the same period last year. For the first half of 2000, Con-Way spent $58.9 million of cash primarily on revenue equipment and infrastructure and Emery spent $33.2 million of cash primarily on infrastructure. Capital expenditures by Con-Way and Emery in the first half of 2000 declined $30.4 million and $10.2 million, respectively, from the same period last year. Lower capital expenditures at Con-Way and Emery were partially offset by the in-process construction of a CNF corporate administrative facility. Software expenditures in the first half of 2000 declined $10.6 million from the first half of last year. Financing activities in the first six months of 2000 provided $46.5 million compared to the use of $50.7 million in the same period last year. As discussed in Note 2 of the Notes to Consolidated Financial Statements, a portion of the net proceeds of $197.5 million from the issuance in March 2000 of $200 million of 8 7/8% Notes due 2010 were used to repay short-term and long-term borrowings outstanding under lines of credit. As discussed above under "Results of Operations" for the "Other Segment", the provisional rate currently being paid to EWA by the U.S. Postal Service 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 operating under the contract. As discussed in Note 7 of the Notes to Consolidated Financial Statements, 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, we paid the IRS $93.4 million in August 2000 for tax and interest related to issues raised under the examination. We paid the IRS with cash and the proceeds from short-term borrowings. We maintain a $350 million unsecured credit facility and a supplemental $100 million unsecured credit facility. At June 30, 2000, we had no borrowings outstanding under the unsecured credit facilities. PAGE 19 The $350 million facility is also available for issuance of letters of credit. Under that facility, outstanding letters of credit totaled $52.6 million at June 30, 2000. Available capacity under the $350 million facility and the supplemental line of credit was $397.4 million at June 30, 2000. At June 30, 2000 we also had $75.0 million of uncommitted lines with no outstanding borrowings. Under other unsecured facilities, $66.0 million in letters of credit were outstanding at June 30, 2000. Our ratio of total debt to capital increased to 31.8% from 30.5% at December 31, 1999, primarily due to the March 2000 issuance of $200 million of 8 7/8% Notes due 2010. 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 - ----------- We are exposed to a variety of market risks, including the effects of interest rates, commodity prices and foreign currency exchange rates. Our policy is to enter into derivative financial instruments only in circumstances that warrant the hedge of an underlying asset, liability or future cash flow against exposure to some form of commodity, interest rate or currency-related risk. Additionally, the designated hedges should have high correlation to the underlying exposure such that fluctuations in the value of the derivatives offset reciprocal changes in the underlying exposure. Our policy prohibits entering into derivative instruments for trading purposes. We may be exposed to the effect of interest rate fluctuations in the fair value of our long-term debt and capital lease obligations, as summarized in Notes 3 and 4 of our 1999 Annual Report to Shareholders. Changes in our long-term debt in the first half of 2000 are discussed herein in Note 2 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 $21 million at June 30, 2000. We use interest rate swaps to mitigate the impact of interest rate volatility on cash flows and the fair value of our long-term debt. At March 31, 2000, interest rate swaps consisted only of cash flow hedges. The underlying exposure of these swaps was from equipment lease obligations with variable interest rate components. As of June 30, 2000, we estimate that the net payments under these swaps given a hypothetical adverse change of 10% in market interest rates would not have a material effect on our financial condition or results of operations. In April 2000, we entered into interest rate swaps designated as fair value hedges. The underlying exposure of these swaps is the fluctuation in fair value of the $200 million of 8 7/8% Notes due 2010 issued in March 2000. Under the measurement criteria of hedge effectiveness of SFAS 133, the value of these fair value hedges vary inversely with the fluctuation in fair value of the $200 million 8 7/8% Notes. As of June 30, 2000, the change in the fair value of these interest rate swaps given a hypothetical 10% change in interest rates would be approximately $21 million. PAGE 20 ACCOUNTING STANDARDS - -------------------- 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 plan to adopt the statement in the first quarter of 2001 and are evaluating the impact of adoption on our financial condition and results of operations. YEAR 2000 - --------- Since 1996, our Information Technology professionals have coordinated our continuing Year 2000 (Y2K) compliance effort. We believe our efforts to address Y2K issues have been successful and do not expect any material adverse effect on our financial condition or results of operations. We will continue to monitor for Y2K-related problems. Should problems arise, we will implement the Y2K business resumption contingency plans we previously established. Since 1996, we expensed $38.1 million on Y2K compliance through December 31, 1999. All