-----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, Uot/BDcCzHeKyq0Lf77Khmec+0q1v6ZDP/nbuukEB7IFr59am79MjSjf731YNUeY VYNedpKtgZqyvtcOw0xIFA== 0000023675-01-000003.txt : 20010329 0000023675-01-000003.hdr.sgml : 20010329 ACCESSION NUMBER: 0000023675-01-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNF TRANSPORTATION INC CENTRAL INDEX KEY: 0000023675 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 941444798 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05046 FILM NUMBER: 1581391 BUSINESS ADDRESS: STREET 1: 3240 HILLVIEW AVE CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 6504942900 MAIL ADDRESS: STREET 1: 1717 NW 21ST AVE CITY: PORTLAND STATE: OR ZIP: 97209 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED FREIGHTWAYS INC DATE OF NAME CHANGE: 19920703 10-K 1 0001.txt 10K DOCUMENT PAGE 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 Commission File Number 1-5046 CNF TRANSPORTATION INC. Incorporated in the State of Delaware I.R.S. Employer Identification No. 94-1444798 3240 Hillview Avenue, Palo Alto, California 94304 Telephone Number (650) 494-2900 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------------------ ---------------------- Common Stock ($.625 par value) New York Stock Exchange Pacific Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: 8 7/8% Notes Due 2010 7.35% Notes Due 2005 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No ----- ----- Aggregate market value of voting stock held by persons other than Directors, Officers and those shareholders holding more than 5% of the outstanding voting stock, based upon the closing price per share Composite Tape on January 31, 2001: $ 1,525,251,999 Number of shares of Common Stock outstanding as of February 28, 2001: 48,724,884 DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV CNF Transportation Inc. 2000 Annual Report to Shareholders (only those portions referenced herein are incorporated in this Form 10- K). Part III Proxy Statement dated March 8, 2001 (only those portions referenced herein are incorporated in this Form 10-K). PAGE 2 CNF TRANSPORTATION INC. FORM 10-K Year Ended December 31, 2000 ------------------------------ INDEX ----- Item Page - ---- ---- PART I 1. Business 3 2. Properties 14 3. Legal Proceedings 16 4. Submission of Matters to a Vote of Stockholders 17 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters 18 6. Selected Financial Data 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 7A. Quantitative and Qualitative Discussions about Market Risk 20 8. Financial Statements and Supplementary Data 20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 PART III 10. Directors and Executive Officers of the Registrant 21 11. Executive Compensation 22 12. Security Ownership of Certain Beneficial Owners and Management 22 13. Certain Relationships and Related Transactions 22 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23 PAGE 3 CNF TRANSPORTATION INC. FORM 10-K Year Ended December 31, 2000 ---------------------------- PART I ------ ITEM 1. BUSINESS CNF Transportation Inc. and subsidiaries (collectively the Registrant or the Company) is a management company of global supply-chain services. The Company, formerly Consolidated Freightways, Inc., was incorporated in Delaware in 1958. Following the Spin-off of Consolidated Freightways Corporation, which is described below, the Company changed its name to CNF Transportation Inc. The continuing operations of the Company comprise four business segments: Con-Way Transportation Services, Emery Worldwide, Menlo Logistics, and Other. Con-Way provides regional one- and two-day less-than-truckload (LTL) freight trucking throughout the U.S., Canada and Mexico, expedited and guaranteed ground transportation, and integrated supply chain services. Emery provides expedited and deferred domestic and international air cargo services, ocean delivery, and customs brokerage. Domestically, Emery relies primarily on EWA's dedicated aircraft and ground fleet to provide its services. Internationally, Emery acts principally as a freight forwarder. Menlo is a full-service contract logistics company that specializes in developing and managing complex distribution networks. The Other segment consists primarily of Road Systems, a trailer manufacturer, and Vector SCM, a joint venture formed with General Motors in December 2000. Vector SCM will serve as a logistics service provider to General Motors. VantageParts, the Company's former wholesale distributor of truck parts and supplies, was also included in the Other segment prior to the sale of its assets in May 1999. As described below under "Discontinued Operations", the sortation and transportation operations with the U.S. Postal Service are reflected as discontinued operations due to the termination of the Priority Mail contract, effective January 7, 2001. The results of Consolidated Freightways Corporation (CFC), the Company's former long-haul LTL motor carrier and now a separate publicly traded company, are also reported as discontinued operations due to the tax-free distribution of CFC's common stock (the Spin-off) to the Registrant's shareholders on December 2, 1996. The Company's shareholders received one share of CFC stock for every two shares of the Registrant's stock that were owned on November 15, 1996. In compliance with Statement of Financial Accounting Standards 131, "Disclosures about Segments of an Enterprise and Related Information", the Company discloses segment information in the manner in which the components are organized for making operating decisions, assessing performance and allocating resources. For financial information concerning the Company's business segments, refer to Note 14 of the Notes to Consolidated Financial Statements contained in the Company's 2000 Annual Report to Shareholders, which Note is incorporated herein by reference. PAGE 4 The operations of the Company are primarily conducted in the U.S. but to an increasing extent are conducted in foreign countries. For geographic group information, also refer to Note 14 of the Notes to Consolidated Financial Statements contained in the 2000 Annual Report to Shareholders, which Note is incorporated herein by reference. - --------------------- CONTINUING OPERATIONS - --------------------- Con-Way Transportation Services Segment - ----------------------------------- The Con-Way Transportation Services (Con-Way) reporting segment consists of Con-Way Transportation Services Inc. and its subsidiaries. Con-Way Regional Carriers Con-Way's primary business units are three regional LTL motor carriers that operate regional trucking networks. These regional LTL carriers principally serve core geographic territories with next-day and second-day service to manufacturing, industrial, commercial and retail business-to-business customers. Con-Way's regional carriers include Con-Way Central Express (CCX), which serves 25 states of the central and northeast U.S., Ontario and Quebec, Canada and Puerto Rico; Con-Way Southern Express (CSE), which serves a 12-state southern market from Texas to Virginia and Florida, and also operates in Puerto Rico and parts of Mexico; and Con-Way Western Express (CWX), which serves 13 western states and parts of Canada and Mexico. In 1998, Con-Way began offering coast-to-coast service in all 50 states by fully linking its three regional carriers. This permitted Con-Way's regional carriers to provide full service throughout the U.S. and to major cities in Canada. By offering joint services, the regional carriers can provide next-day and second-day freight delivery between their respective core territories utilizing existing infrastructure. The joint service allows each regional carrier to provide service into other regions on routes that were not previously serviced as part of its core territory. In February 1999, Con-Way began offering customers a new guaranteed delivery service option. The new service offers a 100% delivery guarantee for an additional charge to the customer. Con-Way NOW, Con-Way Integrated Services, and Con-Way Truckload Services Con-Way NOW specializes in time-definite shipments, such as replacement parts, medical equipment and other urgent shipments, where expedited delivery is critical. Con-Way NOW has delivery service in 48 states and parts of Canada. PAGE 5 In 1998, Con-Way created a new business, Con-Way Integrated Services (CIS), to provide logistics solutions to customers. CIS offers integrated supply chain services for shippers, using its own warehouses, its multi-modal carrier relationships, and alliances with leading supply chain software firms to offer semi- customized solutions configured to its customers' needs. In November 2000, CIS launched a new consulting company called Con-Way Business Solutions (CBS). The new company is designed to help small to medium-sized firms use technology to redefine traditional business processes. CBS will seek to provide a full range of supply chain management and Internet solutions to manufacturers, distributors and emerging Internet companies. Prior to the sale of most of its assets in August 2000, Con-Way Truckload Services (CWT) was a full-service, multi-modal truckload company that provided door-to-door delivery of truckload shipments. Although profitable, CWT was a small company in the truckload market. Con-Way's management believed that CWT's operation was not large enough to generate an acceptable level of profitability in the truckload segment of the trucking industry. Con-Way - Competitive Conditions The trucking industry is intensely competitive. Principal competitors of Con-Way include regional and national LTL companies. Competition in the trucking industry is based on freight rates, service, reliability, transit times and scope of operations. Emery Worldwide Segment - ----------------------- The Emery Worldwide reporting segment includes the combined accounts of Emery Air Freight Corporation and its subsidiaries (EAFC), a portion of the operations of Emery Worldwide Airlines, Inc. (EWA), and Emery Expedite!, Inc. The Registrant is the owner of 100% of the outstanding shares of these companies. EWA primarily provides nightly air delivery services for EAFC, and for Express Mail (a next-day delivery service) under a contract awarded in 1993 by the U.S. Postal Service (USPS). The operations of the Express Mail contract are reported in the Emery Worldwide business segment. In 1997, EWA was awarded a contract for the sortation and transportation of Priority Mail, a second- day delivery service, in the eastern United States. The operations of the Priority Mail contract are described below under "Discontinued Operations" due to the termination of the Priority Mail contract, effective January 7, 2001. Emery Air Freight Corporation Emery Air Freight Corporation provides both domestic and international air freight services. In North America, EAFC relies principally on the dedicated aircraft of EWA and EAFC's ground fleet to provide commercial door-to-door delivery for next- day, second-day and deferred shipments. Internationally, EAFC acts principally as a freight forwarder by providing door-to-door and airport-to-airport commercial services in over 200 countries. PAGE 6 Emery Air Freight Corporation - North America EAFC's hub-and-spoke system is centered at the Dayton, Ohio International Airport, where its leased air cargo facility (the Hub) and related support facilities are located. The Hub handles a wide variety of shipments, ranging from small packages to heavyweight cargo. While Emery's freight system is designed to handle parcels, packages and shipments of a variety of sizes and weights, its air freight operations are focused primarily on heavy air freight (defined as shipments of 70 pounds or more). The operation of the Hub in conjunction with EWA's airlift system contributes to EAFC's ability to maintain service reliability. A $75 million redesign and expansion of the Hub during 1999 and 2000 improved freight handling efficiency and increased throughput capacity by approximately 30%. In addition to the Dayton Hub, EAFC operates nine regional hubs, strategically located around the United States near Sacramento and Los Angeles, California; Dallas, Texas; Chicago, Illinois; Poughkeepsie, New York; Charlotte, North Carolina; Atlanta, Georgia; Nashville, Tennessee; and Orlando, Florida. EAFC provides services in North America through a system of sales offices and service centers. EAFC's door-to-door service within North America relies on the airlift system of EWA, supplemented with commercial airlines. The Company believes that customers are typically concerned with timely deliveries rather than the mode of transportation. Because the average cost of ground transportation is considerably less than air transportation, EAFC seeks to manage its costs by using trucks, rather than aircraft, to transport freight whenever possible, typically in connection with second-day and deferred deliveries. Emery Air Freight Corporation - International Internationally, EAFC operates primarily as an air freight forwarder using commercial airlines, while utilizing owned or leased aircraft only on a limited basis. (International business comprises shipments that either originate or terminate outside of the United States). EAFC provides services internationally through foreign subsidiaries, branches, service centers and agents. EAFC's expansion plans have been focused on international operations due to the expectation of greater opportunities in an expanding worldwide economy and the generally lower capital requirements of its variable-cost-based international operations. From 1995 to 2000, EAFC's international air freight revenue, including fuel surcharges, increased at an average annual rate of 11.8%, compared with a 3.4% average annual rate of increase in North American air freight revenue for the same period. For 2000, international airfreight revenue, including fuel surcharges was $1.21 billion, or 54% of Emery's total airfreight revenue, including fuel surcharges. In 1999, revenue from the Asian region was adversely impacted by a severe regional economic downturn that also affected other international regions. PAGE 7 Emery Worldwide Airlines In addition to providing aircraft for EAFC's commercial air freight operations, EWA uses its owned and leased aircraft to provide charter services and also to provide air delivery services for Express Mail (a next-day delivery service) under a ten-year contract with the USPS. The Express Mail contract was awarded to EWA in 1993 and expires in 2004. In addition, EWA was also awarded separate contracts to carry peak-season Christmas and other mail for the USPS. Emery recognized $258.2 million, $252.6 million and $214.0 million of revenue in 2000, 1999 and 1998, respectively, from Express Mail and other contracts for the USPS, excluding revenue from the Priority Mail contract, which is described under "Discontinued Operations". In January 2001, the USPS and Federal Express Corporation (FedEx) announced an exclusive agreement in which the USPS will pay FedEx to haul Express Mail and Priority Mail. In 2000, EWA recognized revenue of $229.1 million and operating income of $28.2 million from its 10 year contract with the USPS to transport Express Mail. Even though EWA has received no notice of termination of its Express Mail contract from the USPS, there can be no assurance that the USPS will renew its Express Mail contract with EWA when it expires in January 2004 or that the USPS will not terminate EWA's Express Mail contract prior to its scheduled expiration. Any termination or non-renewal of this contract will likely have a material adverse effect on the Company's results of operations. EWA filed a lawsuit in the U.S. Court of Federal Claims against the USPS alleging that its exclusive contract with FedEx violates the USPS' own procurement regulations, which require that all purchases over $10,000 ``must be made on the basis of adequate competition whenever feasible or appropriate,'' and that such a contract violates the USPS' regulatory requirement to provide ``fair and equal treatment'' to all potential suppliers. In March 2001, the U.S. Court of Federal Claims ruled against EWA by upholding the contract between the USPS and FedEx. EWA is considering its legal options and may appeal the court decision. If the USPS terminates the Express Mail contract with EWA before its scheduled expiration date, EWA believes that it is entitled to reimbursement of costs related to servicing the contract. Emery Expedite!, Emery Global Logistics and Emery Customs Brokerage To enhance the range of services it can offer to its customers and to provide further avenues for growth, Emery has established several variable-cost-based "strategic business units". These units include Emery Expedite!, a rapid response freight handling subsidiary providing door-to-door delivery of shipments in North America and overseas. Emery Global Logistics operates North American and international warehouses and distribution centers for a variety of customers. Emery Customs Brokerage (ECB) provides full service customs clearance regardless of mode or carrier. Emery - Competition The air freight industry is intensely competitive. Principal competitors of Emery include other integrated air freight carriers, air freight forwarders and international airlines and, to a lesser extent, trucking companies and passenger and cargo air carriers. Competition in the air freight industry is based on, among other things, freight rates, quality of service, reliability, transit times and scope of operations. PAGE 8 Emery - Strategic Initiatives and Outlook 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 chief financial officer and served as Emery's interim chief executive officer 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 requiring compensation that is commensurate with premium services. Internationally, management will focus on expanding its variable- cost-based operations and actively renegotiating airhaul rates in an effort to improve operating margins, mitigate higher