-----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, Ix6wS3u85M9xXC7xLeOMI+uAG7QFoZSO11kc/vPD0SiGUDQsEnuUjBk77J4beM8C 39ZKM78Wp9zgk3liLV96Kw== /in/edgar/work/0000023675-00-000008/0000023675-00-000008.txt : 20001115 0000023675-00-000008.hdr.sgml : 20001115 ACCESSION NUMBER: 0000023675-00-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 762799 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 PAGE 1 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 September 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 October 31, 2000: 48,605,487 PAGE 2 CNF TRANSPORTATION INC. FORM 10-Q Quarter Ended September 30, 2000 ___________________________________________________________________________ ___________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 3 Statements of Consolidated Income - Three and Nine months Ended September 30, 2000 and 1999 5 Statements of Consolidated Cash Flows - Nine months Ended September 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 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 25 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 26 PAGE 3 ITEM 1. FINANCIAL STATEMENTS CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) September 30, December 31, 2000 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 79,896 $ 146,263 Trade accounts receivable, net of allowances 884,674 914,307 Other accounts receivable 18,181 25,419 Operating supplies, at lower of average cost or market 42,505 46,019 Prepaid expenses 49,543 41,971 Deferred income taxes 79,530 26,254 Net current assets of discontinued operations (Note 2) 71,054 - Total Current Assets 1,225,383 1,200,233 PROPERTY, PLANT AND EQUIPMENT, NET Land 119,836 119,403 Buildings and leasehold improvements 665,011 573,688 Revenue equipment 808,669 854,519 Other equipment 415,902 447,962 2,009,418 1,995,572 Accumulated depreciation and amortization (920,281) (864,538) 1,089,137 1,131,034 OTHER ASSETS Deferred charges and other assets 147,772 200,739 Capitalized software, net 88,963 88,157 Unamortized aircraft maintenance (Note 1) 270,949 226,629 Goodwill, net 257,593 265,896 Net long-term assets of discontinued operations (Note 2) 138,419 - 903,696 781,421 TOTAL ASSETS $3,218,216 $3,112,688 The accompanying notes are an integral part of these statements. PAGE 4 CNF TRANSPORTATION INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) September 30, December 31, 2000 1999 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 408,582 $ 407,605 Accrued liabilities 370,488 422,470 Accrued claims costs 129,011 99,940 Current maturities of long-term debt and capital leases 7,553 6,452 Short-term borrowings 5,000 40,000 Income taxes payable 42,667 53,455 Total Current Liabilities 963,301 1,029,922 LONG-TERM LIABILITIES Long-term debt and guarantees (Note 3) 424,096 322,800 Long-term obligations under capital leases 110,562 110,646 Accrued claims costs 49,868 81,978 Employee benefits 242,190 217,519 Other liabilities and deferred credits 44,321 45,450 Aircraft lease return provision (Note 1) 100,504 82,910 Deferred income taxes 116,286 128,515 Total Liabilities 2,051,128 2,019,740 COMMITMENTS AND CONTINGENCIES (Note 8) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY CONVERTIBLE DEBENTURES OF THE COMPANY (Note 7) 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 828,678 and 840,407 shares, respectively 8 8 Additional paid-in capital, preferred stock 126,034 127,817 Deferred compensation, Thrift and Stock Plan (82,173) (87,600) Total Preferred Shareholders' Equity 43,869 40,225 Common stock, $.625 par value; authorized 100,000,000 shares; issued 55,379,531 and 55,306,947 shares, respectively 34,612 34,567 Additional paid-in capital, common stock 330,160 328,721 Retained earnings 826,702 747,936 Deferred compensation, restricted stock (1,423) (2,010) Cost of repurchased common stock (6,792,782 and 6,856,567 shares, respectively) (167,485) (169,057) 1,022,566 940,157 Accumulated foreign currency translation adjustment (19,952) (8,039) Minimum pension liability adjustment (4,395) (4,395) Accumulated Other Comprehensive Loss (24,347) (12,434) Total Common Shareholders' Equity 998,219 927,723 Total Shareholders' Equity 1,042,088 967,948 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,218,216 $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 Nine Months Ended September 30, September 30, 2000 1999 2000 1999 REVENUES $ 1,410,586 $ 1,290,182 $ 4,140,497 $ 3,670,757 Costs and Expenses Operating expenses 1,186,955 1,041,670 3,427,082 2,969,221 General and administrative 127,104 125,098 375,385 360,624 Depreciation 41,118 37,646 121,687 108,655 Net gain on sale of assets of parts distribution operation - - - (10,112) Net gain on legal settlement - - - (16,466) 1,355,177 1,204,414 3,924,154 3,411,922 OPERATING INCOME 55,409 85,768 216,343 258,835 . Other Income (Expense) Investment income 327 35 1,191 155 Interest expense (8,536) (6,822) (22,817) (21,300) Dividend requirement on preferred securities of subsidiary trust (Note 7) (1,563) (1,563) (4,689) (4,689) Miscellaneous, net 1,664 784 5,652 1,543 (8,108) (7,566) (20,663) (24,291) Income from Continuing Operations before Income Taxes 47,301 78,202 195,680 234,544 Income Taxes 19,633 34,018 82,694 102,246 Income from Continuing Operations 27,668 44,184 112,986 132,298 Income from Discontinued Operations, net of Income Taxes (Note 2) - - - 2,966 Loss from Discontinuance, net of Income Tax Benefits (Note 2) (13,508) - (13,508) - (13,508) - (13,508) 2,966 Net Income 14,160 44,184 99,478 135,264 Preferred Stock Dividends 2,047 2,037 6,153 6,125 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 12,113 $ 42,147 $ 93,325 $ 129,139 Weighted-Average Common Shares Outstanding (Note 6) Basic 48,511,156 48,306,902 48,464,021 48,131,556 Diluted 56,349,127 56,032,549 56,379,755 55,908,199 Earnings per Common Share (Note 6) Basic Income from Continuing Operations $ 0.53 $ 0.87 $ 2.21 $ 2.62 Income from Discontinued Operations - - - 0.06 Loss from Discontinuance (0.28) - (0.28) - Net Income $ 0.25 $ 0.87 $ 1.93 $ 2.68 Diluted Income from Continuing Operations $ 0.48 $ 0.77 $ 1.96 $ 2.33 Income from Discontinued Operations - - - 0.05 Loss from Discontinuance (0.24) - (0.24) - Net Income $ 0.24 $ 0.77 $ 1.72 $ 2.38