Y2K costs have been funded from operations. A portion of our capitalized software costs was for new financial and administrative systems that are Y2K compliant. Some of these systems replaced non-compliant systems. FORWARD-LOOKING STATEMENTS - -------------------------- Certain statements included 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 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, could cause actual results and other matters to differ materially from those in such forward-looking statements: changes in general business and economic conditions; increasing domestic and international competition and pricing pressure; changes in fuel prices; uncertainty regarding EWA's Priority Mail contract with the United States Postal Service, including uncertainties regarding EWA's claims under the contract described herein; PAGE 21 labor matters, including changes in labor costs, renegotiations of labor contracts and the risk of work stoppages or strikes, including the fact that ALPA has been authorized by its members to strike against EWA; changes in governmental regulation; environmental and tax matters, including aircraft maintenance and other tax matters discussed herein; and matters relating to the spin-off of CFC. In that regard, we are 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 described herein. Although CFC is, in general, either the primary or secondary obligor or jointly and severally liable with us with respect to these matters, a failure to pay or other default by CFC with respect to the obligations as to which we are or may be, or may be perceived to be, liable, whether because of CFC's bankruptcy or insolvency or otherwise, could lead to substantial claims against us. As a result of the foregoing, no assurance can be given as to future results of operations or financial condition. PAGE 22 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings As previously reported, 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 its share of the clean-up costs will not have a material adverse effect on the Company's financial condition or results of operations. The Department of Transportation, through its Office of Inspector General, and the Federal Aviation Administration are conducting an investigation relating to the handling of so-called hazardous materials by Emery. The investigation is ongoing and Emery is cooperating fully. Because the investigation is at a preliminary stage, the Company is 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 is conducting an investigation. The Company is currently unable to predict the outcome of this matter or the effect it may have on the Company. The Company 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. Certain legal matters are discussed in Note 7 in the Notes to Consolidated Financial Statements in Part I of this form. ITEM 4. Submission of Matters to a Vote of Security Holders At the Annual Shareholders Meeting held April 25, 2000, the following proposals were presented with the indicated voting results: For the purpose of electing members of the Board of Directors, the votes representing shares of Common and Preferred stock were cast as follows: Nominee For Against Robert Alpert 44,667,226 894,516 Margaret G. Gill 44,685,648 876,094 Robert Jaunich II 44,684,233 877,509 Robert P. Wayman 44,689,533 872,209 The following directors did not stand for election and continued in office as directors after the Annual Shareholders Meeting: Richard A. Clarke, W. Keith Kennedy, Jr., Richard B. Madden, Donald E. Moffitt, Michael J. Murray, Gregory L. Quesnel, Robert D. Rogers, and William J. Schroeder. PAGE 23 Amendments to the Company's 1997 Equity and Incentive Plan, and the re- approval of the Plan in its entirety was approved by the following vote: For 35,474,173; Against 4,341,725; Abstain 443,444. The appointment of Arthur Andersen LLP as independent public accountants for the year 2000 was approved by the following vote: For 44,885,937; Against 387,301; Abstain 288,504. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10 Agreement Resolving Certain Matters Under the Tax Sharing Agreement 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges were 3.8x and 4.2x for the six months ended June 30, 2000 and 1999, respectively. (b) Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends -- the ratios of earnings to combined fixed charges and preferred stock dividends were 3.7x and 4.0x for the six months ended June 30, 2000 and 1999, respectively. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2000. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company (Registrant) has duly caused this Form 10-Q Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. CNF Transportation Inc. (Registrant) August 11, 2000 /s/Chutta Ratnathicam Chutta Ratnathicam Senior Vice President and Chief Financial Officer EX-10 2 0002.txt Exhibit 10 - Material Contracts AGREEMENT RESOLVING CERTAIN MATTERS UNDER THE TAX SHARING AGREEMENT This AGREEMENT RESOLVING CERTAIN MATTERS UNDER THE TAX SHARING AGREEMENT ("Agreement") is made as of May 15, 2000, by and between CNF Transportation Inc., a Delaware corporation (hereinafter "CNF"), formerly known as Consolidated Freightways, Inc. (hereinafter "CFI"), and Consolidated Freightways Corporation, a Delaware corporation ("CFC"). RECITALS WHEREAS, CFC was formerly a subsidiary of CFI; WHEREAS, CFC and CFI entered into a Distribution Agreement as of November 25, 1996 (hereinafter the "Distribution Agreement"), providing