fuel prices, and balance directional capacity. Emery's management believes that a slowing domestic economy in 2001 has contributed to a significant decline in pounds transported by EAFC's North American operations in the first two months of 2001 when compared to the same period last year. Emery's management is evaluating initiatives for increasing its return on capital. Certain of these initiatives include a reduction or revision to EAFC's North American freight service center network and/or EWA's fleet of aircraft. There can be no assurance that implementation of one or more of these initiatives will not have a material adverse effect on its results of operations and financial condition. Menlo Logistics Segment - ----------------------- The Menlo reporting segment consists of Menlo Logistics, Inc., which was founded in 1990, and its subsidiaries (Menlo). Menlo specializes in developing and managing complex national and global supply and distribution networks, including transportation management, dedicated contract warehousing and dedicated contract carriage. In serving its customers, Menlo uses and develops logistics optimization and customer order and shipment tracking software, and also provides real-time warehouse, transportation and order management systems. Menlo has developed the ability to link these systems with each other and with its customers' internal systems. The Company believes that Menlo's technology skills, operations processes, and design expertise with sophisticated logistics systems have established it as a leader in the field of contract logistics. Complex projects, which call upon Menlo's skills in managing carrier networks, dedicated vehicle fleets and automated warehouses as an integrated system, recently have been the fastest growing segment of Menlo's business. PAGE 9 The Company believes that three industry trends have driven Menlo's growth. First, the Company believes that a number of businesses are increasingly evaluating their overall logistics costs, including transportation, warehousing and inventory carrying costs. Second, the Company believes that outsourcing of non-core services, such as distribution, has become more commonplace with many businesses. Finally, the Company believes that the ability to access information through computer networks has increased the value of capturing real-time logistics information to track inventories, shipments and deliveries. Menlo believes that its ability to provide solutions to intricate distribution issues for large companies with complex supply chains has helped Menlo to secure new projects and expand services for existing customers. Compensation from Menlo's customers takes different forms, including cost-plus, gain- sharing, per-piece, fixed-dollar and consulting fees. In most cases, customers reimburse Menlo's customer-specific start-up and development costs. Menlo seeks to limit the financial commitments it undertakes by typically requiring that any facility or major equipment lease that it enters into on behalf of a customer must be assumed by the customer upon termination of the contract with Menlo. However, relatively few relationships between Menlo and its customers have been terminated. While the Company seeks to take advantage of cross-business synergies whenever possible, Menlo is operated as an independent business segment within the Company and not as a conduit through which transportation business is routinely referred to Con-Way or Emery. The Company considers Menlo's independence from the Company's other primary business units as essential to Menlo's business. Menlo - Competition Menlo operates in the relatively new but intensely competitive third-party logistics (3PL) industry. Competition is based largely on computer system skills and the ability to rapidly implement logistics solutions. Competitors in the 3PL industry are numerous and include domestic and foreign logistics companies and the logistics arms of integrated transportation companies; however, Menlo primarily competes against a limited number of major competitors that have resources sufficient to service large logistics contracts. Other Segment - ------------- The Other segment consists primarily of Road Systems, a trailer manufacturer, and Vector SCM, a joint venture described below. VantageParts, the Company's former wholesale distributor of truck parts and supplies, was also included in the Other segment prior to the sale of its assets in May 1999. Road Systems and VantageParts A majority of the revenue from Road Systems and, prior to the sale of its assets in May 1999, VantageParts, was from sales to other subsidiaries of the Company and to CFC. Road Systems primarily manufactures and rebuilds trailers, converter dollies and other transportation equipment. PAGE 10 Prior to the sale of its assets in May 1999, VantageParts served as a distributor and remanufacturer of vehicle component parts and accessories to the heavy-duty truck and trailer industry, as well as the maritime, construction and aviation industries. Vector SCM General Motors (GM) and CNF announced in December 2000 the formation of a joint venture company called Vector SCM (supply chain management). Under the terms of the joint venture agreement, Vector SCM, which is headquartered in Novi, Michigan, is expected to become GM's lead logistics service provider worldwide. Vector SCM was established to reduce GM's supply chain costs and improve GM's supply chain management by bringing increased speed and reliability to the shipment of parts to GM's manufacturing plants and its vehicles to dealers. With more dependable deliveries, GM's goal is to build a vehicle to schedule when necessary and deliver that vehicle as promised to the consumer. Under the terms of the joint venture agreement, the transition of logistics services and management to Vector SCM is expected to occur over three years. The initial transition of logistics services in North America is expected to include inbound production material, vehicle distribution, premium transportation and international export/import. Vector SCM implementation is expected to expand to other regions in varying degrees in accordance with regional business requirements. Under the joint venture agreement, CNF would share in any savings realized by GM as a result of reductions in its supply chain costs. The Vector SCM joint venture is included in the Company's financial statements using the equity method of accounting. - ----------------------- DISCONTINUED OPERATIONS - ----------------------- On November 3, 2000, Emery Worlwide Airlines (EWA) and the U.S. Postal Service (USPS) announced an agreement to terminate their contract for the transportation and sortation of Priority Mail. The contract was originally scheduled to terminate in the first quarter of 2002, subject to renewal options. Under terms of the agreement, the USPS on January 7, 2001 assumed operating responsibility for services covered under the contract, except certain air transportation and related services. As a part of the termination agreement, EWA agreed to provide certain air transportation and related services to the USPS for a transition period of not less than ninety days. In January 2001, EWA received notification from the USPS of its intention to terminate the requirement for EWA to provide transition air transportation and related services, effective April 23, 2001. The USPS has agreed to reimburse EWA 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 January 7, 2001, the USPS paid EWA $60 million toward the termination costs. The termination agreement provides for this provisional payment to 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. We believe that contract termination costs incurred by EWA are reimbursable under the termination agreement and do not exceed the Termination Liability Cap. However, there can be no assurance that all termination costs incurred by Emery will be recovered. PAGE 11 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, and EWA has initiated litigation in the U.S. Court of Federal Claims for that purpose. These claims are to recover costs of operating under the contract as well as profit and interest thereon. At December 31, 2000, the Company's consolidated financial statements included $176.2 million of unbilled revenue with respect to the Priority Mail contract. (Unbilled revenue at December 31, 2000 reflects payments totaling $102.1 million received from the USPS in October 2000). As described in Note 2 of the Notes to Consolidated Financial Statements included in the 2000 Annual Report to Shareholders, which Note is incorporated by reference, unbilled revenue represents the accrual of revenue sufficient only to recover EWA's costs of operating under the Priority Mail contract and therefore does not include either profit or interest on unbilled revenue or profit. Any unbilled revenue that EWA does not recover would be written off and reflected in operating results for discontinued operations in the period in which the write-off occurs. Any amount of litigation award in excess of unbilled revenue would be reflected as income from discontinued operations in the then current period. The Company believes that its position with respect to claims for underpayment under the Priority Mail contract is reasonable and well founded; however, there can be no assurance that litigation will result in an award sufficient to recover unbilled revenue recognized under the contract. The government is investigating matters relating to the Priority Mail contract, and EWA has received subpoenas for documents from a grand jury in Massachusetts and the USPS Inspector General. Accordingly, the Company can give no assurance that matters relating to the Priority Mail contract with the USPS will not have a material adverse effect on its financial condition or results of operations. As a result of the contract termination, the results of operations of the Company's Priority Mail contract have been segregated and classified as discontinued operations in the Company's financial statements included in the 2000 Annual Report to Shareholders, which financial statements are incorporated by reference. GENERAL - ------- Employees At December 31, 2000, the Company's continuing operations had approximately 28,700 regular full-time employees. Regular full- time employees by segment were as follows: Con-Way, 15,300; Emery Worldwide, 10,100; Menlo, 2,100; Other segment, 1,200. Of the 1,200 regular full-time employees included in the Other segment, approximately 900 were employed by CNF in executive, administrative and technology positions to support the Company's operating subsidiaries. At December 31, 2000, the discontinued Priority Mail operations had approximately 2,200 regular full- time employees. PAGE 12 Seasonality The Company operates in industries that are affected directly by general economic conditions and seasonal fluctuations, both of which affect demand for transportation services. In a typical year for the trucking and air freight industries, the months of September and October usually have the highest business levels while the months of January and February usually have the lowest business levels. Regulation - Ground Transportation The motor carrier industry is subject to federal regulation by the Federal Highway Administration (FHWA) and the Surface Transportation Board (STB), both of which are units of the United States Department of Transportation (DOT). The FHWA performs certain functions inherited from the Interstate Commerce Commission (ICC) relating chiefly to motor carrier registration, cargo and liability insurance, extension of credit to motor carrier customers, and leasing of equipment by motor carriers from owner-operators and also enforces comprehensive trucking safety regulations. The STB has authority to resolve certain types of pricing disputes and authorize certain types of intercarrier agreements under jurisdiction inherited from the ICC. At the state level, federal preemption of economic regulation does not prevent the states from regulating motor vehicle safety on their highways. In addition, federal law allows all states to impose insurance requirements on motor carriers conducting business within their borders, and empowers most states to require motor carriers conducting interstate operations through their territory to make annual filings verifying that they hold appropriate registrations from FHWA. Motor carriers also must pay state fuel taxes and vehicle registration fees, which normally are apportioned on the basis of mileage operated in each state. Regulation - Air Transportation The air transportation industry is subject to extensive regulation by various federal, state and foreign governmental entities. The industry is subject to federal regulation under the Federal Aviation Act of 1958, as amended (Aviation Act) and regulations issued by the DOT pursuant to the Aviation Act. EAFC, as an air freight forwarder, and EWA, as an airline, are subject to different regulations. Air freight forwarders are exempted from most DOT economic regulations and are not subject to Federal Aviation Administration (FAA) safety regulations, except security-related rules. Airlines such as EWA are subject to, among other things, maintenance, operating and other safety- related regulations by the FAA, including Airworthiness Directives promulgated by the FAA which require airlines such as EWA to make modifications to aircraft. PAGE 13 During recent years, operations at several airports have been subject to restrictions or curfews on arrivals or departures during certain night-time hours designed to reduce or eliminate noise for surrounding residential areas. None of these restrictions has materially affected EWA's or EAFC's operations. If such restrictions were to be imposed with respect to the airports at which EWA's or EAFC's activities are centered (particularly EAFC's major Hub at the Dayton International Airport), and no alternative airports were available to serve the affected areas, there could be a material adverse effect on EWA's or EAFC's operations. Under applicable law, the FAA is authorized to establish aircraft noise standards and the administrator of the Environmental Protection Agency is authorized to issue regulations setting forth standards for aircraft emissions. The Company believes that its present fleet of owned, leased and chartered aircraft is operating in substantial compliance with currently applicable noise and emission laws. Regulation - Environmental The Company is subject to stringent laws and regulations that (i) govern activities or operations that may have adverse environmental effects such as discharges to air and water, as well as handling and disposal practices for solid and hazardous waste, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous materials. In particular, under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities (including liabilities resulting from lawsuits brought by private litigants) relating to its operations and properties. Environmental liabilities relating to the Company's properties may be imposed regardless of whether the Company leases or owns the properties in question and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant, and also may be imposed with respect to properties which the Company may have owned or leased in the past. The Company's operations involve the storage, handling and use of diesel and jet fuel and other hazardous substances. In particular, the Company is subject to stringent environmental laws and regulations dealing with underground fuel storage tanks and the transportation of hazardous materials. The Company has been designated a Potentially Responsible Party (PRP) by the EPA with respect to the disposal of hazardous substances at various sites. The Company expects that its share of the clean-up costs will not have a material adverse effect on the Company's financial position or results of operations. PAGE 14 ITEM 2. PROPERTIES - --------------------- CONTINUING OPERATIONS - --------------------- Con-Way Transportation Services Segment - --------------------------------------- As of December 31, 2000, Con-Way operated 333 freight service centers, of which 119 were owned and 214 were leased. The service centers, which are strategically located to cover the geographic areas served by Con-Way, represent physical buildings and real property with dock, office and/or shop space ranging in size from approximately 1,000 to 96,000 square feet. These facilities do not include meet-and-turn points, which generally represent small owned or leased real property with no physical structures. In addition to freight service centers operated by Con-Way's regional carriers, Con-Way Integrated Services leases 5 warehouses near Mira Loma, California; Chicago, Illinois; Atlanta, Georgia; Houston, Texas; and Dallas Texas. The warehouses range in size from approximately 50,000 to 240,000 square feet. The total number of trucks, tractors and trailers utilized in the Con-Way operations at December 31, 2000 was approximately 27,700. Emery Worldwide Segment - ----------------------- Emery's hub system is centered at the Dayton, Ohio International Airport (the Hub), where its leased air cargo facility and related support facilities are located. The Hub, which encompasses approximately 800,000 square feet, was financed by City of Dayton, Ohio revenue bonds, of which $108 million in principal amount was outstanding as of December 31, 2000. The Hub and related property secures the industrial revenue bonds. As of December 31, 2000, EAFC operated 130 freight facilities in North America, including service centers and logistics warehouses, of which 15 were owned and 115 were leased. The freight service centers are strategically located to cover the geographic areas served by Emery. These facilities range in size from approximately 1,000 to 112,000 square feet of office, dock and/or shop space. At December 31, 2000, Emery operated approximately 100 leased facilities in international locations, including service