The accompanying notes are an integral part of these statements. PAGE 6 CNF TRANSPORTATION INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in thousands) Nine Months Ended September 30, 2000 1999 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 146,263 $ 73,897 OPERATING ACTIVITIES Net income 99,478 135,264 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operations, net of tax 13,508 - Depreciation and amortization 157,842 139,646 Increase (decrease) in deferred income taxes (3,415) 46,570 Amortization of deferred compensation 5,785 9,125 Provision for uncollectable accounts 11,422 8,446 Gain from sale of equity securities, net (2,619) - Loss (gain) from sales of property, net (773) 35 Net gain from sale of assets of parts distribution operation - (10,112) Loss from sale of assets of truckload operation 5,459 - Changes in assets and liabilities: Receivables (202,160) (19,208) Prepaid expenses (9,230) (24,463) Unamortized aircraft maintenance (44,320) (31,416) Accounts payable 10,317 1,567 Accrued liabilities (29,139) 64,725 Accrued claims costs (2,850) 30,145 Income taxes (10,788) (12,340) Employee benefits 25,739 25,109 Aircraft lease return provision 17,594 18,584 Deferred charges and credits 22,377 (9,935) Other (6,926) (15,919) Net Cash Provided by Operating Activities 57,301 355,823 INVESTING ACTIVITIES Capital expenditures (170,887) (239,070) Software expenditures (14,327) (27,897) Proceeds from sale of equity securities 2,619 - Proceeds from sales of property 10,206 10,667 Proceeds from sale of assets of parts distribution operation - 29,260 Proceeds from sale of assets of truckload operation 7,263 - Net Cash Used in Investing Activities (165,126) (227,040) 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 leases (96,482) (32,977) Repayment of short-term borrowings, net (35,000) (18,000) Proceeds from exercise of stock options 950 7,106 Payments of common dividends (14,559) (14,473) Payments of preferred dividends (10,903) (11,078) Net Cash Provided by (Used in) Financing Activities 41,458 (69,422) Increase (Decrease) in Cash and Cash Equivalents (66,367) 59,361 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 79,896 $ 133,258 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. 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. Discontinued Operations On November 3, 2000, Emery Worldwide Airlines (EWA) and the U.S. Postal Service (USPS) announced an agreement to terminate their contract for the transportation and sortation of Priority Mail. Under terms of the agreement, the USPS on January 7, 2001 will assume operating responsibility for services covered under the contract. The contract was originally scheduled to terminate in the first quarter of 2002, subject to renewal options. As a part of the transition of the Priority Mail operations from Emery to the USPS, Emery has agreed to provide certain air transportation and related services to the USPS for a period of not less than ninety days beginning on January 7, 2001. The USPS has agreed to reimburse the Company for Priority Mail contract termination costs, including costs of contract-related equipment, inventory, and operating lease commitments, up to $125 million (the "Termination Liability Cap"). On or before January 7, 2001, the USPS is obligated to pay EWA $60 million toward the termination costs. This provisional payment will be adjusted if actual termination costs are greater or less than $60 million, in which case either the USPS will be required to make an additional payment or EWA will be required to return a portion of the provisional payment. Under the termination agreement, EWA agreed to dismiss a complaint filed in April 2000 in the U.S. Court of Federal Claims that requested a declaration of contract rights under the Priority Mail contract and a ruling that the USPS was in breach of contractual payment obligations. However, the termination agreement preserves EWA's right to pursue claims for underpayment under the contract. EWA intends to pursue these claims, and has initiated litigation in the U.S. Court of Federal Claims for those claims that are ripe for disposition there. These claims, and recent payments made by the USPS toward these claims, are described under "Discontinued Operations" in "Management Discussion and Analysis". The Company's accounting policy for revenue recognition under the Priority Mail contract, including claims for underpayment relating to any period until the effective termination date on January 7, 2001, is described below. As a result of the contract termination, the results of operations of the Company's Priority Mail contract have been reclassified as discontinued operations in the Statements of Consolidated Income for all periods presented. Assets and liabilities have been reclassified in the Consolidated Balance Sheet as of September 30, 2000 from their historical classifications to separately reflect them as net assets of discontinued operations. The Consolidated Balance Sheet as of December 31, 1999 has not been restated. Cash flows related to discontinued operations have not been segregated in the Statements of Consolidated Cash Flows, and, as a result, amounts on the Statements of Consolidated Income and Consolidated Balance Sheets may not agree with certain captions on the Statements of Consolidated Cash Flows. PAGE 9 The summarized results of discontinued operations were as follows: Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenue $ 124,317 $ 118,209 $ 386,362 $ 354,594 Operating income before taxes - - - 4,862 Income taxes - - - 1,896 ---------- ---------- ---------- ---------- Income from discontinued operations $ - $ - $ - $ 2,966 ========== ========== ========== ========== Loss from discontinuance, net of tax benefits $ (13,508) $ - $ (13,508) $ - ========== ========== ========== ========== The loss from discontinuance of $13.5 million recognized in the third quarter of 2000, which is reported net of $8.6 million of income tax benefits, includes estimates for the write-down of non-reimbursable assets, legal and advisory fees, costs of providing transportation services for a three-month period following the effective termination date, certain employee-related costs and other non-reimbursable costs from discontinuance. The net assets of discontinued operations as of September 30, 2000 were as follows: (Dollars in thousands) Current Assets Trade accounts receivable, net $ 115,583 Other 6,715 ---------- 122,298 Property, plant and equipment, net 68,647 Long-term receivables and other assets 132,238 ---------- Total assets of discontinued operations $ 323,183 ---------- Current Liabilities $ 51,244 Long-term liabilities 62,466 ---------- Total liabilities of discontinued operations $ 113,710 ---------- Net assets of discontinued operations $ 209,473 ========== For periods prior to the effective termination date on January 7, 2001, the Priority Mail contract provides for the re-determination of prices paid to EWA under the contract, which gives 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 will be reflected in operating results for discontinued operations in the current period. PAGE 10 The amount of unbilled revenue related to the Company's Priority Mail contract recognized at September 30, 2000 and December 31, 1999 was $194.4 million and $123.7 million, respectively. As described above and under "Discontinued Operations" in "Management's Discussion and Analysis", EWA received payments from the U.S. Postal Service in October 2000 totaling $102.1 million, reducing the $194.4 million recognized by EWA as unbilled revenue as of September 30, 2000 to $92.3 million. As of September 30, 2000, $102.1 million of unbilled revenue was classified as Trade Accounts Receivable and $92.3 million was classified as Other Long-Term Receivables. 3. 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 repayment 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. 4. 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 Nine Months Ended (Dollars in thousands) September 30, September 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net income $ 14,160 $ 44,184 $ 99,478 $ 135,264 Foreign currency translation adjustment (3,996) 1,704 (11,913) 2,398 ---------- ---------- ---------- ---------- $ 10,164 $ 45,888 $ 87,565 $ 137,662 ========== ========== ========== ========== PAGE 11 5. Business Segments Selected financial information about the Company's operating segments is shown below and reflects only continuing operations. Prior periods have been reclassified to exclude discontinued operations. Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenues Con-Way Transportation $ 520,864 $ 496,589 $1,569,404 $1,404,200 Emery Worldwide 662,621 620,470 1,908,329 1,742,105 Menlo Logistics 228,992 181,473 684,363 529,310 Other 11,283 11,651 40,988 53,255 ---------- ---------- ---------- ---------- 1,423,760 1,310,183 4,203,084 3,728,870 Intercompany Eliminations Con-Way Transportation (2,730) (5,931) (12,160) (16,616) Emery Worldwide (5,160) (3,154) (18,925) (9,514) Menlo Logistics (3,353) (2,791) (10,270) (8,466) Other (1,931) (8,125) (21,232) (23,517) ---------- ---------- ---------- ---------- (13,174) (20,001) (62,587) (58,113) External Revenues Con-Way Transportation 518,134 490,658 1,557,244 1,387,584 Emery Worldwide 657,461 617,316 1,889,404 1,732,591 Menlo Logistics 225,639 178,682 674,093 520,844 Other 9,352 3,526 19,756 29,738 ---------- ---------- ---------- ---------- $1,410,586 $1,290,182 $4,140,497 $3,670,757 ========== ========== ========== ========== Operating Income (Loss) Con-Way Transportation (1) $ 52,189 $ 56,938 $ 175,980 $ 171,715 Emery Worldwide (2) (5,788) 22,551 14,588 43,527 Menlo Logistics 8,628 6,298 24,739 16,127 Other (3) 380 (19) 1,036 27,466 ---------- ---------- ---------- ---------- $ 55,409 $ 85,768 $ 216,343 $ 258,835 ========== ========== ========== ========== (1) For the three and nine months ended September 30, 2000, results include a $5.5 million loss on the sale of certain assets of Con-Way Truckload Services. (2) For the three and nine months ended September 30, 2000, results include an $11.9 million loss from the termination of certain aircraft leases. (3) The Other segment includes the operating results of Road Systems and, prior to the sale of its assets in May 1999, VantageParts. For the nine months ended September 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, and a $16.5 million net gain on a lawsuit settled in January 1999. PAGE 12 6. Earnings Per Share Basic earnings per share was computed by dividing income from continuing operations by the weighted-average common shares outstanding. The calculation for diluted earnings per share on continuing operations was calculated as shown below. Prior periods have been reclassified to exclude discontinued operations. Three Months Ended Nine Months Ended (Dollars in thousands except September 30, September 30, per share data) 2000 1999 2000 1999 ---------- ---------- --------- ---------- Earnings: Income from Continuing Operations $ 25,621 $ 42,147 $ 106,833 $ 126,173 Add-backs: Dividends on Series B preferred stock, net of replacement funding 345 309 1,051 980 Dividends on preferred securities of subsidiary trust, net of tax 954 954 2,862 2,862 ---------- ---------- ---------- ---------- $ 26,920 $ 43,410 $ 110,746 $ 130,015 ---------- ---------- ---------- ---------- Shares: Basic shares (weighted- average common shares outstanding) 48,511,156 48,306,902 48,464,021 48,131,556 Stock