for the distribution by CFI of the common stock of CFC to the holders of CFI stock as of the close of business on December 2, 1996 (hereinafter, the "Distribution Date"); WHEREAS, in connection with the Distribution Agreement, CFC and CFI entered into a Tax Sharing Agreement dated as of December 2, 1996 (hereinafter the "Tax Sharing Agreement"), providing, inter alia, for the allocation among CFC, CFI and their subsidiaries, of federal, state, local and foreign taxes for the taxable period ending on or before, or including, the Distribution Date (hereinafter the "Pre- Distribution Periods"); WHEREAS, CFC and CFI entered into a Memorandum of Understanding, attached as Exhibit A to the Tax Sharing Agreement, providing for application of advance payments and tax and interest reserves under the Tax Sharing Agreement (hereinafter the "MOU"); WHEREAS, the CFI consolidated federal income tax returns for certain Pre-Distribution Periods have been audited by the IRS, and additional tax liabilities have been determined; WHEREAS, CFC and CNF have reached agreement on the allocation of payment obligations with respect to such additional tax liabilities and as to the manner in which one or more of the liabilities asserted by the IRS may be further contested; WHEREAS, pursuant to such agreement, CFC will pay to CNF certain amounts and enter into certain agreements with CNF; WHEREAS, the Tax Sharing Agreement provides that it may not be amended, except by an agreement in writing, signed by the parties thereto; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS 1.1. Capitalized terms used in this Agreement and not otherwise defined herein have the meaning ascribed to them in the Tax Sharing Agreement, and the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined). 1.2. "1984-1990 CFC Adjustments" has the meaning provided in Section 2.1 hereof. 1.3. "1991-1996 CFC Carryforward Adjustments" has the meaning provided in Section 2.2 hereof. 1.4. "Agreed Property Value" has the meaning provided in Section 3.4(a) hereof. 1.5. "Agreement" shall mean this Agreement Resolving Certain Matters Under the Tax Sharing Agreement, made as of May 15, 2000, between CNF and CFC, including the Exhibits hereto, and all amendments made in accordance with the provisions of Section 9.4 hereof. 1.6. "CFC Affiliate" means any corporation, partnership or other entity directly or indirectly controlled by CFC. 1.7. "CFC Allocated Adjustments" has the meaning provided in Section 2.3 hereof. 1.8. "CFCD" means Consolidated Freightways Corporation of Delaware, a Delaware corporation and a subsidiary of CFC. 1.9. "Claims" shall have the meaning provided in Section 7.1 hereof. 1.10. "Closing" has the meaning provided in Section 9.1 hereof. 1.11. "Closing Date" has the meaning provided in Section 9.1 hereof. 1.12. "CNF Affiliate" means any corporation, partnership or other entity directly or indirectly controlled by CNF. 1.13. "Disputed Amount" has the meaning provided in Section 2.3 hereof. 1.14. "Distribution Agreement" has the meaning provided in the Recitals. 1.15. "Distribution Date" has the meaning provided in the Recitals. 1.16. "Dover Transfer Agreement" has the meaning provided in Section 3.5 hereof. 1.17. "JAMS Rules" has the meaning provided in Section 8.1 hereof. 1.18. "Leases" means the lease agreements entered into pursuant to Section 3.4(c) hereof. 1.19. "Letter of Credit" means the letter of credit in the amount delivered by CFCD pursuant to Section 3.4(b) hereof. 1.20. "MOU" had the meaning provided in the Recitals. 1.21. "Note" has the meaning provided in Section 3.3 hereof. 1.22. "Other Documents" means the Note, the Real Estate Notes, the Dover Transfer Agreement, the Letter of Credit, the Leases, and any other documents delivered by CFC or an affiliate of CFC in connection with the Closing. 1.23. "Pre-Distribution Periods" has the meaning provided in the Recitals. 1.24. "Real Estate Notes" means the promissory notes delivered pursuant to Section 3.4(a) hereof. 1.25. "Real Properties" means the real properties listed on Exhibit C-1 hereto. 1.26. "Tax Sharing Agreement" has the meaning provided in the Recitals. 1.27. "Transfer Completion Date" means, for any Real Property, the date set forth opposite such Real Property on Exhibit C-1 hereto under the caption "Transfer to Be Completed By." 1.28. "Workers Compensation Adjustments" means all IRS adjustments with respect to accrual of liability for filed and uncontested workers compensation claims. The portion of such Workers Compensation Adjustments allocable to CFC, based on the adjustments proposed by the IRS, is shown on Exhibit E, attached hereto. ARTICLE 2. AGREED ITEMS 2.1. The consolidated federal income tax returns of CFI for the taxable years 1984 through and including 1990 have been audited by the IRS, which has proposed adjustments thereto. Except with respect to the Workers Compensation Adjustments, the adjustments relating to CFC (hereinafter the "1984-1990 CFC Adjustments") have been agreed between CNF and the IRS, after consultation with CFC. 2.2. The consolidated federal income tax returns for CFI for the taxable years 1991 through 1996 have been audited by the IRS, which has proposed adjustments thereto. Certain of the adjustments, listed on Exhibit A hereto, relate in whole or in part to items for which CFC is responsible under the Tax Sharing Agreement, and which carry forward adjustments from earlier tax years (hereinafter the "1991-1996 CFC Carryforward Adjustments"). Except