centers, logistics warehouses and office space. At December 31, 2000, Emery's aircraft fleet included 74 aircraft, of which 25 were owned and 49 were leased. In addition to owned and leased aircraft, Emery "wet leases" aircraft on a short-term basis to supplement nightly capacity and to provide feeder services. The wet lease agreements call for the owner- operator to provide the aircraft, flight crews, maintenance, insurance, and other supplies required to operate the aircraft. The number of aircraft operating under wet leases can vary depending on seasonal demand. PAGE 15 As of December 31, 2000, 2 aircraft were dedicated to the Priority Mail operations and 19 of the aircraft reported above were designated for shared use with the Priority Mail operation. These aircraft are used primarily at night in EWA's commercial non-Priority Mail freight operations. However, prior to termination of the Priority Mail contract, effective January 7, 2001, the 19 designated aircraft were also used in "daylight turns" of aircraft for the transportation of Priority Mail. As of December 31, 2000, 25 aircraft were dedicated to service the Express Mail contract with the USPS. Operations related to the Express Mail contract are included in the Emery Worldwide segment and the Priority Mail operations are described under "Discontinued Operations". At December 31, 2000, EAFC operated approximately 1,700 trucks, tractors and trailers, as well as equipment provided by its agents. Menlo Logistics Segment - ----------------------- As of December 31, 2000, Menlo operated 64 warehouses. Of these warehouses operated by Menlo, 25 were leased by Menlo and 39 were leased or owned by Menlo's clients. The 25 facilities leased by Menlo ranged in size from approximately 12,000 to 390,000 square feet. At December 31, 2000, Menlo operated approximately 500 trucks, tractors and trailers. Other Segment - ------------- Principal properties of the Other segment include the Company's leased executive offices in Palo Alto, California, and its Administrative and Technology (AdTech) Center in Portland, Oregon. As of December 31, 2000, the Company's administrative and technology employees were located at the Company-owned 125,000 square-foot AdTech Center and in several other nearby leased office facilities. At January 31, 2001, the Company had substantially completed a new 250,000 square-foot building that will expand the existing AdTech campus and will eliminate the need to lease nearby office space. - ----------------------- DISCONTINUED OPERATIONS - ----------------------- As described above in Item 1, "Discontinued Operations", 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. Reimbursement by the USPS is subject to the Termination Liability Cap and the terms discussed above. PAGE 16 Contract-related equipment at December 31, 2000 included approximately 900 trucks, tractors and trailers. As discussed above under "Emery Worldwide Segment", as of December 31, 2000, 2 aircraft in EWA's fleet were dedicated to the Priority Mail operations and 19 aircraft were designated for shared use with the Priority Mail operation prior to termination of the Priority Mail contract, effective January 7, 2001. As described above in Item 1, "Discontinued Operations", EWA agreed to provide certain air transportation and related services to the USPS until April 23, 2001. The 2 aircraft in EWA's fleet that were dedicated to the Priority Mail operations prior to termination of the Priority Mail contract, effective January 7, 2001, are expected to be utilized in providing transition air transportation and related services to the USPS until April 23, 2001. Thereafter, these aircraft are expected to be used in EAFC's commercial air freight operations. Operating lease commitments at December 31, 2000 were comprised primarily of leases on 10 Priority Mail Processing Centers, which are large sortation facilities located in the eastern United States. Under the termination agreement described above, the USPS assumed these leases on January 7, 2001. ITEM 3. LEGAL PROCEEDINGS Certain legal proceedings of the Company are summarized in Note 13 of the Notes to Consolidated Financial Statements contained in the 2000 Annual Report to Shareholders, which Note is incorporated herein by reference. Discussion of environmental matters is presented in Item 1. The Department of Transportation, through its Office of Inspector General, and the Federal Aviation Administration 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. The Company is unable to predict the outcome of this investigation. EWA has received subpoenas issued by a grand jury in Massachusetts and the USPS Inspector General for documents relating to the Priority Mail contract. EWA has provided, or is in the process of providing, the documents. On February 16, 2000, a DC-8 cargo aircraft operated by EWA personnel crashed shortly after take-off from Mather Field, near Sacramento, California. The crew of three was killed. 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 investigation or the effect it may have on the Company. Emery, EWA and the Company have been named as defendants in wrongful death lawsuits brought by the families of the three deceased crew members, seeking compensatory and punitive damages. Emery, EWA and the Company also may be subject to other claims and proceedings relating to the crash, which could include other private lawsuits seeking monetary damages and governmental proceedings. Although Emery, EWA and the Company maintain insurance that is intended to cover claims that may arise in connection with an airplane crash, there can be no assurance that the insurance will in fact be adequate to cover all possible types of claims. In particular, any claims for punitive damages or any sanctions resulting from possible governmental proceedings would not be covered by insurance. As a domestic airline, EWA operates under a certificate issued by the Federal Aviation Administration ("FAA"). As such, EWA is subject to maintenance, operating and other safety-related regulations promulgated by the FAA, and routinely undergoes FAA inspections. Based on recent inspections, the FAA has identified a number of instances where it believes EWA has failed to comply with applicable regulations, and in some cases has issued notices of proposed civil penalties. EWA disagrees with certain of the FAA's findings, and is engaged in discussions with the FAA to try to resolve the matters in dispute. However, there can be no assurance that EWA will be able to reach agreement with the FAA on all matters in dispute, and if no agreement is reached, the FAA may seek to impose sanctions on EWA. The FAA has the authority to seek civil and criminal penalties and to suspend or revoke an airline's operating certificate. PAGE 17 Emery and the Company have been named as defendants in a lawsuit arising from a dispute with an aircraft lessor regarding the return of six McDonnell Douglas DC-8 aircraft following lease termination. Plaintiff is seeking damages in the amount of approximately $16 million, in addition to holdover rent and interest. Emery and the Company dispute the plaintiff's claims, and intend to vigorously defend themselves against the lawsuit. Con-Way and the Company have been named as defendants in a class action lawsuit filed in Federal District Court in San Francisco for alleged violations of federal and state wage and hour laws regarding classification of freight operations supervisors for purposes of overtime pay. No motion has yet been made for certification of the class. Because the lawsuit is at a preliminary stage, the Company is unable to predict the outcome of this litigation or the effect it may have on Con-Way or the Company ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS Not applicable. PAGE 18 PART II ------- Information for Items 5 through 8 of Part II of this Report appears in the Company's 2000 Annual Report to Shareholders as indicated below and those pages are incorporated herein by reference. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed for trading on the New York and Pacific Stock Exchanges under the symbol "CNF". Page Number of Annual Report to Shareholders ---------------------- Range of common stock prices for each of the quarters in 2000 and 1999 38 Common shareholders of record at December 31, 2000 40 Dividends paid on common stock for each of the quarters in 2000 and 1999 38 ITEM 6. SELECTED FINANCIAL DATA Selected Consolidated Financial Data 40 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 Recent Developments On March 14, 2001, the Company announced that it expected first- quarter 2001 earnings to be below those of the first quarter of 2000. The Company estimates that diluted earnings per share in the first quarter of 2001 will be in the range of $0.22 to $0.27. The Company's core transportation businesses are each experiencing substantial tonnage and revenue declines as a result of a continuing slowdown of the U.S. economy. The Company believes that the slowdown was first noted late in the third quarter of 2000 and has become more pronounced in each successive month through February of 2001. March is traditionally the Company's strongest month of the first quarter; however, the decline in operating results for March 2001 compared to March 2000 has been consistent with lower operating results for January and February of 2001 when compared to the same months last year. The Company expects that Con-Way's operating income in the first quarter of 2001 will decline from operating income in the same quarter last year. Tonnage shipped by Con-Way in the 2001 first quarter is expected to be lower than last year's first quarter, with an estimated percentage decline from 3 to 7 percent. The Company expects that Emery will incur an operating loss in the first quarter of 2001. The Company believes that Emery's domestic airfreight volumes in the first quarter of 2001 will be lower than the same quarter last year due to continued and significant weakness in the automotive and technology sectors, with an estimated percentage decline from 15 to 19 percent. Emery's international airfreight volumes in the first quarter of 2001 are expected to be essentially unchanged from the same quarter last year. PAGE 19 The Company expects that Menlo's operating income in the first quarter of 2001 will be slightly higher than the same quarter last year. Management has initiated cost control programs throughout the Company and Emery, in particular, is continuing its restructuring program to bring its size in line with lower business levels. Management also believes that weather conditions adversely affected revenues and costs at Emery and Con-Way. Certain statements included or incorporated by reference herein constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties. Any such forward-looking statements contained or incorporated by reference herein should not be relied upon as predictions of future events. All statements other than statements of historical fact are forward-looking statements including any projections of earnings, revenues, tonnage, volumes, income or other financial or operating items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, statements of estimates and belief and any statements or assumptions underlying the foregoing. 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 there can be no assurance that they will be realized. In that regard, the following factors, among others and in addition to the matters discussed below and elsewhere in this document and in documents incorporated by reference herein, could cause actual results and other matters to differ materially from those in such forward- looking statements: changes in general business and economic conditions, including lower business levels that the Company has experienced during the first quarter of 2001 and which the Company expects will continue; increasing domestic and international competition and pricing pressure; changes in fuel prices, particularly in light of recent fuel price increases; uncertainty regarding EWA's claims under its former Priority Mail contract with the USPS described herein or incorporated by reference; uncertainties regarding EWA's existing Express Mail contract with the USPS; labor matters, including changes in labor costs, renegotiations of labor contracts and the risk of work stoppages or strikes; enforcement of and changes in governmental regulations; environmental and tax matters, including claims made by the Internal Revenue Service with respect to the aircraft maintenance tax matters discussed in documents incorporated by reference; the Department of Transportation investigation relating to Emery Worldwide's handling of hazardous materials; the February 2000 crash of an EWA aircraft and related litigation; and matters relating to the spin-off of Consolidated Freightways Corporation (CFC). In that regard, the Company is or may be subject to substantial liabilities with respect to certain matters relating to CFC's business and operations, including, without limitation, guarantees of certain indebtedness of CFC and liabilities for employment-related, tax and environmental matters, including the tax matters discussed in documents incorporated by reference. Although CFC is, in general, either the primary or secondary obligor or jointly and severally liable with the Company with respect to these matters, a failure to pay or other default by CFC with respect to the obligations as to which the Company is or may be, or may be perceived to be, liable, whether because of CFC successfully contesting their obligation to reimburse the Company or otherwise, could lead to substantial claims against the Company. As a result of the foregoing, no assurance can be given as to future results of operations or financial condition. PAGE 20 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Number of Annual Report to Shareholders ---------------------- Consolidated Balance Sheets 20 Statements of Consolidated Income 22 Statements of Consolidated Cash Flows 23 Statements of Consolidated Shareholders' Equity 24 Notes to Consolidated Financial Statements 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PAGE 21 PART III -------- Information for Items 10 through 12 of Part III of this Report appears in the Proxy Statement for the Company's 2000 Annual Meeting of Shareholders to be held on April 24, 2001, as indicated below and that information on those pages is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Executive Officers of the Company, their ages at December 31, 2000, and their applicable business experience are as follows: Gregory L. Quesnel, 52, President and Chief Executive Officer of the Company. Mr. Quesnel joined the CNF organization as Director of Accounting in 1975, following several years of professional experience with major corporations in the petroleum and wood products industries. Mr. Quesnel advanced through increasingly responsible positions and in 1986 was promoted to the top financial officer position at the Company's largest subsidiary. In 1990, Mr. Quesnel was elected Vice President and Treasurer of CNF; in 1991, he was elected Senior Vice President and Chief Financial Officer; and he was promoted to Executive Vice President and Chief Financial Officer in 1994. As part of a planned succession, Mr. Quesnel was elected President and Chief Operating Officer in July 1997. In May 1998, Mr. Quesnel was named President and Chief Executive Officer of the Company. At that time, he was also elected as a member of the CNF Board of Directors. Mr. Quesnel is a member of the Financial Executives Institute, the California Business Roundtable, and the Conference Board. He also serves as a member of the Executive Committee of the Bay Area Council of the Boy Scouts of America. Mr. Quesnel earned a bachelor's degree in finance from the University of Oregon and holds a master's degree in business administration from the University of Portland. Mr. Quesnel is a member of the Executive and Director Affairs Committees of the Board. Gerald L. Detter, 56, President and Chief Executive Officer of Con-Way Transportation Services and Senior Vice President of the Company. Mr. Detter joined the former Consolidated Freightways Corporation of Delaware (CFCD) in 1964 as a dockman and advanced through several positions of increasing responsibility to become Division Manager in Detroit, Michigan in 1976. In 1982, he was named the first President and Chief Executive Officer of Con-Way Central Express. In 1997, Mr. Detter was named to his current position. Chutta Ratnathicam, 53, Chief Executive Officer of Emery Worldwide and Senior Vice President of the Company. Mr. Ratnathicam joined the Company in 1977 as a corporate auditor and following several increasingly responsible positions was named Vice President Internal Audit for the Company in 1989. In 1991, he was promoted to Vice President-International for Emery. In 1997, Mr. Ratnathicam was named Senior Vice President and Chief Financial Officer of the Company. In September 2000, Mr. Ratnathicam was named to his current position, succeeding Roger Piazza, who retired. PAGE 22 Eberhard G.H. Schmoller, 57, Senior Vice President, General Counsel and Corporate Secretary of the Company. Mr. Schmoller joined CFCD in 1974 as a staff attorney and in 1976 was promoted to CFCD Assistant General Counsel. In 1983, he was appointed Vice President and General Counsel of the former CF AirFreight and assumed the same position with Emery after the acquisition in 1989. Mr. Schmoller was named Senior Vice President and General Counsel of the Company in 1993. John H. Williford, 44, President and Chief Executive Officer of Menlo Logistics and Senior Vice President of the Company. Mr. Williford joined the Company in 1981 as an Economics/Senior Marketing Analyst. In 1984, he was named Director of Marketing for the Company's international operations and was later appointed Director of Marketing for the Company. Since its inception in 1990, Mr. Williford has been the principal executive in charge of Menlo Logistics, first as General Manager and then as President and Chief Executive Officer. In 1998, Mr. Williford was named Senior Vice President of the Company. Information regarding members of the Company's Board of Directors is presented on pages 3 through 9, inclusive, of the Company's Proxy Statement dated March 8, 2001 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Page Number of Proxy Statement --------------- Compensation Information 14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Stock Ownership - Directors and Executive Officers 10 Stock Ownership - Significant shareholders 27 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PAGE 23 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The consolidated financial statements of the Company, together with the Notes to Consolidated Financial Statements, and the report thereon of Arthur Andersen LLP, dated January 26, 2001, are presented on pages 20 through 39 of the Company's 2000 Annual Report to Shareholders and are incorporated herein by reference. With the exception of the information incorporated by reference in Items 1, 3, 5, 6, 7, 7A, 8 and 14 hereof, the Company's 2000 Annual Report to Shareholders is not to be deemed as filed as part of this Report. 