option dilution 267,471 630,513 345,234 681,509 Series B preferred stock 4,445,500 3,970,134 4,445,500 3,970,134 Preferred securities of subsidiary trust 3,125,000 3,125,000 3,125,000 3,125,000 ---------- ---------- ---------- ---------- 56,349,127 56,032,549 56,379,755 55,908,199 ---------- ---------- ---------- ---------- Diluted Earnings Per Share for Continuing Operations $ 0.48 $ 0.77 $ 1.96 $ 2.33 ========== ========== ========== ========== 7. Preferred Securities of Subsidiary Trust On June 11, 1997, CNF Trust I (the Trust), a Delaware business trust wholly owned by the Company, issued 2,500,000 of its $2.50 Term Convertible Securities, Series A (TECONS) to the public for gross proceeds of $125 million. The combined proceeds from the issuance of the TECONS and the issuance to the Company of the common securities of the Trust were invested by the Trust in $128.9 million aggregate principal amount of 5% convertible subordinated debentures due June 1, 2012 (the Debentures) issued by the Company. The Debentures are the sole assets of the Trust. Holders of the TECONS are entitled to receive cumulative cash distributions at an annual rate of $2.50 per TECONS (equivalent to a rate of 5% per annum of the stated liquidation amount of $50 per TECONS). The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TECONS, to the extent the Trust has funds available therefor and subject to certain other limitations (the Guarantee). The Guarantee, when taken together with the obligations of the Company under the Debentures, the Indenture pursuant to which the Debentures were issued, and the Amended and Restated Declaration of Trust of the Trust including its obligations to pay costs, fees, expenses, debts and other obligations of the Trust (other than with respect to the TECONS and the common securities of the Trust), provide a full and unconditional guarantee of amounts due on the TECONS. PAGE 13 The Debentures are redeemable for cash, at the option of the Company, in whole or in part, on or after June 1, 2000, at a price equal to 103.125% of the principal amount, declining annually to par if redeemed on or after June 1, 2005, plus accrued and unpaid interest. In certain circumstances relating to federal income tax matters, the Debentures may be redeemed by the Company at 100% of the principal plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of TECONS will be redeemed. The TECONS do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 1, 2012, or upon earlier redemption. Each TECONS is convertible at any time prior to the close of business on June 1, 2012, at the option of the holder into shares of the Company's common stock at a conversion rate of 1.25 shares of the Company's common stock for each TECONS, subject to adjustment in certain circumstances. 8. 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 October 1, 2000, CFC had provided the Company with approximately $6.0 million of letters of credit. However, the letters of credit 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 1998 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 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, was $145 million as of September 30, 2000. The amount due under the Notice was reduced in the third quarter by a portion of the Company's $93.4 million payment to the IRS, which is described below. 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. 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 with an estimated value of $21.2 million. In September 2000, the Company received real property with an estimated value of $13.8 million as partial settlement of CFC's commitment to transfer land and buildings. PAGE 14 As discussed above, the IRS is seeking to recover $145 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 substantial additional adjustments for tax years 1991 through 1996 with respect to various issues, including aviation excise taxes, matters relating to CFC for years prior to the spin-off, and, as mentioned above, 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 and under "Legal Proceedings" below, 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 15 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- On November 3, 2000, Emery Worldwide Airlines (EWA) and the U.S. Postal Service (USPS) announced an agreement to terminate their contract for the transportation and sortation of Priority Mail. Accordingly, the results of operations and net assets of the Priority Mail operation have been classified as discontinued operations. A summary of selected terms of the agreement, summary financial data, and related information are included in Note 2 of the Notes to Consolidated Financial Statements. Background and additional information are described below under "Discontinued Operations". Continuing Operations - --------------------- Income from continuing operations (hereinafter, reduced by preferred stock dividends) for the third quarter of 2000 was $25.6 million ($0.53 per basic share and $0.48 per diluted share) compared to $42.1 million ($0.87 per basic share and $0.77 per diluted share) in the same quarter of last year. The third quarter of 2000 included an $11.9 million non-recurring loss ($0.14 per basic share and $0.12 per diluted share) from the termination of certain aircraft leases and a $5.5 million loss from the sale of certain assets of Con-Way Truckload Services ($0.07 per basic share and $0.06 per diluted share). Excluding these non-recurring charges, income from continuing operations in the third quarter of 2000 was $35.8 million, a 15.1% decline from the same quarter last year. Income from continuing operations for the first nine months of 2000 was $106.8 million ($2.21 per basic share and $1.96 per diluted share) compared to $126.2 million ($2.62 per basic share and $2.33 per diluted share) in the same period last year. In addition to the non-recurring charges discussed above, the first nine