with respect to the Workers Compensation Adjustments, all of the 1991-1996 CFC Carryforward Adjustments have been agreed between the IRS and CNF, after consultation with CFC. 2.3. The 1984-1990 CFC Adjustments and the 1991-1996 CFC Carryforward Adjustments (collectively, the "CFC Allocated Adjustments"), assuming that CNF and CFC are not able to obtain reductions to the Workers Compensation Adjustments from the adjustments proposed by the IRS, including interest with respect thereto through April 30, 1999, have been calculated by CNF to total Eighty-Three Million, Six Hundred Twenty-Two Thousand, Two Hundred Ninety-Eight Dollars ($83,622,298). CNF and CFC agree that CFC is entitled to a credit against such amount of $5,000,000, in full satisfaction of CNF's obligation to true-up amounts previously paid with respect to the 1996 Consolidated Group Federal income tax return. As a result, CNF claims entitlement to receive Seventy-Eight Million, Six Hundred Twenty-Two Thousand, Two Hundred Ninety-Eight Dollars ($78,622,298) from CFC with respect to the CFC Allocated Adjustments, plus interest until the date of payment (the "Disputed Amount"). 2.4. CFC disputes that it is liable to CNF for the Disputed Amount. In compromise of such Disputed Amount, CFC agrees to make certain payments to CNF and to deliver certain promissory notes to CNF, and to enter into, or cause CFC Affiliates to enter into, one or more agreements with CNF or CNF Affiliates as provided in Article 3 hereof. CNF agrees to accept the payment of such amounts, and the delivery by CFC and CFC Affiliates of, and performance by CFC and CFC Affiliates of, their respective obligations under this Agreement and the Other Documents, in full and complete satisfaction of CFC's obligations under the Tax Sharing Agreement and the MOU for federal income Taxes with respect to the CFC Allocated Adjustments. ARTICLE 3. DELIVERIES AT CLOSING 3.1. At the Closing, CFC shall pay to CNF, by wire transfer of immediately available funds, the amount of Twelve Million Seven Hundred Thousand Dollars ($12,700,000) in respect of the CFC Allocated Adjustments. 3.2. At the Closing, CFC shall pay to CNF, by wire transfer of immediately available funds, the amount of Four Million Dollars ($4,000,000), representing interest on an amount equal to the CFC Allocated Adjustments, calculated from May 1, 1999, through the date of payment. 3.3. At the Closing, CFC shall deliver to CNF its negotiable promissory note (the "Note") in the principal sum of Twenty Million Dollars ($20,000,000), payable to the order of CNF, in the form attached as Exhibit B hereto. The Note shall be payable over a four-year term, with interest payable annually at the rate of six and eight tenths percent (6.80%) per annum, and with principal due at maturity. 3.4. At the Closing, with respect to each of the Real Properties (other than the Dover, New Jersey Property): (a) CFC shall deliver to CNF or its designee a promissory note, in the principal amount of the agreed value of the such Real Property shown on Exhibit C-1 (hereinafter, the "Agreed Property Value"), in the form attached as Exhibit C- 2 hereto (the "Real Estate Note"). The Real Estate Note shall be payable to CNF or its designee, and shall bear interest on the unpaid balance at the rate of eight percent ( 8.00%) per annum, payable on the last day of each month, in arrears. The Real Estate Notes shall be collectively secured by the Letter of Credit, as provided in Section 3.4(b) hereof. (b) CFC shall cause ABN Amro Bank N.V. to issue an irrevocable letter of credit in the amount of Seven Million Dollars ($7,000,000) in favor of CNF or its designee in the form attached as Exhibit C-3 hereto (the "Letter of Credit"), securing payment of the Real Estate Notes. (c) CFC shall cause CFCD to enter into a lease agreement with CNF or its designee in form and substance substantially similar to Exhibit C-4 hereto (the "Lease"), providing for a lease of the Real Property to CNF or its designee for a twenty (20)-year term commencing as of the Closing Date. 3.5. At the Closing, CFC shall cause CFCD to execute and deliver a transfer agreement with CNF or its designee in the form attached hereto as Exhibit D (the "Dover Transfer Agreement") providing for transfer of title to the Dover, New Jersey Real Property to CNF or its designee within 30 days after Closing. 3.6. At the Closing, CFC, certain CFC Affiliates, CNF and certain CNF Affiliates shall execute and deliver such other documents and agreements as the parties may agree. ARTICLE 4. WORKERS COMPENSATION LITIGATION 4.1. CNF and CFC have agreed to litigate the proposed Workers Compensation Adjustments. CNF shall be responsible for conducting the litigation. CNF agrees to consult in good faith with CFC with respect to all aspects of the litigation and to take CFC's interests into account. CNF and CFC agree to share the costs incurred with respect to such litigation after the Closing (including CNF's and CFC's legal fees, but not including the costs of CNF and CFC employees), in the ratio of seventy-seven percent (77%) CFC- twenty-three percent (23%) CNF. 4.2. CNF agrees that it will not make any settlement offer with respect to the Workers Compensation Adjustments except in writing and in such case the amount offered shall be determined jointly by CNF and CFC. In the case of any settlement offer from the Government, CNF shall promptly advise CFC and shall consult with CFC. If CFC advises CNF in writing that it is prepared to accept the settlement offer, then CNF shall either accept the settlement proposal, or shall fully indemnify and hold harmless CFC from and against any and all liability for federal income Taxes and other costs and expenses (including, without limitation, attorneys' fees) over and above the payments that CFC would have been liable for if CNF had entered into the proposed settlement. If CNF advises CFC in writing that it is prepared to accept the settlement offer, then CFC shall either accept the settlement proposal, or shall fully indemnify and hold harmless CNF from and against any and all liability for federal income Taxes and other costs and expenses (including, without limitation, attorneys' fees) over and above the payments that CNF would have been liable for if CNF had entered into the proposed settlement. 