2. FINANCIAL STATEMENT SCHEDULE Page Number in Form 10-K ------------ Report of Independent Public Accountants on Financial Statement Schedule S-1 Schedule II - Valuation and Qualifying Accounts S-2 All other financial statement schedules have been omitted because they are not applicable or the required information is included in the consolidated financial statements, or the notes thereto, contained in the Company's 2000 Annual Report to Shareholders and incorporated herein by reference. 3. EXHIBITS Exhibits are being filed in connection with this Report and are incorporated herein by reference. The Exhibit Index on pages E-1 through E-6 is incorporated herein by reference. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended December 31, 2000. PAGE 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. CNF TRANSPORTATION INC. (Registrant) March 26, 2001 /s/ Gregory L. Quesnel --------------------------------- President, Chief Executive Officer and Interim Chief Financial Officer PAGE 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. March 26, 2001 /s/ Donald E. Moffitt --------------------------------- Donald E. Moffitt Chairman of the Board March 26, 2001 /s/ Gregory L. Quesnel --------------------------------- Gregory L. Quesnel President, Chief Executive Officer and Director March 26, 2001 /s/ Robert Alpert --------------------------------- Robert Alpert, Director March 26, 2001 /s/ Richard A. Clarke --------------------------------- Richard A. Clarke, Director March 26, 2001 --------------------------------- Margaret G. Gill, Director March 26, 2001 /s/ Robert Jaunich II --------------------------------- Robert Jaunich II, Director March 26, 2001 /s/ W. Keith Kennedy, Jr. --------------------------------- W. Keith Kennedy, Jr., Director March 26, 2001 /s/ Richard B. Madden --------------------------------- Richard B. Madden, Director March 26, 2001 /s/ Michael J. Murray --------------------------------- Michael J. Murray, Director March 26, 2001 /s/ Robert D. Rogers --------------------------------- Robert D. Rogers, Director March 26, 2001 /s/ William J. Schroeder --------------------------------- William J. Schroeder, Director March 26, 2001 /s/ Robert P. Wayman --------------------------------- Robert P. Wayman, Director S-1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 2-81030, 33-52599, 33-60619, 33- 60625, 33-60629, 333-26595, 333-30327, 333-48733, 333-56667, 333- 92399, 333-36180 and 333-54558. /s/Arthur Andersen LLP ---------------------- ARTHUR ANDERSEN LLP San Francisco, California March 26, 2001 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Shareholders and Board of Directors of CNF Transportation Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in CNF Transportation Inc.'s 2000 Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 2001. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The Schedule II--Valuation and Qualifying Accounts on page S-2 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP ---------------------- ARTHUR ANDERSEN LLP San Francisco, California January 26, 2001 S-2 SCHEDULE II CNF TRANSPORTATION INC. VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 2000 (In thousands) DESCRIPTION - ----------- ALLOWANCE FOR DOUBTFUL ACCOUNTS ADDITIONS ------------------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER DEDUCTIONS END OF PERIOD EXPENSES ACCOUNTS (a) PERIOD --------- -------- -------- ---------- ------- 2000 $26,163 $9,070 $ - $(13,511) $21,722 1999 $21,098 $15,229 $ - $(10,164) $26,163 1998 $20,155 $11,050 $ - $(10,107) $21,098 (a) Accounts written off net of recoveries. ALLOWANCE FOR COSTS OF DISCONTINUED OPERATIONS ADDITIONS ------------------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER DEDUCTIONS END OF PERIOD EXPENSES ACCOUNTS PERIOD --------- -------- -------- ---------- ------- 2000 $ - 22,144 $ - $(513) $21,631 E-1 INDEX TO EXHIBITS ITEM 14(a)(3) Exhibit No. - ----------- (3) Articles of incorporation and by-laws: 3.1 CNF Transportation Inc. Certificate of Incorporation,as amended. (Exhibit 4(a) to the Company's registration statement on Form S-3 dated May 6, 1997.*) 3.2 CNF Transportation Inc. By-laws, as amended September 28, 1998 (Exhibit 4(b) to the Company's registration statement on Form S-3 dated November 10, 1998.*). (4) Instruments defining the rights of security holders, including debentures: 4.1 Certificate of Designations of the Series B Cumulative Convertible Preferred Stock. (Exhibit 4.1 as filed on Form SE dated May 25, 1989*) 4.2 Indenture between the Registrant and Bank One, Columbus, NA, as successor trustee, with respect to 9-1/8% Notes Due 1999, Medium-Term Notes, Series A and 7.35% Notes due 2005. (Exhibit 4.1 as filed on Form SE dated March 20, 1990*) 4.3 Indenture between the Registrant and The First National Bank of Chicago Bank, trustee, with respect to debt securities. (Exhibit 4(d) as filed on Form S-3 dated June 27, 1995*) 4.4 Indenture between the Registrant and Bank One, Columbus, NA, trustee, with respect to subordinated debt securities. (Exhibit 4(e) as filed on Form S-3 dated June 27, 1995*) 4.5 Form of Security for 7.35% Notes due 2005 issued by Consolidated Freightways, Inc. (Exhibit 4.4 as filed on Form S-4 dated June 27, 1995*) 4.6 Declaration of Trust of the Trust (Exhibit 4(k) to the Company's Amendment 1 to Form S-3 dated May 30, 1997*) 4.7 Form of Amended and Restated Declaration of Trust of the Trust, including form of Trust Preferred Security. (Exhibit 4(l) to the Company's Amendment 1 to Form S-3 dated May 9, 1997*) 4.8 Form of Guarantee Agreement with respect to Trust Preferred Securities. (Exhibit 4(m) to the Company's Amendment 1 to Form S- 3 dated May 30, 1997*) E-2 4.9 Form of Indenture between CNF Transportation Inc. and Bank One Trust Company, National Association (Exhibit 4(d)(i) to the Company's Form 8-K dated March 3, 2000*). 4.10 Form of Security for 8 7/8% Notes due 2010 issued by CNF Transportation Inc. (Exhibit 4(i) to the Company's Form 8-K dated March 3, 2000*). Instruments defining the rights of security holders of long-term debt of CNF Transportation Inc., and its subsidiaries for which financial statements are required to be filed with this Form 10-K, of which the total amount of securities authorized under each such instrument is less than 10% of the total assets of CNF Transportation Inc. and its subsidiaries on a consolidated basis, have not been filed as exhibits to this Form 10-K. The Company agrees to furnish a copy of each applicable instrument to the Securities and Exchange Commission upon request. (10) Material contracts: 10.1 Consolidated Freightways, Inc. Long-Term Incentive Plan of 1988 as amended through Amendment 3. (Exhibit 10.2 as filed on Form SE dated March 25, 1991*#) 10.2 Consolidated Freightways, Inc. Stock Option Plan of 1988 as amended. (Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1987 as amended in Form S-8 dated December 16, 1992*#) 10.3 Emery Air Freight Plan for Retirees, effective October 31, 1987. (Exhibit 4.23 to the Emery Air Freight Corporation Quarterly Report on Form 10-Q dated November 16, 1987**) 10.4 Consolidated Freightways, Inc. Common Stock Fund (formerly Emery Air Freight Corporation Employee Stock Ownership Plan, as effective October 1, 1987 ("ESOP"). (Exhibit 4.33 to the Emery Air Freight Corporation Annual Report on Form 10-K dated March 28,1988**) 10.5 Employee Stock Ownership Trust Agreement, dated as of October 8, 1987, as amended, between Emery Air Freight Corporation and Arthur W. DeMelle, Daniel J. McCauley and Daniel W. Shea, as Trustees under the ESOP Trust. (Exhibit 4.34 to the Emery Air Freight Corporation Annual Report on Form 10-K dated March 28, 1988**) E-3 10.6 Amended and Restated Subscription and Stock Purchase Agreement dated as of December 31, 1987 between Emery Air Freight Corporation and Boston Safe Deposit and Trust Company in its capacity as successor trustee under the Emery Air Freight Corporation Employee Stock Ownership Plan Trust ("Boston Safe"). (Exhibit B to the Emery Air Freight Corporation Current Report on Form 8-K dated January 11, 1988**) 10.7 Supplemental Subscription and Stock Purchase Agreement dated as of January 29, 1988 between Emery Air Freight Corporation and Boston Safe. (Exhibit B to the Emery Air Freight Corporation Current Report on Form 8-K dated February 12, 1988**) 10.8 Trust Indenture, dated as of November 1, 1988, between City of Dayton, Ohio and Security Pacific National Trust Company (New York), as Trustee and Bankers Trust Company, Trustee. (Exhibit 4.1 to Emery Air Freight Corporation Current Report on Form 8-K dated December 2, 1988**) 10.9 Bond Purchase Agreement dated November 7, 1988, among the City of Dayton, Ohio, the Emery Air Freight Corporation and Drexel Burnham Lambert Incorporated. (Exhibit 28.7 to the Emery Air Freight Corporation Current Report on Form 8-K dated December 2, 1988**) 10.10 Lease agreement dated November 1, 1988 between the City of Dayton, Ohio and Emery Air Freight Corporation. (Exhibit 10.1 to the Emery Air Freight Corporation Annual Report on Form 10-K for the year ended December 31, 1988**) 10.11 $350 million Amended and Restated Credit Agreement dated November 21, 1996 among Consolidated Freightways, Inc. and various financial institutions. (Exhibit 10.18 to the Company's Form 10-K for the year ended December 31, 1996*). 10.12 Official Statement of the Issuer's Special Facilities Revenue Refunding Bonds, 1993 Series E and F dated September 29, 1993 among the City of Dayton, Ohio and Emery Air Freight Corporation. (Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended September 30, 1993*). 10.13 Trust Indenture, dated September 1, 1993 between the City of Dayton, Ohio and Banker's Trust Company as Trustee. (Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended September 30, 1993*). E-4 10.14 Supplemental Lease Agreement dated September 1, 1993 between the City of Dayton, Ohio, as Lessor, and Emery Air Freight Corporation, as Lessee. (Exhibit 10.3 to the Company's Form 10-Q for the quarterly period ended September 30, 1993*). 10.15 Supplemental Retirement Plan dated January 1, 1990. (Exhibit 10.31 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.16 Directors' 24-Hour Accidental Death and Dismemberment Plan. (Exhibit 10.32 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.17 Executive Split-Dollar Life Insurance Plan dated January 1, 1994. (Exhibit 10.33 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.18 Board of Directors' Compensation Plan dated January 1, 1994. (Exhibit 10.34 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.19 Directors' Business Travel Insurance Plan. (Exhibit 10.36 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.20 Deferred Compensation Plan for Executives 1998 Restatement. (Exhibit 10.20 to the Company's Form 10-K for the year ended December 31, 1997. *#) 10.21 Amended and Restated 1993 Nonqualified Employee Benefit Plans Trust Agreement dated January 1, 1995. (Exhibit 10.38 to the Company's Form 10-K for the year ended December 31, 1994.*#) 10.22 CNF Transportation Inc., 1997 Equity and Incentive Plan for Non-Employee Directors, as amended June 30, 1997. (Exhibit 10.33 to the Company's Form 10-K for the year ended December 31, 1997. *#) 10.23 Amended and Restated Retirement Plan for Directors of Consolidated Freightways, Inc. dated January 1, 1994. (Exhibit 10.40 to the Company's Form 10-K for the year ended December 31, 1994.*#) 10.24 CNF Transportation Inc. Return on Equity Plan, as amended through Amendment No. 1 (Exhibit 10.24 to the Company's Form 10-K for the year ended December 31, 1997. *#) 10.25 Employee Benefit Matters Agreement by and between Consolidated Freightways, Inc. and Consolidated Freightways Corporation dated December 2, 1996. (Exhibit 10.33 to the Company's form 10-K for the year ended December 31, 1996.*#) E-5 10.26 Distribution Agreement between Consolidated Freightways, Inc., and Consolidated Freightways Corporation dated November 25, 1996. (Exhibit 10.34 to the Company's Form 10-K for the year ended December 31, 1996.*#) 10.27 Transition Services Agreement between CNF Service Company, Inc. and Consolidated Freightways Corporation dated December 2, 1996. (Exhibit to the Company's Form 10-K for the year ended December 31, 1996.*#) 10.28 Tax Sharing Agreement between Consolidated Freightways, Inc., and Consolidated Freightways Corporation dated December 2, 1996. (Exhibit to the Company's Form 10-K for the year ended December 31, 1996.*#) 10.29 CNF Transportation Inc. 1997 Equity and Incentive Plan as amended as of January 31, 2000. (Exhibit A to the Company's Proxy Statement dated March 20, 2000. *#) 10.30 CNF Transportation Inc. Deferred Compensation Plan for Directors 1998 Restatement. (Exhibit 10.34 to the Company's Form 10-K for the year ended December 31, 1997. *#) 10.31 CNF Transportation Inc. Executive Severance Plan. (Exhibit 10.32 to the Company's Form 10-K for the year ended December 31, 1998.*#) 10.32 CNF Transportation Inc. Summary of Incentive Compensation plans for 2001. # 10.33 Value Management Plan dated June 28, 1999.# (12a)Computation of ratios of earnings to fixed charges (12b)Computation of ratios of earnings to combined fixed charges and preferred stock dividends. (13) Annual report to security holders: CNF Transportation Inc. 2000 Annual Report to Shareholders (Only those portions referenced herein are incorporated in this Form 10-K. Other portions such as "Letter to Shareholders" are not required and, therefore, are not "filed" as part of this Form 10-K.) (18) Preferability letter regarding change in accounting principle (21) Significant Subsidiaries of the Company. E-6 (99) Additional documents: 99.1 CNF Transportation Inc. 2000 Notice of Annual Meeting and Proxy Statement dated March 8, 2001 and filed on Form DEF 14A. (Only those portions referenced herein are incorporated in this Form 10-K. Other portions are not required and, therefore, are not "filed" as a part of this Form 10-K. *) 99.2 Note Agreement dated as of July 17, 1989, between the ESOP, Consolidated Freightways, Inc. and the Note Purchasers named therein. (Exhibit 28.1 as filed on Form SE dated July 21, 1989*) 99.3 Guarantee and Agreement dated as of July 17, 1989, delivered by Consolidated Freightways, Inc. (Exhibit 28.2 as filed on Form SE dated July 21, 1989*). 