months of 2000 included a $2.6 million non-recurring net gain ($0.03 per basic and diluted share) from the sale of securities. The first nine months of last year benefited from a $10.1 million non-recurring net gain ($0.12 per basic share and $0.10 per diluted share) from the sale of assets of the Company's former wholesale parts distribution operation and a $16.5 million non-recurring net gain ($0.19 per basic share and $0.17 per diluted share) from the settlement of a lawsuit. Except for the gain from the sale of securities in 2000, the non-recurring items in the first nine months of 2000 and 1999 were included in operating income. Excluding the non-recurring items in both nine-month periods, income from continuing operations for the first nine months of 2000 increased 3.7% over the first nine months of 1999. Revenue for the third quarter and first nine months of 2000 increased 9.3% and 12.8%, respectively, over the third quarter and first nine months of last year due to higher revenue from the Company's three largest segments. Operating income of $55.4 million for the third quarter and $216.3 million for the first nine months of 2000 decreased 35.4% and 16.4%, respectively, from the comparable periods last year. Excluding the non- recurring charges in 2000 and the non-recurring gains in 1999, operating income for the third quarter and first nine months of 2000 decreased 15.2% and 0.6%, respectively. In the third quarter of 2000, an operating loss from Emery and lower operating income from Con-Way (including the Con-Way Truckload Services asset sale) was partially offset by record operating income earned by Menlo. For the nine-month period, higher operating income from Menlo and Con-Way was more than offset by lower operating income from Emery and the Other segment. The Other segment, which includes the operating results of Road Systems, also included the non-recurring gains recognized in the first nine months of 1999. PAGE 16 Other net expenses in the third quarter of 2000 increased 7.2% from the same quarter last year due primarily to a 25.1% increase in interest expense. Other net expenses in the first nine months of 2000 fell 14.9% due primarily to a $2.6 million net gain from the sale of securities in March 2000 and interest income on a note receivable from CFC (described in Note 8 of the Notes to Consolidated Financial Statements), partially offset by a 7.1% increase in interest expense. Long-term debt transactions discussed in Note 3 of the Notes to Consolidated Financial Statements resulted in higher interest expense on long-term borrowings in the third quarter and first nine months of 2000 compared to the respective periods last year. The effective tax rate during the third quarter and first nine months of 2000 was 41.5% and 42.3%, respectively, compared to 43.5% in the third quarter of 1999 and 43.6% in the first nine months of 1999. The reduction was due primarily to resolution of certain tax issues and tax planning strategies in 2000. Con-Way Transportation Services Third-quarter revenue from Con-Way Transportation Services (Con-Way) in 2000 increased 5.6% over the same period last year due primarily to higher revenue per hundredweight (yield) and essentially flat tonnage (weight). Revenue in the first nine months of 2000 increased 12.2% over the same period last year due primarily to higher tonnage and yield. Total and less-than-truckload (LTL) weight transported by Con-Way's regional carriers in the first nine months of 2000 increased 5.3% and 5.2%, respectively, over the same period last year. Tonnage in the third quarter and first nine months of 2000 was positively impacted by continued growth in inter-regional joint services. Con-Way's management believes that flat tonnage growth in the third quarter of 2000 was due in part to the closures of two of Con-Way's competitors in the second quarter of 1999, which created additional demand for Con-Way's services in the third quarter of last year. In the third quarter of 2000, revenue per hundredweight for the regional carriers increased 7.9% over the third quarter of last year and the regional carriers' revenue per hundredweight for the first nine months of 2000 was 6.9% higher than the first nine months of 1999. The increases in yield were due primarily to higher rates obtained for Con-Way's core premium services; a larger percentage of inter-regional joint services, which command higher rates on longer lengths of haul; and, to a lesser extent, fuel surcharges. Con-Way's operating income in the third quarter of 2000 fell 8.3% from the same period last year due in part to a $5.5 million loss from the sale of certain assets of Con-Way Truckload Services. Excluding the non- recurring charge, operating income for the 2000 third quarter increased 1.2% from the third quarter of 1999. Operating income in the first nine months of 2000 rose 2.5% from the same period last year. Excluding the non- recurring charge, higher operating income in the third quarter and first nine months of 2000 was due primarily to higher revenue and continued emphasis on operating efficiencies, including increased load factor. Higher diesel fuel costs in the first nine months of 2000 were substantially mitigated by a fuel surcharge implemented by Con-Way in August 1999. The first nine months of 2000 and 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. PAGE 17 Emery Worldwide Emery's revenue for the third quarter and first nine months of 2000 increased 6.5% and 9.1%, 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 third quarter and first nine months of 2000, excluding fuel surcharges, increased 14.7% and 17.5%, respectively, over the third quarter and first nine months of 1999 due primarily to increases in pounds transported (weight) and revenue per pound (yield). Weight and yield for the third quarter of 2000 increased 9.8% and 4.4%, respectively, over the third quarter of last year. In