4.3. Except as provided in this Section 4.3, neither CNF nor CFC shall be under any obligation to maintain the Workers Compensation Adjustment litigation beyond the trial court level. Immediately following entry of a decision in the trial court, the calculations provided in Section 5.2 hereof shall be made as if the decision of the trial court were a Final Determination, and CFC or CNF, as the case may be, shall make the payment provided in Section 5.2. If requested by CFC, CNF will appeal the decision of the trial court, provided that all costs and expenses of maintaining the appeal shall be borne by CFC. If CNF appeals the decision of the trial court at the request of CFC, CFC shall have the option of retaining attorneys of its choice to prosecute the appeal. CFC shall notify CNF of its decision in this regard within thirty (30) days of the notice by CFC to CNF to appeal the decision of the trial court. If the appeal results in a reduction in the workers compensation adjustment, the amount by which CNF's Taxes are thereby reduced shall be allocated between the parties as follows: (i) CFC shall be allocated an amount equal to one hundred fifty percent (150%) of its out-of-pocket costs and expenses in maintaining the appeal; and (ii) any remaining amount shall be allocated seventy-seven percent (77%) CFC-twenty- three percent (23%) CNF. ARTICLE 5. POST-PAYMENT ADJUSTMENTS 5.1. Upon a Final Determination with respect to all Pre- Distribution Periods beginning on or after January 1, 1984, CNF and CFC shall determine what the total interest payable to the IRS with respect to such Pre-Distribution Periods would have been in the absence of the application of the interest netting rules of Rev. Proc. 99-43, 1999-47 I.R.B. 579, or any similar or superseding ruling, procedure or statute, and what the total interest payable to the IRS with respect to such Pre-Distribution Periods was after the application of such interest netting rules. If the amount determined by application of the interest netting rules is less than the amount determined without application of the interest netting rules by more than Six Million Dollars ($6,000,000), CNF shall pay to CFC fifty percent (50%) of the excess of such difference over Six Million Dollars ($6,000,000). Otherwise, no adjustment shall be made under this Section 5.1. Any payment required shall be paid by CNF to CFC by wire transfer of immediately available funds within twenty (20) days of the date that CNF and CFC determine that an amount is owing to CFC under this Section 5.1. 5.2. Upon a Final Determination with respect to all Pre- Distribution Periods beginning on or after January 1, 1984, CNF and CFC shall request Arthur Andersen & Co. LLP (or such other accounting firm as CNF and CFC may agree) to prepare a calculation of the total interest payable to the IRS with respect to such Pre-Distribution Periods (calculated through April 30, 1999) and to determine the total interest payable to the IRS with respect to such Pre-Distribution Periods (calculated through April 30, 1999) as determined by the IRS. Upon receipt of the report of Arthur Andersen & Co. LLP (or such other accounting firm as CNF and CFC may agree), CNF and CFC shall have thirty days to review the report and discuss the calculations with Arthur Andersen & Co. LLP (or such other accounting firm as CNF and CFC may agree). Thereafter, Arthur Andersen & Co. LLP (or such other accounting firm as CNF and CFC may agree) shall promptly deliver to CNF and CFC its final report. If the final report indicates that the total interest payable, as calculated by Arthur Andersen & Co. LLP (or such other accounting firm as CNF and CFC may agree) is less than or equal to the interest determined by the IRS, there shall be no adjustment under this Section 5.2. If such final report indicates that the interest determined by Arthur Andersen & Co. LLP is greater than the interest calculated by the IRS, then CNF shall pay to CFC fifty percent (50%) of such difference within ten (10) working days of receipt of the final report. The determination of Arthur Andersen & Co. LLP (or such other accounting firm as CNF and CFC may agree) shall be final and binding on the parties hereto, and shall not be subject to the dispute resolution procedures of Article 8 hereof. 