99.4 Form of Restructured Note Agreement between Consolidated Freightways, Inc., Thrift and Stock Ownership Trust as Issuer and various financial institutions as Purchasers named therein, dated as of November 3, 1992. (Exhibit 28.4 to the Company's Form 10-K for the year ended December 31, 1992*). The remaining exhibits have been omitted because either (1) they are neither required nor applicable or (2) the required information has been included in the consolidated financial statements or notes thereto. Footnotes to Exhibit Index --------------------------- * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. ** Incorporated by reference to indicated reports filed under the Securities Act of 1934, as amended, by Emery Air Freight Corporation File No. 1-3893. # Designates a contract or compensation plan for Management or Directors. EX-10 2 0002.txt EXHIBIT 10.32 Exhibit 10.32 CNF TRANSPORTATION INC. SUMMARY OF INCENTIVE COMPENSATION PLANS FOR 2001 For 2001, CNF Transportation Inc. and certain of its subsidiaries (each a "CNF Company") have adopted short- term incentive compensation plans that provide for annual incentive compensation to be paid to plan participants if certain performance goals are met by the applicable CNF Company. This document summarizes the general terms of those plans. The plans vary in terms of the performance measures to be met, and the amount of compensation to be paid, but generally contain the terms as described below. THE PLANS In order to motivate eligible employees to perform more effectively and efficiently, each CNF Company has established a short-term incentive compensation plan (Plan), under which participants are eligible to receive short-term incentive compensation payments based upon calendar year 2001 Incentive Performance Goals. DESIGNATION OF PARTICIPANTS Participation in each Plan is limited to full-time non- contractual employees of the applicable CNF Company. A master list of each Plan's participants is maintained in the office of the President of the applicable CNF Company. ELIGIBILITY FOR PAYMENT Participants generally commence participation in the Plans on January 1, 2001. Eligible employees who are employed by a CNF Company after January 1 commence participation at the beginning of the first full calendar quarter after joining the CNF Company. Calendar quarters begin January 1, April 1, July 1, and October 1 or the first working day thereafter. A participant who commences participation in the Plan during the 2001 Plan year, and who participates less than four full quarters, receives a pro rata payment based on the number of full calendar quarters of Plan participation. Subject to the following exceptions, no participant is eligible to receive any payment under a Plan unless on the date the payment is actually made that person is then currently (i) employed by a CNF Company and (ii) a Plan participant. EXCEPTION 1. A Plan participant who is employed by a CNF Company through December 31, 2001 but leaves that employment or otherwise becomes ineligible after December 31, 2001 but before the final payment is made relating to 2001, unless terminated for cause, is entitled to receive payments under the Plan. EXCEPTION 2. An appropriate pro rata payment will be made (1) to a Plan participant who retires prior to December 31, 2001 pursuant to the CNF Transportation Inc. Retirement Plan and who, at the time of retirement, was a participant in the Plan, (2) to the heirs, legatees, administrators or executors of a Plan participant who dies prior to December 31, 2001 and who, at the time of death, was a participant in the Plan, (3) to a Plan participant who is placed on an approved leave prior to December 31, 2001, or (4) to a Plan participant who is transferred to another CNF Company and who remains an employee through December 31, 2001. METHOD OF PAYMENT Each Plan participant is assigned an incentive participation factor as a percent of annual compensation. The incentive participation factor is indexed to specific performance goals such as revenue, profit, service, etc. Minimum and incentive factor performance goals are established separately for each Plan. Participants are not entitled to any payments under the Plan until the minimum performance goal is achieved. Incentive compensation for the assigned goals will be earned on a pro rata basis for accomplishments between the minimum level and the incentive factor goals and will continue to be earned ratably for performance over the incentive factor goal. The maximum payment that any Plan participant may receive is 200% of incentive compensation factor. In addition, the aggregate amount of payments to all participants is limited to the amount of a specified pool of funds. DATE OF PAYMENT The President of each CNF Company may authorize a partial payment of the estimated annual incentive compensation earned under the Plan to be made in December 2001. The final payment to participants, less any previous partial payment, is to be made on or before March 15, 2002. INCENTIVE PERFORMANCE GOALS Incentive Performance Goals are defined by each Plan but generally consist of profits equal to earnings before deducting any amounts expensed under a Company and/or qualified subsidiary incentive plans, before deducting income taxes and for some plans exclude interest income and expense. Incentive Performance Goals may also include specific levels of revenue, profit, service or other measurable factors. ANNUAL COMPENSATION Annual Compensation for incentive purposes for each Plan participant is that participant's annualized salary before any incentive or other special compensation (including long term disability insurance plan payments) as of the first pay period following the date the participant becomes eligible to participate in this Plan. For certain Plans, the annualized salary is based on the last pay period of the calendar year. The term "special compensation" used herein does not include deferred salary arrangements wherein the participant could have chosen to receive the deferred salary in the Plan year. LAWS GOVERNING PAYMENTS No payment shall be made under this Plan in an amount that is prohibited by law. AMENDMENT, SUSPENSION, AND ADMINISTRATION OF PLAN The Board of Directors of the CNF Company may at any time amend, suspend, or terminate the operation of the Plans, by thirty-day written notice to the Plan participants, and has full discretion as to the administration and interpretation of this Plan. No participant in this Plan shall at any time have any right to receive any payment under this Plan until such time, if any, as any payment is actually made. DURATION OF PLANS The Plans are for the calendar year 2001 only. EX-12 3 0003.txt EXHIBIT 12 Exhibit 12(a) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Year Ended December 31, (dollars in thousands)
2000 1999 1998 1997 1996 ------------- ------------- ------------- ------------- ------------- Fixed Charges: Interest expense $ 29,972 $ 25,972 $ 32,627 $ 39,553 $ 39,766 Capitalized interest 4,636 5,864 2,342 2,077 2,092 Dividend requirement on Series B Preferred Stock(1) 10,809 10,992 12,133 12,377 12,645 Interest component of rental expense (2) 38,161 41,363 40,750 35,607 28,521 ------------- ------------- ------------- ------------- ------------- Fixed Charges $ 83,578 $ 84,191 $ 87,852 $ 89,614 $ 83,024 ============= ============= ============= ============= ============= Earnings: Income from continuing operations before taxes and accounting change $ 261,196 $ 332,260 $ 253,812 $ 234,812 $ 147,132 Fixed charges 83,578 84,191 87,852 89,614 83,024 Capitalized interest (4,636) (5,864) (2,342) (2,077) (2,092) Preferred dividend requirements(3) (10,809) (10,992) (12,133) (12,377) (12,645) ------------- ------------- ------------- ------------- ------------- $ 329,329 $ 399,595 $ 327,189 $ 309,972 $ 215,419 ============= ============= ============= ============= ============= Ratio 3.9 x 4.7 x 3.7 x 3.5 x 2.6 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 and Accounting Change
EX-12 4 0004.txt EXHIBIT 12 Exhibit 12(b) CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Year Ended December 31, (dollars in thousands)
2000 1999 1998 1997 1996 ------------- ------------- ------------- ------------- ------------- Combined Fixed Charges and Preferred Stock Dividends: Interest expense $ 29,972 $ 25,972 $ 32,627 $ 39,553 $ 39,766 Capitalized interest 4,636 5,864 2,342 2,077 2,092 Dividend requirement on Series B Preferred Stock(1) 10,809 10,992 12,133 12,377 12,645 Dividend requirement on Series C Preferred Stock (1) - - - - - Dividend requirement on preferred securities of subsidiary trust 6,250 6,250 6,250 3,471 - Interest component of rental expense (2) 38,161 41,363 40,750 35,607 28,521 ------------- ------------- ------------- ------------- ------------- Fixed Charges $ 89,828 $ 90,441 $ 94,102 $ 93,085 $ 83,024 ============= ============= ============= ============= ============= Earnings: Income from continuing operations before taxes and accounting change $ 261,196 $ 332,260 $ 253,812 $ 234,812 $ 147,132 Fixed charges: 89,828 90,441 94,102 93,085 83,024 Capitalized interest (4,636) (5,864) (2,342) (2,077) (2,092) Preferred dividend requirements(3) (10,809) (10,991) (12,133) (12,377) (12,645) ------------- ------------- ------------- ------------- ------------- $ 335,579 $ 405,846 $ 333,439 $ 313,443 $ 215,419 ============= ============= ============= ============= ============= Ratio 3.7 x 4.5 x 3.5 x 3.4 x 2.6 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 Combined Fixed Charges but not deducted in the determination of Income from Continuing Operations Before Taxes and Accounting Change.
EX-13 5 0005.txt EXHIBIT 13 Exhibit 13 PAGE 14 MANAGEMENT'S DISCUSSION AND ANALYSIS 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. Under terms of the agreement, the USPS, on January 7, 2001, assumed responsibility for services covered under the contract, except for certain air transportation and related services described below under "Discontinued Operations." Accordingly, the results of operations, net assets, and cash flows of the Priority Mail operations have been segregated and 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. Net income available to common shareholders in 2000 was $126.8 million ($2.36 per diluted share), including a $13.5 million after-tax loss ($0.24 per diluted share) from discontinuance of the Priority Mail operations, and a $2.7 million after-tax loss ($0.05 per diluted share) from the cumulative effect of an accounting change. The change in our accounting policy for revenue recognition on in-transit freight is described in Note 1 of the Notes to Consolidated Financial Statements. Comparative results of continuing operations were also affected byunusual items discussed below under "Continuing Operations." Net income available to common shareholders of $182.3 million ($3.35 per diluted share) in 1999 benefited from after-tax income of $3.0 million ($0.06 per diluted share) from discontinued Priority Mail operations. In 1998, net income available to common shareholders was $130.8 million ($2.45 per diluted share), including an after-tax loss of $2.1 million ($0.04 per diluted share) from discontinued operations. CONTINUING OPERATIONS Net income from continuing operations (income from continuing operations reduced by preferred stock dividends) for 2000 declined to $143.1 million ($2.65 per diluted share) from $179.3 million ($3.29 per diluted share) in 1999 due to lower operating income and higher other net expenses, partially offset by a lower effective tax rate. Operating income of $290.0 million in 2000 declined from $354.2 million in 1999 due primarily to lower operating income from Emery and the Other segment, partially offset by record operating income from Menlo. Revenue of $5.57 billion in 2000 increased 10.6% from $5.04 billion in 1999 due primarily to higher revenue from Con-Way, Emery and Menlo. Operating income for all reporting segments in 2000 was adversely affected by a 20.8% increase in health and welfare costs, including prescription drug coverage. In 2001, health and welfare costs are expected to continue increasing at a lower rate than in 2000. This increase, along with higher anticipated pension expense, will likely have an adverse effect on operating results in 2001. Management believes that a slowing domestic economy in the fourth quarter of 2000 adversely affected the operating results of all reporting segments. If the slowing trend continues, 2001 revenue will likely decline and operating income will likely be adversely affected unless proportionate cost reductions can be made. Excluding the unusual items described below, net income from continuing operations was $151.9 million ($2.81 per diluted share) in 2000 compared to $158.9 million ($2.93 per diluted share) in 1999. Excluding unusual items, operating income in 2000 was $307.8 million compared with $327.7 million in 1999. Net income from continuing operations in 1999 increased 34.9% from net income of $132.9 million ($2.49 per diluted share) earned from continuing operations in 1998 due primarily to higher operating income, lower other net expenses and a lower tax rate. Operating income of $354.2 million in 1999 increased 20.5% over 1998, reflecting growth in operating income at all of our reporting segments. Revenue in 1999 increased 11.2% from $4.53 billion in 1998 due primarily to higher revenue from Con-Way, Emery and Menlo. An improved international economy and a strong domestic economy aided revenue and operating income in 1999. Excluding the unusual items, net income from continuing operations in 1999 increased 19.5% from 1998 and operating income in 1999 increased 11.5% from 1998. Unusual Items Results of continuing operations included various unusual or non-recurring items that affected reported results in 2000 and 1999: For 2000, operating income for Emery included an $11.9 million unusual loss ($0.12 per diluted share) from the termination of certain aircraft leases and Con-Way's operating income included a $5.5 million non-recurring loss from the sale of certain assets of Con-Way Truckload Services ($0.06 per diluted share). Other net expenses in 2000 included a $2.6 million unusual net gain ($0.03 per diluted share) from the sale of securities. PAGE 15 Operating income in 1999 benefited from a $16.5 million net gain ($0.17 per diluted share) from the settlement of a lawsuit. Another non-recurring net gain of $10.1 million ($0.10 per diluted share) was recognized in operating income on the sale of the assets of VantageParts, our former wholesale distributor of truck parts and supplies. These unusual gains in 1999 are included in operating income for the Other segment. In addition, other net expenses in 1999 included a $9.6 million net gain from the sale of securities ($0.10 per diluted share). Con-Way Transportation Services Con-Way's revenue in 2000 increased 8.9% over 1999 to $2.04 billion due primarily to higher revenue per hundredweight (yield) and an increase in weight per day (weight or tonnage). In 2000, revenue per hundredweight for the regional carriers increased 7.1% over 1999 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. Total and less-than-truckload (LTL) weight per day transported by Con-Way's regional carriers in 2000 increased 3.2% and 3.3%, respectively, over 1999. Tonnage in 2000 was positively impacted by continued growth in inter-regional joint services. Con-Way's management believes that tonnage growth in 2000 compared to 1999 was adversely affected by a slowing domestic economy in the last half of 2000 and by the closures of two of Con-Way's competitors in the second quarter of 1999, which management believes created additional demand for Con-Way's services in the last half of 1999. Revenue in 1999 was 11.5% higher than in 1998 as Con-Way's regional carriers increased total weight per day by 7.2%, LTL weight per day by 7.4%, and yield by 5.7%. Con-Way's operating income in 2000 fell just shy of the record $228.8 million earned by Con-Way in 1999 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 2000 increased 1.7% from 1999 due primarily to higher revenue and continued emphasis on operating efficiencies, including increased utilization of the freight network, partially offset by higher employee benefit costs. Higher diesel fuel costs in 2000 and in the last half of 1999 were mitigated by a fuel surcharge implemented by Con-Way in August 1999. Operating losses from Con-Way's multi-client warehousing and logistics business, which was formed in the fourth quarter of 1998, negatively affected operating income in 2000 and 1999. Con-Way's record operating income in 1999 grew 10.6% over operating income of $206.9 million in 1998 due primarily to higher revenue and operating efficiencies. Emery Worldwide Emery's revenue in 2000 increased 8.3% to a record $2.61 billion. Higher revenue in 2000 was due primarily to an increase in international airfreight revenue and, to a lesser extent, fuel surcharges. International airfreight revenue for 2000, including fuel surcharges, increased 20.4% over 1999 due primarily to increases in weight (freight volume) and revenue per pound (yield). Weight and yield in 2000, which were favorably affected by improved economic conditions in the international markets served by Emery, increased 11.6% and 7.8%, respectively, over 1999. North American airfreight revenue for 2000, including fuel surcharges, was essentially unchanged from 1999. In 2000, a 7.9% decline in North American airfreight weight was partially offset by a 9.1% increase in yield (including fuel surcharges). Improved yield in 2000 was due in part to an increase in the percentage of higher-yielding guaranteed delivery service provided and Emery's ongoing yield management, which is designed to eliminate or reprice certain low-margin business. Lower weight transported in North America for 2000 was due in part to a slowing domestic economy, which adversely affected certain industries served by Emery, and Emery's ongoing yield management. Emery's revenue in 1999 was 9.3% higher than revenue of $2.20 billion in 1998. Increases in international airfreight revenue and revenue from an Express Mail contract with the U.S. Postal Service were partially offset by slightly lower North American revenue. Growth in international revenue was accomplished with a 10.2% increase in weight per day and 2.4% higher yield. The small 0.7% decline in North American airfreight revenue was primarily the result of a 5.7% drop in weight partially offset by a 5.3% increase in yield. Emery's operating income was $28.4 million in 2000 compared to operating income of $75.5 million in 1999. Operating income in 2000 was adversely affected by an $11.9 million charge for the termination of certain aircraft leases and by higher airhaul costs. Domestically, airhaul expense was negatively impacted by higher aircraft maintenance costs, including an increase in amortization from shortened maintenance cycles resulting from a recent Federal Aviation Administration directive. Internationally, reduced airlift capacity in some international markets adversely affected airhaul margins. Higher jet fuel costs in 2000 and the last quarter of 1999 were substantially mitigated by a fuel surcharge implemented by Emery in September 1999. Operating income in 1999 increased 17.4% from 1998 due primarily to higher international airfreight revenue and revenue from the Express Mail contract. PAGE 16 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 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 requiring compensation that is commensurate with premium services. Internationally, management will focus on expanding Emery's variable-cost-based operations and actively renegotiating airhaul rates in an effort to improve operating margins, mitigate higher fuel prices, and balance directional capacity. Management will continue efforts to increase Emery's international revenue as a percentage of its total revenue. In January 2001, the USPS and Federal Express Corporation (FedEx) announced an exclusive agreement in which the USPS will pay FedEx to haul Express Mail and Priority Mail. In 2000, EWA recognized revenue of $229.1 million and operating income of $28.2 million from a 10-year contract with the USPS to transport Express Mail and other classes of mail. This contract expires in January 2004. Even though EWA has received no notice of termination of its Express Mail contract from the USPS, there can be no assurance that the USPS will not terminate EWA's Express Mail contract prior to its scheduled expiration in January 2004. Any termination or non-renewal of this contract will likely have a material adverse effect on our results of operations or financial condition. EWA filed a lawsuit against the USPS alleging that an exclusive contract with FedEx violates the USPS' own procurement regulations, which require that all purchases over $10,000 "must be made on the basis of adequate competition whenever feasible or appropriate," and that such a contract violates the USPS' regulatory requirement to provide "fair and equal treatment" to all potential suppliers. The U.S. Court of Federal Claims in January 2001 declined to issue a temporary restraining order barring the USPS from signing the exclusive contract for air transportation network services with FedEx; however, EWA's lawsuit against the USPS over the Express Mail contract is still before the courts. If the USPS terminates the Express Mail contract with EWA before its scheduled expiration date, EWA would be entitled to reimbursement of costs related to servicing the contract. Menlo Logistics Menlo's revenue in 2000 was a record $890.8 million, exceeding revenue of $716.0 million in 1999 by 24.4%. Higher revenue in 2000 was due to continued growth in logistics contracts, including several large contracts secured in the fourth quarter of 1999, and consulting fees earned on contracts entered into in 2000. Revenue in 1999 increased 22.0% over revenue of $586.8 million in 1998 due partially to a full year of revenue from several large logistics contracts awarded in the second quarter of 1998 and higher revenue from other contracts awarded prior to 1998. 