the first nine months of 2000, weight and yield rose 13.2% and 3.8%, respectively, over the first nine months of 1999. Weight and yield in the third quarter and first nine months of 2000 were favorably affected by improved economic conditions in the international markets served by Emery. North American airfreight revenue for the third quarter and first nine months of 2000, excluding fuel surcharges, fell 6.6% and 3.2%, respectively, from the comparable periods last year. Including fuel surcharges, North American airfreight revenue for the third quarter declined 2.8% when compared to the third quarter of last year and North American airfreight revenue in the first nine months of 2000 was essentially flat compared to the same period last year. In the third quarter of 2000, a 9.0% decline in North American airfreight weight was partially offset by a 2.7% increase in yield (excluding fuel surcharges). In the first nine months of 2000, a 6.3% reduction in North American airfreight weight was partially offset by a 3.3% increase in revenue per pound (excluding fuel surcharges). Lower weight transported in North America for the third quarter and first nine months of 2000 was due in part to a decline in demand from certain industries served by Emery. Improved revenue per pound in the third quarter and first nine months of 2000 was due in part to an increase in the percentage of higher-yielding guaranteed delivery service and Emery's ongoing yield management, which is designed to eliminate or reprice certain low-margin business. Emery's operating results declined to a third-quarter operating loss of $5.8 million in 2000 from operating income of $22.6 million in 1999. Operating income for the nine-month period declined to $14.6 million, down from $43.5 million in the same period last year. Operating results in 2000 were adversely affected by an $11.9 million non-recurring charge from the termination of certain aircraft leases in the third quarter and higher airhaul costs. Domestically, airhaul expense was negatively impacted by higher aircraft maintenance costs, including an increase in amortization from shortened maintenance cycles. Internationally, reduced airlift capacity in some international markets adversely impacted airhaul rates. Higher jet fuel costs in the third quarter and first nine months of 2000 were substantially mitigated by a fuel surcharge implemented by Emery in September 1999. In September 2000, Chutta Ratnathicam was named Chief Executive Officer of Emery Worldwide, succeeding Roger Piazza, who retired. Mr. Ratnathicam most recently served as CNF's Senior Vice President and Chief Financial Officer and served as Emery's interim CEO for a brief period in 1998 prior to Mr. Piazza's appointment. Under Mr. Ratnathicam, Emery's management intends to continue positioning Emery as a premium service provider, focusing on achieving higher yield with a reduced cost structure. In North America, management will seek to improve yield by earning compensation that is commensurate with premium services. Internationally, management will focus on expanding Emery's variable-cost-based operations and continuously renegotiating airhaul rates to improve operating margins. Management will continue efforts to increase Emery's international revenue as a percentage of its total revenue. PAGE 18 In September 2000, Emery and the Airline Pilots Association, the union representing Emery's pilots, signed a four-year collective bargaining agreement. Menlo Logistics Menlo's revenue in the third quarter and first nine months of 2000 exceeded the comparable periods last year by 26.3% and 29.4%, respectively. Higher revenue was due in part to existing contracts and consulting fees earned on contracts entered into in the first nine months 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. Menlo refers to this as purchased transportation. Menlo's revenue in the third quarter, net of purchased transportation, increased 31.1% from the same quarter last year to $67.5 million. For the first nine months of 2000, Menlo's revenue, net of purchased transportation, increased 33.0% from the same period last year to $197.7 million. Operating income for Menlo in the third quarter and first nine months of 2000 increased 37.0% and 53.4%, respectively, over the third quarter and first nine months of 1999. Higher operating income was primarily attributable to increased revenue and an increase in the percentage of revenue from higher-margin consulting fees. Other Segment The Other segment includes the operating results of Road Systems and, prior to the sale of its assets in May 1999, VantageParts. Also included in the Other segment for 1999 were net gains from the VantageParts asset sale and settlement of a lawsuit in January 1999. The Other segment's revenue for the nine-month period decreased in 2000 due to the loss of revenue from VantageParts following the sale of its assets in May 1999. The Other segment's third-quarter operating income of $380,000 increased from a $19,000 operating loss in the third quarter of 1999. The Other segment's operating income of $1.0 million in the first nine months decreased from $27.5 million in the same period of 1999. Last year's first nine months of operating income included a $16.5 million net gain from the settlement of a lawsuit in January 1999, and a $10.1 million net gain from the VantageParts asset sale. PAGE 19 Discontinued Operations - ----------------------- Recent Events On November 3, 2000, Emery Worldwide Airlines (EWA) and the U.S. Postal Service (USPS) announced an agreement to terminate their contract for the transportation and sortation of Priority Mail. Under the agreement, EWA agreed to dismiss a complaint filed in April 2000 in the U.S. Court of Federal Claims that requested a declaration of contract rights under the Priority Mail contract and a ruling that the USPS was in breach of contractual payment obligations. However, the agreement preserves EWA's right to pursue claims for underpayment under the contract, which are described below, and EWA intends to do so. As a result of the above, the results of operations and net assets of the Priority Mail operation have been classified as discontinued operations. A summary of selected terms of the agreement, summary financial data, and related information are included in Note 2 of the Notes to Consolidated Financial Statements. Background In accordance with the Priority Mail contract, in February 1999, EWA, our subsidiary that operates the Priority Mail contract, submitted a proposal to the 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. Also, in August 1999, the USPS denied EWA's previously filed claim for reimbursement of additional costs incurred during the 1998 holiday season. 