5.3. CNF shall request from the IRS copies of transcripts showing the application of all payments made by CNF relating to the IRS audit adjustments and shall provide copies of such transcripts to CFC. CNF shall also request from the IRS copies of all other documents (available to taxpayers) requested by CFC relating to the interest calculations, including documents relating to the application of payments and the payment of refund amounts, and shall provide such documents to CFC. 5.4. No later than sixty (60) days following the Final Determination of the Workers Compensation Adjustments for all tax years through 1996, CNF shall calculate, in the manner provided in Exhibit E hereto, CFC's proportionate share of any reduction in the Workers Compensation Adjustments realized by CNF and CFC in litigation. If CFC's proportionate share of such reduction is less than Four Million Dollars ($4,000,000), CFC shall pay to CNF, by wire transfer of immediately available funds, an amount equal to Four Million Dollars ($4,000,000) less the amount of CFC's proportionate share of such reduction. If CFC's proportionate share of such reduction exceeds Four Million Dollars ($4,000,000), then CNF shall pay to CFC, by wire transfer of immediately available funds, the amount by which CFC's proportionate share of such reduction exceeds Four Million Dollars ($4,000,000). Payments under this Section 5.5 shall be made without additional interest. 5.5. If either CNF or CFC is able to secure a legislative or administrative remedy after the Closing that reduces CNF's liability for Taxes with respect to any CFC Allocated Adjustment, CNF shall refund to CFC, in immediately available funds, at the time such remedy becomes effective, or at the time such reduction occurs, whichever last occurs, the entire amount of such recovery with respect to the CFC Allocated Adjustment. ARTICLE 6. OTHER POST-CLOSING MATTERS 6.1. CFC acknowledges that CNF's ability to sell the Note in a private placement transaction was and is an important element in the overall settlement provided by this Agreement, and CFC agrees to reasonably cooperate with CNF in connection with the efforts made by CNF, either directly or through its agents, to sell the Note in a private placement transaction. CNF shall reimburse to CFC its reasonable out of pocket expenses incurred pursuant to this Section 6.1. 6.2. As soon as practicable following the Closing, CNF shall reduce CFC's letter of credit requirement under Section 8(d) of the Reimbursement and Indemnification Agreement entered into as of October 1, 1996, between CNF and CFC, as amendment by Amendment No. 1, dated as of September 1, 1998, from Eleven Million Dollars ($11,000,000) to Six Million Dollars ($6,000,000). ARTICLE 7. RELEASES 7.1. Effectively immediately upon the Closing, CFC, on behalf of itself and its affiliates, subsidiaries, successors, heirs and assigns, hereby releases and forever discharges CNF and its respective affiliates, subsidiaries, predecessors, successors, heirs and assigns, and the past and present officers, directors, members, shareholders, employees, and agents of each of them, from any and all claims, demands, rights, causes of action, liabilities, or suits, of any kind whatsoever (hereinafter "Claims"), whether known or unknown, that any of them ever had, now has, or may in the future have, arising from or in any way connected with the Tax Sharing Agreement, the Memorandum of Understanding, the determination of the Disputed Amount or the handling of the CNF federal income tax audits for the Pre-Distribution Periods, except with respect to: (i) acts or omissions occurring after the Closing Date; (ii) CNF's obligations under the first sentence of Section 3.03(a) of the Tax Sharing Agreement; and (iii) CNF's obligations under Section 5.01 of the Tax Sharing Agreement. Notwithstanding the foregoing, it is expressly understood and agreed that this release does not apply to excuse performance by CNF, its affiliates, subsidiaries, successors, heirs and assigns of their obligations under this Agreement and the Other Documents. 7.2. Effective immediately upon the Closing, CNF, on behalf of itself and its affiliates, subsidiaries, successors, heirs and assigns, hereby releases and forever discharges CFC and its respective affiliates, subsidiaries, predecessors, successors, heirs and assigns, and the past and present officers, directors, members, shareholders, employees, and agents of each of them, from any and all Claims, whether known or unknown, that any of them ever had, now has, or may in the future have, arising from or in any way connected with the Tax Sharing Agreement or the Memorandum of Understanding, except with respect to: (i) federal income Tax adjustments for 1991-1996 (including, without limitation, Restructuring Taxes) not included in the 1991-1996 CFC Carryforward Adjustments; (ii) CFC's obligations with respect to federal income Taxes under Section 3.03(b) of the Tax Sharing Agreement; (iii) CFC's obligations with respect to Other Taxes under Section 3.06 of the Tax Sharing Agreement; and (iv) CFC's obligations under Section 5.01 of the Tax Sharing Agreement. Notwithstanding the foregoing, it is expressly understood and agreed that this release does not apply to excuse performance by CFC, its affiliates, subsidiaries, successors, heirs and assigns of their obligations under this Agreement and the Other Documents. 