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 net revenue (revenue less purchased transportation) was $265.6 million in 2000, $206.6 million in 1999, and $189.1 million in 1998. Operating income for Menlo in 2000 was a record $33.3 million, a 49.6% increase over operating income of $22.3 million in 1999. Higher operating income was primarily attributable to increased revenue from core supply chain projects and an increase in the percentage of revenue from higher-margin consulting fees. Operating income in 1999 increased 14.4% from $19.5 million earned by Menlo in 1998 due primarily to increased revenue. Higher business development and information systems costs incurred during 1999 contributed to lower operating income as a percentage of revenue than in 1998. Other Operations In 2000, the Other segment included the operating results of Road Systems and Vector SCM, a new joint venture described below. In 1999, the Other segment included Road Systems, and prior to the sale of its assets in May 1999, VantageParts. Also included in the Other segment in 1999 were a $16.5 million non-recurring net gain from the settlement of a lawsuit, and a $10.1 million non-recurring net gain from the VantageParts asset sale. In 1998, the Other segment included Road Systems and VantageParts. In December 2000, CNF and General Motors formed a joint venture, Vector SCM, to provide logistics services to General Motors. The operating results of Vector SCM are reported as an equity investment in the Other segment. Startup costs for Vector SCM in 2000 were $560,000 and are expected to be approximately $6 million in the first quarter of 2001. PAGE 17 Other Net Expense Other net expenses in 2000 increased 30.9% from 1999 due primarily to a $9.6 million net gain from the sale of securities in December 1999. Higher interest expense in 2000 also contributed to the increase in other net expenses, but was partially offset by higher investment income in 2000 and a $2.6 million net gain from the sale of securities in March 2000. Long-term debt transactions described in Note 4 of the Notes to Consolidated Financial Statements contributed to a 15.4% increase in interest expense in 2000 compared to 1999. Other net expense in 1999 decreased 45.2% from 1998 due primarily to the $9.6 million net gain from the sale of securities in 1999 and lower interest expense. The decline in interest expense was partially due to a net reduction of long-term debt as described in Note 4 of the Notes to Consolidated Financial Statements. Income Taxes The effective tax rate for 2000 was 42.1% compared to 43.6% in 1999 and 44.4% in 1998. The reductions in the effective tax rate were primarily attributable to the implementation of tax planning strategies and resolution of tax issues. DISCONTINUED OPERATIONS On November 3, 2000, EWA and the 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 assumed operating responsibility for services covered under the contract, except certain air transportation and related services. As a part of the termination agreement, EWA agreed to provide certain air transportation and related services to the USPS for a transition period of not less than ninety days. In January 2001, EWA received notification from the USPS of its intention to terminate the requirement for EWA to provide transition air transportation and related services, effective April 23, 2001. The USPS has agreed to reimburse EWA 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 January 7,2001, the USPS paid EWA $60 million toward the termination costs. The termination agreement provides for this provisional payment to 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. We believe that contract termination costs incurred by EWA are reimbursable under the termination agreement and do not exceed the Termination Liability Cap. However, there can be no assurance that all termination costs incurred by Emery will be recovered. 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 which it believes are owed by the USPS under the contract. EWA intends to pursue these claims and has initiated litigation in the U.S. Court of Federal Claims for that purpose. These claims are to recover costs of operating under the contract as well as profit and interest thereon. At December 31, 2000, our financial statements included $176.2 million of unbilled revenue with respect to the Priority Mail contract. Unbilled revenue represents the accrual of revenue sufficient only to recover costs and therefore does not include profit or interest on either unbilled revenue or profit. Any unbilled revenue that we do not recover would be written off and reflected in operating results for discontinued operations in the current period. Any amount of litigation award in excess of unbilled revenue would be reflected as income from discontinued operations in the current period. We believe our position with respect to claims for underpayment under the Priority Mail contract is reasonable and well founded; however, there can be no assurance that litigation will result in an award sufficient to recover unbilled revenue recognized under the contract. 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. As a result of the above, the results of operations and net assets of the Priority Mail operations have been segregated and 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. PAGE 18 LIQUIDITY AND CAPITAL RESOURCES Continuing Operations In 2000, cash and cash equivalents decreased $41.7 million to $104.5 million. The net use of cash from investing activities of $234.1 million was funded with $162.7 million of cash provided by operating activities, $32.4 million provided by financing activities and a reduction in cash. Operating activities in 2000 generated net cash of $162.7 million compared to $396.0 million of cash generated by operating activities in 1999. Cash from operations in 2000 was provided primarily by income from continuing operations before depreciation and amortization (excluding the cumulative after-tax effect of an accounting change). Positive operating cash flows in 2000 were partially offset by changes in receivables, unamortized aircraft maintenance, accrued liabilities and accrued income taxes. In 2000, a $15.8 million increase in unamortized aircraft maintenance was the result of $55.4 million of cash used in capitalized maintenance costs, partially offset by a $39.6 million non-cash write-off of unamortized aircraft maintenance costs against the lease return provision, related in part to the termination of certain aircraft leases. As described in Note 13 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. Funding was provided by liquidating short-term investments and with borrowings under short-term credit lines. Also described in Note 13 of the Notes to Consolidated Financial Statements, the decline in accrued liabilities in 2000 was due in part to a $29.6 million payment to the IRS in settlement of a proposed IRS adjustment related to excise taxes. Cash from operations in 1999 increased $112.7 million over 1998 and was provided primarily by income from continuing operations before depreciation and amortization, and an increase in accrued liabilities. Investing activities in 2000 used $69.4 million less cash than in 1999. Capital expenditures of $235.2 million in 2000 declined $89.4 million from 1999. For 2000, Con-Way spent $122.6 million of cash primarily on infrastructure and Emery spent $68.1 million of cash primarily on infrastructure and aircraft equipment. Capital expenditure declines by Con-Way and Emery in 2000 of $89.4 million and $32.1 million, respectively, were partially offset by the in-process construction of a CNF corporate administration and information technology facility. In 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 1999. Proceeds from sales of securities in 2000 were $2.6 million, down from $9.6 million in 1999. The sale of certain assets of Con-Way Truckload Services in 2000 generated cash of $7.3 million in 2000 compared to $29.3 million of cash provided by the sale of assets of VantageParts in 1999. Software expenditures in 2000 declined $15.6 million from 1999. Cash used in investing activities in 1999 was $52.4 million higher than in 1998 due primarily to a $109.7 million increase in capital expenditures by Con-Way, partially offset by proceeds from the sale of VantageParts and securities in 1999. Financing activities in 2000 provided cash of $32.4 million compared to a $58.9 million reduction in cash in 1999. As discussed in Note 4 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 borrowings outstanding under lines of credit. The net cash used by financing activities in 1999 compared to $12.7 million of positive financing cash flow in 1998 was due primarily to long-term debt transactions described in Note 4 of the Notes to Consolidated Financial Statements and fluctuations in short-term borrowings. We maintain a $350 million unsecured credit facility with no borrowings outstanding at December 31, 2000. The $350 million facility is also available for issuance of letters of credit. Under that facility, outstanding letters of credit totaled $71.8 million at December 31, 2000. Available capacity under the $350 million facility was $278.2 million at December 31, 2000. At December 31, 2000 we also had $100.0 million of uncommitted lines with no outstanding borrowings. Under other unsecured facilities, $73.6 million in letters of credit and bank guarantees were outstanding at December 31, 2000. Our ratio of total debt to capital increased to 31.4% at December 31, 2000 from 30.5% at December 31, 1999, primarily due to the March 2000 issuance of $200 million of 8 7/8% Notes due 2010. PAGE 19 Discontinued Operations As described above under "Results of Operations," cash flows from the Priority Mail operations have been segregated and classified as net cash flows from discontinued operations in the Statements of Consolidated Cash Flows. As described in Note 2 of the Notes to Consolidated Financial Statements, EWA received payments in the fourth quarter of 2000 totaling $102.1 million from the USPS for rate adjustments. Also described in Note 2, EWA in January 2001 received a $60 million provisional payment toward reimbursable termination costs, as provided under a termination agreement signed by EWA and the USPS in November 2000. 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. 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 speculative 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 4 and 5 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 $23 million at December 31, 2000. We use interest rate swaps to mitigate both the impact of interest rate volatility on cash flows related to lease payments and on the fair value of our long-term debt. Cash flow hedges include interest rate swaps on variable-rate equipment lease obligations. As of December 31, 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 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, which we plan to adopt effective January 1, 2001, the value of these fair value hedges varies inversely with the fluctuation in fair value of the $200 million 8 7/8% Notes. As of December 31, 2000, the change in the fair value of these interest rate swaps given a hypothetical 10% change in interest rates would be approximately $14 million. At December 31, 2000, we had not entered into any derivative contracts to hedge our foreign currency exchange exposure. 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 delayed 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 without a material impact on our financial condition and results of operations. PAGE 20 CNF TRANSPORTATION INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31 (Dollars in thousands) 2000 1999 ASSETS Current Assets Cash and cash equivalents $ 104,515 $ 146,263 Trade accounts receivable, net (Note 1) 881,268 781,802 Other accounts receivable 59,478 49,416 Operating supplies, at lower of average cost or market 42,271 45,314 Prepaid expenses 47,301 41,132 Deferred income taxes (Note 6) 105,502 76,032 Net current assets of discontinued operations (Note 2) - 25,710 Total Current Assets 1,240,335 1,165,669 Property, Plant and Equipment, at Cost Land 130,101 119,403 Buildings and leasehold improvements 692,312 564,278 Revenue equipment 797,444 816,172 Other equipment 420,788 375,482 2,040,645 1,875,335 Accumulated depreciation and amortization (934,123) (828,088) 1,106,522 1,047,247 Other Assets Deferred charges and other assets (Note 13) 137,393 177,442 Capitalized software, net (Note 1) 89,829 86,097 Unamortized aircraft maintenance, net (Note 1) 242,468 226,629 Goodwill, net (Note 1) 254,887 265,896 Net non-current assets of discontinued operations (Note 2) 173,507 90,354 898,084 846,418 Total Assets $3,244,941 $3,059,334 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. PAGE 21 CNF TRANSPORATION INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31 (Dollars in thousands except per share data) LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 Current Liabilities Accounts payable $ 418,157 $ 395,617 Accrued liabilities (Note 3) 317,650 377,919 Accrued claims costs (Note 1) 145,558 121,917 Current maturities of long-term debt and capital leases (Notes 4 and 5) 7,553 6,452 Short-term borrowings (Note 4) - 40,000 Income taxes payable (Notes 6 and 13) 1,777 53,455 Net current liabilities of discontinued operations (Note 2) 68,214 - Total Current Liabilities 958,909 995,360 Long-Term Liabilities Long-term debt and guarantees (Note 4) 424,116 322,800 Long-term obligations under capital leases (Note 5) 110,533 110,646 Accrued claims costs (Note 1) 82,502 77,774 Employee benefits (Note 9) 252,482 216,500 Other liabilities and deferred credits 51,163 45,450 Aircraft lease return provision (Note 1) 33,851 82,910 Deferred income taxes (Note 6) 144,463 114,946 Total Liabilities 2,058,019 1,966,386 Commitments and Contingencies (Notes 4, 5 and 13) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Convertible Debentures of the Company (Note 7) 125,000 125,000 Shareholders' Equity (Note 8) Preferred stock, no par value; authorized 5,000,000 shares: Series B, 8.5% cumulative, convertible, $.01 stated value; designated 1,100,000 shares; issued 824,902 and 840,407 shares, respectively 8 8 Additional paid-in capital, preferred stock 125,459 127,817 Deferred compensation, Thrift and Stock Plan (Note 10) (80,602) (87,600) Total Preferred Shareholders' Equity 44,865 40,225 Common stock, $.625 par value; authorized 100,000,000 shares; issued 55,426,605 and 55,306,947 shares, respectively 34,642 34,567 Additional paid-in capital, common stock 331,282 328,721 Retained earnings 855,314 747,936 Deferred compensation, restricted stock (Note 11) (1,423) (2,010) Cost of repurchased common stock (6,770,628 and 6,856,567 shares, respectively) (166,939) (169,057) 1,052,876 940,157 Accumulated foreign currency translation adjustments (27,378) (8,039) Minimum pension liability adjustment (Note 9) (8,441) (4,395) Accumulated Other Comprehensive Loss (35,819) (12,434) Total Common Shareholders' Equity 1,017,057 927,723 Total Shareholders' Equity 1,061,922 967,948 Total Liabilities and Shareholders' Equity $3,244,941 $3,059,334 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. PAGE 22 CNF TRANSPORTATION INC. AND SUBSIDIARIES STATEMENTS OF CONSOLDATED INCOME YEARS ENDED DECEMBER 31 (Dollars in thousands except per share data) 2000 1999 1998 REVENUES $5,572,377 $5,037,301 $4,530,686 Costs and Expenses Operating expenses 4,611,079 4,079,152 3,658,583 General and administrative expenses 506,986 483,661 442,799 Depreciation 164,346 146,828 135,385 Net gain on sale of assets of parts distribution operation - (10,112) - Net gain on legal settlement - (16,466) - 5,282,411 4,683,063 4,236,767 OPERATING INCOME 289,966 354,238 293,919 Other Income (Expense) Investment income 2,373 189 327 Interest expense (29,972) (25,972) (32,627) Dividend requirement on preferred securities of subsidiary trust (Note 7) (6,250) (6,250) (6,250) Miscellaneous, net (Note 12) 5,079 10,055 (1,557) (28,770) (21,978) (40,107) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 261,196 332,260 253,812 Income taxes (Note 6) 109,880 144,752 112,756 Income from Continuing Operations before Accounting Change 151,316 187,508 141,056 Discontinued operations, net of tax (Note 2) - 2,966 (2,078) Loss from discontinuance, net of tax (Note 2) (13,508) - - (13,508) 