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. Consistent with our accounting policy described in Note 2 of the Notes to Consolidated Financial Statements, 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. Until the contract's effective termination on January 7, 2001, 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 under discontinued operations. If we determine that the unbilled revenue is not collectable, the uncollectable amount will be charged as expense to discontinued operations in the period when and if that determination is made. Unbilled revenue excludes profit under the contract and interest attributable to unbilled revenue and profit. However, our claims discussed herein are to recover costs of operating under the Priority Mail contract as well as profit and interest thereon. Under the termination agreement, EWA preserves the right to pursue these claims for underpayment under the Priority Mail contract. PAGE 20 As a result of the claims discussed above and the USPS's decision to assert price reductions, EWA recognized $21.0 million and $70.7 million of unbilled revenue in the third quarter and first nine months of 2000, respectively. EWA has recognized a total of $194.4 million of unbilled revenue since the beginning of the Priority Mail contract through September 30, 2000, which amount is in dispute. 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 U.S. Court of Federal Claims in Washington, D.C. that requested a declaration of contract rights under the Priority Mail contract and a ruling that the USPS is in breach of contractual payment obligations. As a result of a decision in August 2000 in the U.S. Court of Federal Claims, the USPS increased its provisional rate paid to EWA for transportation and sortation of Priority Mail for 2000. The USPS also increased the provisional rate paid to EWA for 1999. Based on these rate adjustments, early in the fourth quarter of 2000 EWA received payments totaling $102.1 million from the U.S. Postal Service, reducing the total amount recognized by EWA as unbilled revenue to approximately $92.3 million. The current rate is below EWA's cost to service this contract. Until the Priority Mail contract is terminated on January 7, 2001, EWA will be compensated below its cost of operating the contract. 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 21 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- As described in Note 2 of the Notes to Consolidated Financial Statements, cash flows related to discontinued operations have not been segregated in the Statements of Consolidated Cash Flows, and, as a result, amounts on the Statements of Consolidated Income and Consolidated Balance Sheets may not agree with certain captions on the Statements of Consolidated Cash Flows. In the first nine months of 2000, cash and cash equivalents decreased $66.4 million to $79.9 million. The net use of cash from investing activities of $165.1 million was funded with $57.3 million of cash provided by operating activities, $41.5 million provided by financing activities and a reduction in cash. Operating activities in the first nine months of 2000 generated net cash of $57.3 million. Net income of $113.0 million (excluding loss on discontinuance) and depreciation and amortization of $157.8 million were partially offset by a $202.2 million increase in receivables and a $44.3 million increase in unamortized aircraft maintenance. 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 under "Results of Operations" for "Discontinued Operations", payments from the U.S. Postal Service in October 2000 totaling $102.1 million reduced the total amount recognized by EWA as unbilled revenue from $194.4 million at September 30, 2000 to $92.3 million. Investing activities in the first nine months of 2000 used $165.1 million of cash, $61.9 million less than the first nine months of 1999. Capital expenditures of $170.9 million in the first nine months of 2000 declined $68.2 million from the same period last year. For the first nine months of 2000, Con-Way spent $82.4 million of cash primarily on infrastructure and Emery spent $51.0 million of cash primarily on infrastructure and aircraft equipment. Capital expenditures by Con-Way and Emery in the first nine months of 2000 declined $70.1 million and $20.5 million, respectively, from the same period last year and were partially offset by the in-process construction of a CNF corporate administrative facility. In the first nine months of 2000, $66.7 million of revenue equipment was acquired by Con-Way under operating leases while no new capital items were acquired by Con-Way under operating leases in the same period of last year. Proceeds from the sale of equity securities and the sale of certain assets of Con-Way Truckload Services generated cash of $2.6 million and $7.3 million, respectively, in the first nine months of 2000. Software expenditures in the first nine months of 2000 declined $13.6 million from the first nine months of last year. Financing activities in the first nine months of 2000 provided $41.5 million