7.3. Upon the advice of legal counsel, CFC and CNF waive any and all rights under California Civil Code section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. CFC and CNF also waive any rights or benefits afforded by any similar statute or law of any other jurisdiction. The foregoing waiver of rights under California Civil Code section 1542 and any similar statute or law is an essential term of this Agreement without which this Agreement would not have been made. 7.4. CFC and CNF acknowledge that they may hereafter discover claims, and/or facts now unknown or unsuspected, or in addition to, or different from, those which CFC or CNF now knows or believes to be true with respect to the releases implemented by this Agreement. Nevertheless, CFC and CNF intend by this Agreement to release fully, finally, and forever all matters released hereby. Accordingly, the releases in this Agreement shall remain in full force notwithstanding the discovery or existence of any such additional or different claims and/or facts before or after the Closing Date. ARTICLE 8. DISPUTE RESOLUTION 8.1. The parties agree that any and all disputes, claims or controversies arising out of or relating to this Indemnity Agreement that are not resolved by their mutual agreement shall be submitted to final and binding arbitration before JAMS, or its successor, pursuant to the United States Arbitration Act, 9 U.S.C. 1 et seq. Subject to the provisions of this Article 5, either party may commence the arbitration process called for in this Indemnity Agreement by filing a written demand for arbitration with JAMS, with a copy to the other party. The arbitration will be conducted in San Francisco, California, in accordance with the JAMS Comprehensive Arbitration Rules and Procedures in effect at the time of filing the demand for arbitration (the "JAMS Rules"), as modified by the terms of this Article 8. The provisions of this Section 8.1 may be enforced by any court of competent jurisdiction, and the party seeking enforcement shall be entitled to an award of all costs, fees and expenses, including attorneys' fees, to be paid by the party against whom enforcement is ordered. 8.2. The following procedures shall apply. (a) The party seeking arbitration shall file a written demand for arbitration with JAMS, with a copy to the other party, and shall provide to JAMS a copy of this pre-dispute written contractual provision. The "arbitration process," for purposes of JAMS Rules shall be considered commenced when JAMS confirms in writing that the above requirements have been met. The date of the commencement of the arbitration shall be the date of the JAMS confirmation letter. (b) If the parties cannot agree on an arbitrator within five (5) calendar days of the commencement date of the arbitration, the JAMS Case Administrator will send the parties within five (5) calendar days a list of at least five (5) arbitrator candidates from the JAMS Northern California panel who shall be retired judicial officers. Within five (5) calendar days of the receipt of the list of names, each party may strike two (2) names, and will rank the remaining arbitrator candidates in order of preference. The remaining arbitrator with the highest composite score will become the arbitrator. If this process does not yield an arbitrator, JAMS will designate the arbitrator from the JAMS Northern California panel. (c) The dispute shall be resolved by submission of documents, unless the arbitrator determines that an oral hearing is necessary. The parties expressly waive any right to discovery. (d) The parties agree, consistent with current Rule 17 of the JAMS Rules (or the successor to such Rule 17 at the time the demand for arbitration is filed), that the arbitration hearing will begin within ninety (90) calendar days of the commencement of the arbitration, but in no event later than one hundred fifty (150) calendar days after the commencement date of the arbitration. (e) The arbitrator's jurisdiction shall be limited to: (1) the award of actual damages according to proof; and (2) the award of reasonable attorneys' fees and costs to the prevailing party. ARTICLE 9. MISCELLANEOUS 9.1. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place on May 15, 2000 (the "Closing Date"), at 10:00 a.m., local time, at the offices of CNF at 3240 Hillview Avenue, Palo Alto, CA, or at such other time, date and place as the parties may mutually agree. 9.2. Each party represents and warrants that (a) this Agreement, and each of the Other Documents to which it is a party, upon execution and delivery thereof, will be legal, valid and binding obligations of such party, enforceable against such party in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, arrangement, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally, and general principles of equity, and (b) the execution and delivery by such party of this Agreement and each of the Other Documents to which it is a party, and the performance by such party of its obligations thereunder, have been duly authorized by all necessary corporate action on its part, and do not and will not (i) violate any provision of any law, rule or regulation presently in effect and applicable to such party, or of any order, writ, judgment, decree, determination or award presently in effect and applicable to such party, (ii) violate any provision of the certificate of incorporation or by-laws of such party, (iii) result in a breach of or constitute a default under any agreement or instrument to which it is a party or by which it or its properties are bound, or (iv) in the case of CFC, result in, or require, the creation or imposition of any lien upon or with respect to any of the Real Properties, except as specifically provided herein. 9.3. This Agreement supersedes the provisions of the MOU, which shall have no force and effect following the Closing. The Tax Sharing Agreement, other than the MOU attached thereto, remains in full force and effect, except as provided in this Agreement. 