2,966 (2,078) Cumulative effect of accounting change, net of tax (Note 1) (2,744) - - Net income 135,064 190,474 138,978 Preferred stock dividends 8,261 8,218 8,169 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 126,803 $ 182,256 $ 130,809 Weighted-Average Common Shares Outstanding (Note 1) Basic 48,490,662 48,189,618 47,659,745 Diluted 55,901,374 56,019,317 55,514,318 Earnings Per Share (Note 1) Basic Income from continuing operations $ 2.95 $3.72 $ 2.79 Discontinued operations, net of tax - 0.06 (0.05) Loss from discontinuance, net of tax (0.28) - - Cumulative effect of accounting change, net of tax (0.06) - - Net Income Available to Common Shareholders $ 2.61 $3.78 $ 2.74 Diluted Income from continuing operations $ 2.65 $3.29 $ 2.49 Discontinued operations, net of tax - 0.06 (0.04) Loss from discontinuance, net of tax (0.24) - - Cumulative effect of accounting change, net of tax (0.05) - - Net Income Available to Common Shareholders $ 2.36 $3.35 $ 2.45 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. PAGE 23 CNF TRANSPORTATION INC. AND SUBSIDIARIES STATEMENTS OF CONSOLDIATED CASH FLOWS YEARS ENDED DECEMBER 31 (Dollars in thousands) 2000 1999 1998 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 146,263 $ 73,897 $ 97,617 Operating Activities Net income 135,064 190,474 138,978 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operations, net of tax 13,508 (2,966) 2,078 Cumulative effect of accounting change, net of tax 2,744 - - Depreciation and amortization 190,651 164,876 145,840 Increase in deferred income taxes 47 27,686 26,069 Amortization of deferred compensation 7,356 11,858 9,764 Provision for uncollectible accounts 9,070 15,229 11,050 Loss (gain) from sales of property, net 692 3,038 (1,220) Loss (gain) from sales of assets of businesses, net 5,459 (10,112) - Gain from sales of equity securities (2,619) (9,625) - Changes in assets and liabilities: Receivables (131,694) (94,539) (70,857) Prepaid expenses (6,169) (8,454) 2,164 Unamortized aircraft maintenance (55,419) (34,999) (16,170) Accounts payable 22,634 50,749 1,375 Accrued liabilities (54,931) 51,571 17,387 Accrued claims costs 24,923 35,459 16,494 Income taxes (49,761) (11,885) 2,226 Employee benefits 31,936 29,987 32,050 Aircraft lease return provision 5,366 34,629 (3,827) Deferred charges and credits 18,340 (38,723) (19,234) Other (4,502) (8,245) (10,830) Net Cash Provided by Operating Activities 162,695 396,008 283,337 Investing Activities Capital expenditures (235,221) (324,604) (217,725) Software expenditures (19,211) (34,811) (48,245) Proceeds from sales of equity securities 2,619 9,625 - Proceeds from sales of assets of businesses 7,263 29,260 - Proceeds from sales of property 10,441 16,986 14,872 Net Cash Used in Investing Activities (234,109) (303,544) (251,098) Financing Activities Proceeds from issuance of long-term debt 198,752 162,400 46,000 Proceeds for issuance costs of long-term debt (1,300) - - Repayment of long-term debt, guarantees and capital leases (96,513) (195,396) (51,469) Proceeds from (repayment of) short-term borrowings, net (40,000) (3,000) 43,000 Proceeds from exercise of stock options 1,792 7,474 5,483 Payments of common dividends (19,425) (19,311) (19,068) Payments of preferred dividends (10,903) (11,078) (11,212) Net Cash Provided by (Used in) Financing Activities 32,403 (58,911) 12,734 Net Cash Provided by (Used in) Continuing Operations (39,011) 33,553 44,973 Net Cash Provided by (Used in) Discontinued Operations (2,737) 38,813 (68,693) Increase (Decrease) in Cash and Cash Equivalents (41,748) 72,366 (23,720) CASH AND CASH EQUIVALENTS, END OF YEAR $ 104,515 $ 146,263 $ 73,897 Supplemental Disclosure Cash paid for income taxes, net of refunds $ 82,002 $ 63,207 $ 67,955 Cash paid for interest, net of amounts capitalized 32,806 35,833 33,141 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. PAGE 24 CNF TRANSPORTATION INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (Dollars in thousands except per share data)
Preferred Stock Series B Common Stock Additional Number of Number of Paid-in Deferred Retained Shares Amount Shares Amount Capital Compensation Earnings BALANCE, DECEMBER 31, 1997 865,602 $ 9 54,370,182 $33,981 $433,905 $(104,347) $473,250 Net income - - - - - - 138,978 Other comprehensive loss: Foreign currency translation adjustment - - - - - - - Minimum pension liability adjustment - - - - - - - Comprehensive income - - - - - - - Exercise of stock options including tax benefits of $2,576 - - 321,079 201 7,858 - - Issuance of restricted stock, net of forfeitures - - 106,446 67 3,935 (4,852) - Issuance of employee stock awards - - - - 13 - - Recognition of deferred compensation - - - - - 9,764 - Repurchased common stock issued for conversion of preferred stock (11,411) - - - (1,357) - - Common dividends declared ($.40 per share) - - - - - - (19,068) Series B, Preferred dividends ($12.93 per share) net of tax benefits of $2,982 - - - - - - (8,169) BALANCE, DECEMBER 31, 1998 854,191 9 54,797,707 34,249 444,354 (99,435) 584,991 Net income - - - - - - 190,474 Other comprehensive income: Foreign currency translation adjustment - - - - - - - Minimum pension liability adjustment - - - - - - - Comprehensive income - - - - - - - Exercise of stock options including tax benefits of $4,198 - - 446,128 279 11,393 - - Issuance of restricted stock, net of forfeitures - - 63,112 39 2,387 (2,033) - Issuance of employee stock awards - - - - 12 - - Recognition of deferred compensation - - - - - 11,858 - Repurchased common stock issued for conversion of preferred stock (13,784) (1) - - (1,608) - - Common dividends declared ($.40 per share) - - - - - - (19,311) Series B, Preferred dividends ($12.93 per share) net of tax benefits of $2,774 - - - - - - (8,218) BALANCE, DECEMBER 31, 1999 840,407 8 55,306,947 34,567 456,538 (89,610) 747,936 Net income - - - - - - 135,064 Other comprehensive loss: Foreign currency translation adjustment - - - - - - - Minimum pension liability adjustment - - - - - - - Comprehensive income - - - - - - - Exercise of stock options including tax benefits of $281 - - 115,732 72 2,001 - - Issuance of restricted stock, net of forfeitures - - 3,926 3 295 229 - Issuance of employee stock awards - - - - 1 - - Recognition of deferred compensation - - - - - 7,356 - Repurchased common stock issued for conversion of preferred stock (15,505) - - - (2,094) - - Common dividends declared ($.40 per share) - - - - - - (19,425) Series B, Preferred dividends ($12.93 per share) net of tax benefits of $2,547 - - - - - - (8,261) BALANCE, DECEMBER 31, 2000 824,902 $ 8 55,426,605 $34,642 $456,741 $ (82,025) $855,314
CNF TRANSPORTATION INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (Dollars in thousands except per share data)
Accumulated Cost of Other Repurchased Comprehensive Comprehensive Common Stock Income (Loss) Income BALANCE, DECEMBER 31, 1997 $(172,048) $ (6,647) Net income - - $138,978 Other comprehensive loss: Foreign currency translation adjustment - (2,493) (2,493) Minimum pension liability adjustment - (7,995) (7,995) Comprehensive income - - $128,490 Exercise of stock options including tax benefits of $2,576 - - Issuance of restricted stock, net of forfeitures - - Issuance of employee stock awards 13 - Recognition of deferred compensation - - Repurchased common stock issued for conversion of preferred stock 1,357 - Common dividends declared ($.40 per share) - - Series B, Preferred dividends ($12.93 per share) net of tax benefits of $2,982 - - BALANCE, DECEMBER 31, 1998 (170,678) (17,135) Net income - - $190,474 Other comprehensive income: Foreign currency translation adjustment - 1,101 1,101 Minimum pension liability adjustment - 3,600 3,600 Comprehensive income - - $195,175 Exercise of stock options including tax benefits of $4,198 - - Issuance of restricted stock, net of forfeitures - - Issuance of employee stock awards 13 - Recognition of deferred compensation - - Repurchased common stock issued for conversion of preferred stock 1,608 - Common dividends declared ($.40 per share) - - Series B, Preferred dividends ($12.93 per share) net of tax benefits of $2,774 - - BALANCE, DECEMBER 31, 1999 (169,057) (12,434) Net income - - $135,064 Other comprehensive loss: Foreign currency translation adjustment - (19,339) (19,339) Minimum pension liability adjustment - (4,046) (4,046) Comprehensive income - - $111,679 Exercise of stock options including tax benefits of $281 - - Issuance of restricted stock, net of forfeitures - - Issuance of employee stock awards 24 - Recognition of deferred compensation - - Repurchased common stock issued for conversion of preferred stock 2,094 - Common dividends declared ($.40 per share) - - Series B, Preferred dividends ($12.93 per share) net of tax benefits of $2,547 - - BALANCE, DECEMBER 31, 2000 $(166,939) $(35,819) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
PAGE 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE ONE: DESCRIPTION OF BUSINESS AND PRINCIPAL ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of CNF Transportation Inc. and its wholly owned subsidiaries (the Company or CNF). Organization CNF is a management company of global supply chain services with businesses in primarily regional less-than-truckload trucking, domestic and international air freight, full service logistics management, and trailer manufacturing. As described in Note 2 "Discontinued Operations," the sortation and transportation operations with the U.S. Postal Service are reflected as discontinued operations due to the termination of the Priority Mail contract, effective January 7, 2001, and except where otherwise noted, is excluded from the accompanying notes. See Note 14 "Segment Reporting" for further discussion of the Company's operating segments, markets and product lines. Estimates Management makes estimates and assumptions when preparing the financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the amounts reported in the accompanying financial statements and notes thereto. Actual results could differ from those estimates. Recognition of Revenues As a result of recent pronouncements, including SEC Staff Accounting Bulletin No. 101, the Company elected to prospectively adopt, effective January 1, 2000, a change in accounting method for recognition of its freight transportation revenue to a preferable method. CNF now recognizes the allocation of freight transportation revenue between reporting periods based on relative transit time in each reporting period with expenses recognized as incurred. Previously, revenue was recognized when freight was received for shipment and the estimated costs of performing the transportation service were accrued. The pro forma effect of the accounting change on prior years' operating results is not material. Revenue from long-term contracts is recognized in accordance with contractual terms as services are provided. Cash Equivalents Short-term interest-bearing instruments with maturities of three months or less at the date of purchase are considered cash equivalents. Trade Accounts Receivable, Net Trade accounts receivable are net of allowances of $21,722,000 and $26,163,000 at December 31, 2000 and 1999, respectively. Property, Plant and Equipment Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, which are generally 25 years for buildings and improvements, 10 years or less for aircraft, 5 to 10 years for tractor and trailer equipment and 3 to 10 years for most other equipment. Leasehold improvements are amortized over the shorter of the terms of the respective leases or the useful lives of the assets. Expenditures for equipment maintenance and repairs, except for aircraft, are charged to operating expenses as incurred; betterments are capitalized. Gains (losses) on sales of equipment are recorded in operating expenses. Capitalized Software Capitalized software, net, consists of costs to purchase and develop internal-use software. Amortization of capitalized software is computed on an item-by-item basis over a period of 3 to 10 years, depending on the estimated useful life of the software. Unamortized Aircraft Maintenance The costs to perform required maintenance inspections of engines and aircraft frames for leased and owned aircraft are capitalized and amortized to expense over the shorter of the period until the next scheduled maintenance or the remaining term of the lease agreement. Goodwill Goodwill, which represents the costs in excess of net assets of businesses acquired, is capitalized and amortized on a straight-line basis up to a 40-year period. Accumulated amortization at December 31, 2000 and 1999 was $116,810,000 and $105,887,000, respectively. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the total amount of an asset may not be recoverable. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If the asset is not considered recoverable, an amount equal to the excess of the carrying amount over the estimated discounted cash flows will be charged against the asset with a corresponding expense to the income statement. PAGE 27 Income Taxes The Company follows the liability method of accounting for income taxes. Accrued Claims Costs The Company provides for the uninsured costs of medical, casualty, liability, vehicular, cargo and workers' compensation claims. Such costs are estimated each year based on historical claims and unfiled claims relating to operations conducted through December 31. The actual costs may vary from estimates based on trends of losses for filed claims and claims estimated to be incurred but not filed. The long-term portion of accrued claims costs relate primarily to workers' compensation and vehicular claims that are payable over several years. Beginning January 1, 1999, the Company began to participate in a reinsurance pool to reinsure mostly workers compensation and vehicular liabilities. Insurer participants in the pool cede and each reinsurer participant assumes an equivalent amount of its percentage participation. Reinsurance does not relieve the Company of its liabilities under the original policy. However, in the opinion of management, the Company's reinsurers are sound and any potential exposure to the Company for non-payment is minimal. Aircraft Lease Return Provision Under certain of the Company's aircraft lease agreements, the Company is expected to return the aircraft with a stipulated number of hours remaining on the aircraft and engines until the next scheduled maintenance. The aircraft lease return provision represents the costs accrued for this obligation and any estimated unusable maintenance at the date of lease return or other disposal. 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. Foreign Currency Translation Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the Foreign Currency Translation Adjustment as Other Comprehensive Income (Loss) in the Statements of Consolidated Shareholders' Equity. Earnings Per Share (EPS) Basic EPS for continuing operations is computed by dividing reported income from continuing operations (after preferred dividends) by the weighted-average shares outstanding. Diluted EPS for continuing operations is calculated as follows: (Dollars in thousands except per share data) 2000 1999 1998 Earnings: Net income from continuing operations $143,055 $179,290 $132,887 Add-backs: Dividends on preferred stock, net of replacement funding 1,424 1,337 1,274 Dividends on preferred securities of subsidiary trust, net of tax 3,816 3,816 3,816 $148,295 $184,443 $137,977 Shares: Weighted-average shares outstanding 48,490,662 48,189,618 47,659,745 Stock option and restricted stock dilution 342,826 695,099 708,042 Series B preferred stock 3,942,886 4,009,600 4,021,531 Preferred securities of subsidiary trust 3,125,000 3,125,000 3,125,000 55,901,374 56,019,317 55,514,318 Diluted earnings per share from continuing operations $2.65 $3.29 $2.49 Reclassification Certain amounts in prior years' financial statements have been reclassified to conform to the current year presentation. NOTE TWO: 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. The contract was originally scheduled to terminate in the first quarter of 2002, subject to renewal options. Under terms of the agreement, the USPS on January 7, 2001, assumed operating responsibility for services covered under the contract, except certain air transportation and related services. As a part of the termination agreement, EWA agreed to provide certain air transportation and related services to the USPS for a transition period of not less than ninety days. In January 2001, EWA received notification from the USPS of its intention to terminate the requirement for EWA to provide transition air transportation and related services, effective April 23, 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"). PAGE 28 On January 7, 2001, the USPS paid EWA $60 million toward the termination costs. The termination agreement provides for this provisional payment to 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, and EWA has initiated litigation in the U.S. Court of Federal Claims for that purpose. These claims are to recover costs of operating under the contract as well as profit and interest thereon. The Company's accounting policy for revenue recognition under the Priority Mail contract, including claims for underpayment relating to the period through 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 segregated and classified as discontinued operations in the Statements of Consolidated Income for all periods presented. Assets and liabilities have been reclassified in the Consolidated Balance Sheet from their historical classifications to separately reflect them as net assets of discontinued operations. Cash flows related to discontinued operations have been segregated and classified separately as net cash flows from discontinued operations in the Statements of Consolidated Cash Flows. The summarized results of discontinued operations were as follows: Years Ended December 31 (Dollars in thousands) 2000 1999 1998 Revenues $593,952 $555,509 $410,804 Operating income (loss) before taxes - 4,862 (3,401) Income taxes (benefits) - 1,896 (1,323) Income (loss) from discontinued operations $ - $ 2,966 $ (2,078) Loss from discontinuance, net of tax benefits $ (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 were as follows: (Dollars in thousands) 2000 1999 Current Assets Accounts receivable $ 10,324 $132,505 Other 15,796 1,545 26,120 134,050 Property, plant and equipment, net 66,316 83,787 Long-term receivables and other assets 184,348 25,355 Total assets of discontinued operations 276,784 243,192 Current Liabilities 94,334 108,340 Long-term liabilities 77,157 18,788 Total liabilities of discontinued operations 171,491 127,128 Net assets of discontinued operations $105,293 $116,064 The Priority Mail contract provided for the re-determination of prices paid to EWA under the contract, which gave rise to unbilled revenue. Unbilled revenue representing contract change orders or claims were included in revenue only when it was probable that the change order or claim would result in additional contract revenue and if the amount could be reliably estimated. The Company recognized unbilled revenue related to claims sufficient only to recover costs. Unbilled revenue excludes profit under the contract and interest attributable to both unbilled revenue and profit. Any unbilled revenue that EWA does not recover would be written off and reflected in operating results for discontinued operations in the current period. Any amount of litigation award in excess of unbilled revenue would be reflected as income from discontinued operations in the current period. Accordingly, no operating profit has been recognized in connection with the Priority Mail contract beginning in the third quarter of 1999, when EWA filed a claim for proposed higher prices, and including periods prior to the effective termination date on January 7, 2001. The amount of unbilled revenue related to EWA's Priority Mail contract recognized at December 31, 2000 and 1999 was $176.2 million and $123.7 million, respectively. Unbilled revenue at December 31, 2000 is included in net non-current assets of discontinued operations in the Consolidated Balance Sheets. As described above, the Company is pursuing recovery of this amount plus profit and interest thereon. 