compared to the reduction of $69.4 million in the same period last year. As discussed in Note 3 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 "Discontinued Operations", 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 effective termination date on January 7, 2001, 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 8 of the Notes to Consolidated Financial Statements, the Company is currently under examination by the Internal Revenue Service (IRS) for tax years 1987 through 1998 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 by liquidating short-term investments and with proceeds from short-term borrowings. PAGE 22 We maintain a $350 million unsecured credit facility with no borrowings outstanding at September 30, 2000. The $350 million facility is also available for issuance of letters of credit. Under that facility, outstanding letters of credit totaled $49.6 million at September 30, 2000. Available capacity under the $350 million facility was $300.4 million at September 30, 2000. At September 30, 2000 we also had $100.0 million of uncommitted lines with $5.0 million outstanding. Under other unsecured facilities, $67.6 million in letters of credit were outstanding at September 30, 2000. Our ratio of total debt to capital increased to 31.7% 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, which are reported as "Discontinued Operations", 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 consolidated financial statements included in our 1999 Annual Report to Shareholders. Changes in our long- term debt since December 31, 1999 are discussed herein in Note 3 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 $26 million at September 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. Cash flow hedges include interest rate swaps on variable-rate equipment lease obligations. As of September 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 September 30, 2000, the change in the fair value of these interest rate swaps given a hypothetical 10% change in interest rates would be approximately $12 million. PAGE 23 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. From 1996 through December 31, 1999, 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 PAGE 24 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; labor matters, including changes in labor costs, renegotiations of labor contracts and the risk of work stoppages or strikes; changes in governmental regulation; environmental and tax matters, including 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 liabilities of CFC 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 25 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 has been conducting an investigation relating to the handling of so-called hazardous materials by Emery. The Department of Justice has joined in the investigation and is seeking to obtain additional information. 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 8 in the Notes to Consolidated Financial Statements in Part I of this form. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges were 3.6x and 4.3x for the nine months ended September 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 3.4x and 4.1x for the nine months ended September 30, 2000 and 1999, respectively. (b)Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2000. PAGE 26 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 benine months by the undersigned, thereunto duly authorized. CNF Transportation Inc. (Registrant) November 14, 2000 /s/Greg Quesnel Greg Quesnel President, Chief Executive Officer and Interim Chief Financial Officer EX-27 2 0002.txt
5 1000 9-MOS DEC-31-2000 SEP-30-2000 79,896 0 911,060 (26,386) 42,505 1,225,383 2,009,418 (920,281) 3,218,216 963,301 534,658 125,000 126,034 364,772 551,282 3,218,216 0 4,140,497 0 3,924,154 20,663 0 22,817 195,680 82,694 106,833 (13,508) 0 0 93,325 2.21 1.96
EX-99 3 0003.txt Exhibit 99(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Nine Months Ended September 30, 2000 1999 Fixed Charges: Interest Expense $ 22,817 $ 21,300 Capitalized Interest 3,573 3,887 Dividend Requirement on Series B Preferred Stock [1] 8,121 8,275 Interest Component of Rental Expense [2] 37,609 34,591 $ 72,120 $ 68,053 Earnings: Income from Continuing Operations before Taxes $ 195,680 $ 234,544 Fixed Charges 72,120 68,053 Capitalized Interest (3,573) (3,887) Preferred Dividend Requirements [3] (8,121) (8,275) $ 256,106 $ 290,435 Ratio of Earnings to Fixed Charges: 3.6 x 4.3 x [1] Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt service on notes issued by the Company's Thrift and Stock Plan. [2] Estimate of the interest portion of lease payments. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income from Continuing Operations before Taxes. EX-99 4 0004.txt Exhibit 99(b) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands) Nine Months Ended September 30, 2000 1999 Combined Fixed Charges and Preferred Stock Dividends: Interest Expense $ 22,817 $ 21,300 Capitalized Interest 3,573 3,887 Dividend Requirement on Series B Preferred Stock [1] 8,121 8,275 Dividend Requirement on Preferred Securities of Subsidiary Trust 4,689 4,689 Interest Component of Rental Expense [2] 37,609 34,591 $ 76,809 $ 72,742 Earnings: Income from Continuing Operations before Taxes $ 195,680 $ 234,544 Fixed Charges 76,809 72,742 Capitalized Interest (3,573) (3,887) Preferred Dividend Requirements [3] (8,121) (8,275) $ 260,795 $ 295,124 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends: 3.4 x 4.1 x [1] Dividends on shares of the Series B cumulative convertible preferred stock are used to pay debt service on notes issued by the Company's Thrift and Stock Plan. [2] Estimate of the interest portion of lease payments. [3] Preferred stock dividend requirements included in fixed charges but not deducted in the determination of Income from Continuing Operations before Taxes. -----END PRIVACY-ENHANCED MESSAGE-----