9.4. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto. 9.5. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with acknowledgement of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) If to CNF: CNF Transportation Inc. 3240 Hillview Avenue Palo Alto, CA 94304 Attention: General Counsel Facsimile No.: (650) 494-8372 (b) If to CFC: Consolidated Freightways Corporation 175 Linfield Drive Menlo Park, CA 94025-3799 Attention: General Counsel Facsimile No.: (650) 566-6394 9.6. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by the other party hereto. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9.7. Headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law principles thereof that would call for the application of the laws of any other jurisdiction. IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date first hereinabove written. CONSOLIDATED FREIGHTWAYS CNF TRANSPORTATION INC. CORPORATION By: By:_________________________ Its: Senior Vice President Its: Vice President and and General Counsel Treasurer LIST OF EXHIBITS 2.Exhibit A. 1991-1996 CFC Carryforward Adjustments 2.Exhibit B. Form of Note 3.Exhibit C-1. List of Real Properties 4.Exhibit C-2. Form of Real Property Note 5.Exhibit C-3. Form of Letter of Credit 6.Exhibit C-4. Form of Lease 7.Exhibit D. Form of Dover Transfer Agreement 8.Exhibit E. Workers Compensation Adjustment Formula EXHIBIT A 1991-1996 CFC CARRYFORWARD ADJUSTMENTS NOPA Item Description Number 12 DEPRECIATION EXPENSE ON ITEMS CAPITALIZED IN '87 TO '90 AUDIT 13 ASSET CAPITALIZATION LEVEL FROM $300 TO $500 15 CARGO LOSS ADJUSTMENT AS AGREED TO IN '87 TO '90 AUDIT 16 TRACTOR ENGINE OVERHAULS CAPITALIZED PER '87 TO '90 AUDIT EP 2 PENSION DEDUCTIONS 1 CAPTIVE INSURANCE 50 WORKER COMPENSATION EP-01 MULTI-EMPLOYER PENSION EXHIBIT B FORM OF NOTE EXHIBIT C-1 REAL PROPERTIES PROPERTY AGREED VALUE TRANSFER TO BE COMPLETED BY Bridgeview, IL $6,700,000 May 31, 2002 (land only) Bridgeview, IL $2,200,000 May 31, 2002 (terminal) Dover, NJ $ 975,000 30 days after Closing (terminal) Fremont, IN $7,000,000 August 31, 2001 (terminal) Joliet, IL $ 650,000 May 31, 2002 (terminal) South Chicago, IL $3,650,000 May 31, 2002 (terminal) EXHIBIT C-2 FORM OF REAL PROPERTY NOTE EXHIBIT C-3 FORM OF LETTER OF CREDIT EXHIBIT C-4 FORM OF LEASE EXHIBIT D FORM OF DOVER TRANSFER AGREEMENT EXHIBIT E WORKERS COMPENSATION ADJUSTMENT FORMULA
SETTLED WORKERS REDUCTION REDUCTION TO INCREASE INCREASE COMPENSATION TO WORKERS TAX (DECREASE) (DECREASE) CHANGE TAX & WORKERS COMPENSATION YEAR TO TO % INTEREST COMPENSATIO ADJUSTMENTS OF TAXABLE TAXABLE (C) ADJUSTMENTS N CFC INCOME INCOME (D) ADJUSTMENTS (F) (A) (B) (E) 1984 8,349,394 (B) / 6,472,827 (C) x (D) (C) x (D) x 77% (A) 1985 7,849,143 (B) / 5,661,911 (C) x (D) (C) x (D) x 77% (A) 1986 11,913,266 (B) / 9,158,662 (C) x (D) (C) x (D) x 77% (A) 1987 10,444,132 (B) / 7,407,856 (C) x (D) (C) x (D) x 77% (A) 1988 6,552,881 (B) / 5,740,383 (C) x (D) (C) x (D) x 77% (A) 1989 6,292,810 (B) / 4,913,728 (C) x (D) (C) x (D) x 77% (A) 1990 16,679,975 (B) / 11,668,011 (C) x (D) (C) x (D) x 77% (A) 1991 8,347,944 (B) / 5,096,423 (C) x (D) (C) x (D) x 77% (A) 1992 (30,261,194) (B) / (17,127,337) (C) x (D) (C) x (D) x 77% (A) 1993 (46,168,351) (B) / (16,158,923) (C) x (D) (C) x (D) x 77% (A)
COLUMN EXPLANATIONS (A) Increase (decrease) to taxable income proposed by IRS in RAR for workers compensation. CFC's portion of these amounts is 77%. (B) Change to column A as a result of workers compensation litigation settlement. (C) Column B divided by Column A. (D) Total tax and interest attributable to income increase (decrease) in column A. (E) Column C multiplied by column D. (F) Column E multiplied by 77%. EX-27 3 0003.txt
5 1000 6-MOS DEC-31-2000 JUN-30-2000 136,442 0 1,043,180 (39,309) 41,156 1,343,184 2,091,800 (939,919) 3,269,932 1,013,453 534,667 125,000 126,466 364,896 545,398 3,269,932 0 2,991,956 0 2,831,022 12,555 0 14,281 148,379 63,061 85,318 0 0 0 81,212 1.68 1.49
EX-99 4 0004.txt Exhibit 99(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Six Months Ended June 30, 2000 1999 Fixed Charges: Interest Expense $ 14,281 $ 14,478 Capitalized Interest 2,767 2,508 Dividend Requirement on Series B Preferred Stock [1] 5,433 5,556 Interest Component of Rental Expense [2] 27,179 25,406 $ 49,660 $ 47,948 Earnings: Income before Taxes $ 148,379 $ 161,204 Fixed Charges 49,660 47,948 Capitalized Interest (2,767) (2,508) Preferred Dividend Requirements [3] (5,433) (5,556) $ 189,839 $ 201,088 Ratio of Earnings to Fixed Charges: 3.8 x 4.2 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 before Taxes. EX-99 5 0005.txt Exhibit 99(b) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands) Six Months Ended June 30, 2000 1999 Combined Fixed Charges and Preferred Stock Dividends: Interest Expense $ 14,281 $ 14,478 Capitalized Interest 2,767 2,508 Dividend Requirement on Series B Preferred Stock [1] 5,433 5,556 Dividend Requirement on Preferred Securities of Subsidiary Trust 3,126 3,126 Interest Component of Rental Expense [2] 27,179 25,406 $ 52,786 $ 51,074 Earnings: Income before Taxes $ 148,379 $ 161,204 Fixed Charges and Preferred Stock Dividends 52,786 51,074 Capitalized Interest (2,767) (2,508) Preferred Dividend Requirements [3] (5,433) (5,556) $ 192,965 $ 204,214 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: 3.7 x 4.0 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 before Taxes. -----END PRIVACY-ENHANCED MESSAGE-----