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. PAGE 29 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. Unbilled revenue at December 31, 2000 has been reduced by the $102.1 million payment from the USPS. NOTE THREE: ACCRUED LIABILITIES Accrued liabilities consist of the following as of December 31: (Dollars in thousands) 2000 1999 Other accrued liabilities $107,819 $137,081 Holiday and vacation pay 70,506 63,256 Taxes other than income taxes 38,576 69,251 Wages and salaries 31,571 33,270 Incentive compensation 34,206 35,874 Estimated revenue adjustments 29,352 30,733 Interest 5,620 8,454 Total accrued liabilities $317,650 $377,919 NOTE FOUR: DEBT AND GUARANTEES As of December 31, long-term debt and guarantees consisted of the following: (Dollars in thousands) 2000 1999 Long-term borrowings under lines of credit $ - $ 90,000 7.35% Notes due 2005 (interest payable semi-annually) 100,000 100,000 TASP Notes guaranteed, 6.00% to 8.54%, due through 2009 (interest payable semi-annually) 128,000 134,400 8 7/8% Notes due 2010 (interest payable semi-annually) 198,816 - 6.84% Industrial Revenue Bonds due 2014 (interest payable quarterly) 4,800 4,800 431,616 329,200 Less current maturities (7,500) (6,400) Total long-term debt and guarantees $424,116 $322,800 The Company has a $350 million unsecured credit facility to provide for letter of credit and working capital needs. Borrowings under the agreement, which expires in December 2001, bear interest at a rate based upon select indices plus a margin dependent on the Company's credit rating. The agreement contains various restrictive covenants that limit the incurrence of additional indebtedness and require the Company to maintain minimum amounts of net worth and fixed-charge coverage. At December 31, 2000, the Company had no borrowings and $71.8 million in letters of credit outstanding under this agreement. At December 31, 1999, $50.0 million of borrowings were outstanding with $59.8 million in letters of credit. At December 31, 2000, the Company had $100.0 million of other uncommitted lines of credit with no outstanding borrowings. At December 31, 1999, $150.0 million of other uncommitted lines of credit had no outstanding borrowings and $80.0 million was outstanding under a $100.0 million supplemental credit facility that expired in September 2000. At December 31, 1999, $40.0 million of the $130.0 million outstanding under the unsecured credit lines were classified as short-term with the remaining $90.0 million classified as long-term based on the Company's ability and intent to refinance this amount on a long-term basis. The aggregate principal amount of $117.7 million of the Company's unsecured 9 1/8% Notes was paid in full on the August 15, 1999 maturity date. The redemption of these notes was made in part with $90.0 million of borrowings under lines of credit. The weighted-average interest rate on borrowings outstanding under lines of credit at December 31, 1999 was 7.2%. The Company guarantees the notes issued by the Company's Thrift and Stock Plan (TASP). On July 1, 1999, the Company refinanced $45.25 million of Series "A" and $27.15 million of Series "A restructured" TASP notes. These notes, with respective interest rates of 8.42% and 9.04%, were replaced with $72.4 million of new TASP notes with a rate of 6.0% and a maturity date of January 1, 2006. At December 31, 2000, $66.0 million was outstanding under these refinanced notes, which contain financial covenants that require the Company to maintain minimum amounts of net worth and fixed-charge coverage. The remaining $62.0 million of TASP Notes outstanding at December 31, 2000 are subject to redemption at the option of the holders should a certain designated event occur or ratings by both Moody's and S&P of senior unsecured indebtedness decline below investment grade. The 7.35% Notes due in 2005 contain certain covenants limiting the incurrence of additional liens. The Company's consolidated interest expense as presented on the Statements of Consolidated Income is net of capitalized interest of $4,636,000 in 2000, $5,864,000 in 1999, and $2,342,000 in 1998. The aggregate annual maturities and sinking fund requirements of Long-Term Debt and Guarantees for the next five years ending December 31 are $7,500,000 in 2001, $8,700,000 in 2002, $10,100,000 in 2003, $12,000,000 in 2004 and $112,700,000 in 2005. PAGE 30 NOTE FIVE: LEASES The Company and its subsidiaries are obligated under various non-cancelable leases. The principal capital lease covers a sorting facility in Dayton, Ohio (the Hub). The Hub is financed by City of Dayton, Ohio revenue bonds. These bonds consist of $46 million of Series A refinancing bonds due in February 2018 with an interest rate of 5.625%. The remaining $62 million are due in 2009 and bear rates of interest between 6.05% and 6.20%, and have various call provisions. Included in property, plant and equipment is $83 million of Hub-related equipment and leasehold improvements, including recent expansion costs. Future minimum lease payments under all leases with initial or remaining non-cancelable lease terms in excess of one year, at December 31, 2000, are as follows: Capital Operating (Dollars in thousands) Leases Leases Year ending December 31: 2001 $ 6,819 $175,146 2002 6,819 144,747 2003 6,819 96,899 2004 6,819 68,401 2005 6,819 38,975 Thereafter (through 2018) 156,570 61,006 Total minimum lease payments 190,665 $585,174 Amount representing interest (80,079) Present value of minimum lease payments 110,586 Current maturities of obligations under capital leases (53) Long-term obligations under capital leases $110,533 Certain operating leases contain financial covenants. The most restrictive covenant requires Emery to maintain minimum amounts of fixed-charge coverage. Rental expense for operating leases is comprised of the following: (Dollars in thousands) 2000 1999 1998 Minimum rentals $240,429 $221,047 $203,714 Sublease rentals (6,069) (7,436) (4,001) Amortization of deferred gains (1,147) (1,639) (4,012) $233,213 $211,972 $195,701 NOTE SIX: INCOME TAXES The components of pretax income and income taxes are as follows: (Dollars in thousands) 2000 1999 1998 Pretax income U.S. corporations $230,391 $319,458 $244,239 Foreign corporations 30,805 12,802 9,573 Pretax income from continuing operations $261,196 $332,260 $253,812 Income taxes (benefits) Current U.S. federal $ 89,020 $ 95,629 $ 74,076 State and local 7,383 14,285 8,458 Foreign 13,430 7,152 4,153 $109,833 $117,066 $ 86,687 Deferred U.S. federal $ (1,583) $ 26,787 $ 25,048 State and local 1,630 899 1,021 47 27,686 26,069 Total income taxes $109,880 $144,752 $112,756 The components of deferred tax assets and liabilities at December 31, relate to the following: (Dollars in thousands) 2000 1999 Deferred tax assets Reserves for accrued claims costs $ 48,092 $ 40,688 Reserves for post retirement health benefits 45,843 42,411 Reserves for employee benefits 87,192 81,064 Other reserves not currently deductible 52,181 43,016 233,308 207,179 Deferred tax liabilities Depreciation and amortization 224,013 200,924 Unearned revenue 1,220 3,530 Other 47,036 41,639 272,269 246,093 Net deferred tax liability $ 38,961 $ 38,914 Deferred tax assets and liabilities in the Consolidated Balance Sheets are classified based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specific asset or liability are classified based on the estimated period of reversal. Although realization is not assured, management believes it more likely than not that all deferred tax assets will be realized. PAGE 31 Income taxes vary from the amounts calculated by applying the U.S. statutory income tax rate to the pretax income as set forth in the following reconciliation: 2000 1999 1998 U.S. statutory tax rate 35.0% 35.0% 35.0% State income taxes (net of federal income tax benefit) 2.8 3.3 3.8 Foreign taxes in excess of U.S. statutory rate 1.0 0.8 0.9 Non-deductible operating expenses 0.8 1.0 1.0 Amortization of goodwill 1.2 0.9 1.2 Foreign tax credits, net (0.5) (0.4) (1.6) Other, net 1.8 3.0 4.1 Effective income tax rate 42.1% 43.6% 44.4% The cumulative undistributed earnings of the Company's foreign subsidiaries (approximately $35.4 million at December 31, 2000), which, if remitted, are subject to withholding tax, have been reinvested indefinitely in the respective foreign subsidiaries' operations unless it becomes advantageous for tax or foreign exchange reasons to remit these earnings. Therefore, no withholding or U.S. taxes have been provided. The amount of withholding tax that would be payable on remittance of the undistributed earnings would approximate $3.7 million. Certain contingencies related to income taxes are discussed in Note 13 "Commitments and Contingencies." NOTE SEVEN: 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 therefore and subject to certain other limitations (the "Guarantee"). The Guarantee, when taken together with the obligations of the Company under the Debentures, the Indenture pursuant to which the Debentures were issued, and the Amended and Restated Declaration of Trust of the Trust [including its obligations to pay costs, fees, expenses, debts and other obligations of the Trust (other than with respect to the TECONS and the common securities of the Trust)], provide a full and unconditional guarantee of amounts due on the TECONS. The Debentures are redeemable for cash, at the option of the Company, in whole or in part, on or after June 1, 2000 at a price equal to 103.125% of the principal amount, declining annually to par if redeemed on or after June 1, 2005, plus accrued and unpaid interest. In certain circumstances relating to federal income tax matters, the Debentures may be redeemed by the Company at 100% of the principal plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of TECONS will be redeemed. The TECONS do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 1, 2012, or upon earlier redemption. Each TECONS is convertible at any time prior to the close of business on June 1, 2012 at the option of the holder into shares of the Company's common stock at a conversion rate of 1.25 shares of the Company's common stock for each TECONS, subject to adjustment in certain circumstances. NOTE EIGHT: SHAREHOLDERS' EQUITY Series B Preferred Stock In 1989, the Board of Directors designated a series of 1,100,000 preferred shares as Series B Cumulative Convertible Preferred Stock, $.01 stated value, which is held by the CNF Thrift and Stock Plan (TASP). The Series B preferred stock is convertible into common stock, as described in Note 10 "Thrift and Stock Plan," at the rate of 4.71 shares for each share of preferred stock subject to antidilution adjustments in certain circumstances. Holders of the Series B preferred stock are entitled to vote with the common stock and are entitled to a number of votes in such circumstances equal to the product of (a) 1.3 multiplied by (b) the number of shares of common stock into which the Series B preferred stock is convertible on the record date of such vote. PAGE 32 Holders of the Series B preferred stock are also entitled to vote separately as a class on certain other matters. The TASP trustee is required to vote the allocated shares based upon instructions from the participants; unallocated shares are voted in proportion to the voting instructions received from the participants with allocated shares. Comprehensive Income SFAS 130, "Reporting Comprehensive Income," requires companies to report a measure of all changes in equity except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. The Company has disclosed Comprehensive Income in the Statements of Consolidated Shareholders' Equity. NOTE NINE: EMPLOYEE BENEFIT PLANS Pension Plans The Company has a non-contributory defined benefit pension plan (the Plan) covering non-contractual employees in the United States. The Company's annual pension provision and contributions are based on an independent actuarial computation. Although it is the Company's funding policy to contribute the minimum required tax-deductible contribution for the year, it may increase its contribution above the minimum if appropriate to its tax and cash position and the Plan's funded status. Benefits under the Plan are based on a career average final five-year pay formula. Approximately 95% of the Plan assets are invested in publicly traded stocks and bonds. The remainder is invested in temporary cash investments, real estate funds and investment capital funds. The reported information for the defined benefit pension plan was not restated for discontinued operations due to the immaterial effect on the periods presented. The Company recognized a gain from the curtailment of the projected benefit obligation of $2.4 million in 2000, which is included in the Loss from Discontinuance. The following sets forth the change in funded status and the determination of the accrued benefit cost included in Employee Benefits in the Consolidated Balance Sheets at December 31. (Dollars in thousands) 2000 1999 Change in benefit obligation: Projected benefit obligation at beginning of year $ 397,121 $ 390,867 Service cost-benefits earned during the year 33,866 37,733 Interest cost on projected benefit obligation 33,571 30,525 Actuarial loss (gain) 12,493 (51,645) Benefits paid (11,808) (10,359) Projected benefit obligation at end of year 465,243 397,121 Change in plan assets: Fair value of plan assets at beginning of year 434,347 354,550 Actual return on plan assets (12,804) 88,878 Transfers from defined contribution plan 1,209 1,278 Benefits paid (11,808) (10,359) Fair value of plan assets at end of year 410,944 434,347 Funded status (54,299) 37,226 Unrecognized actuarial gain (66,084) (135,214) Unrecognized prior service costs 11,206 6,632 Unrecognized net asset at transition (3,388) (4,517) Accrued benefit cost $(112,565) $ (95,873) Weighted-average assumptions as of December 31: Discount rate 7.75% 8.00% Expected long-term rate of return on assets 9.50% 9.50% Rate of compensation increase 5.00% 5.00% Net pension cost includes the following: (Dollars in thousands) 2000 1999 1998 Service cost-benefits earned during the year $ 33,866 $ 37,733 $ 30,497 Interest cost on projected benefit obligation 33,571 30,525 25,338 Expected return on plan assets (40,866) (33,298) (29,386) Net amortization and deferral (7,523) 21 56 Net pension cost $ 19,048 $ 34,981 $ 26,505 The Company also has a supplemental retirement program that provides additional benefits for compensation excluded from the basic Plan. The annual provision for these programs is based on independent actuarial computations using assumptions consistent with the Plan. At December 31, 2000 and 1999, the accrued benefit cost was $20,058,000 and $16,706,000, respectively, and the net periodic pension cost was $4,951,000 in 2000, $4,290,000 in 1999, and $4,036,000 in 1998. Also included in Employee Benefits in the Consolidated Balance Sheet at December 31, 2000, was a minimum pension liability for the unfunded supplemental program. The non-cash adjustment for the minimum pension liability of $9,580,000 was offset by an intangible asset of $1,139,000 and accumulated other comprehensive loss of $8,441,000. Post Retirement Plans The Company has a retiree health plan that provides benefits to all non-contractual employees at least 55 years of age with 10 years or more of service. PAGE 33 The retiree health plan limits benefits for participants who were not eligible to retire before January 1, 1993, to a defined dollar amount based on age and years of service and does not provide employer-subsidized retiree health care benefits for employees hired on or after January 1, 1993. The following sets forth the change in accumulated benefit obligation and the determination of the accrued benefit cost included in Employee Benefits in the Consolidated Balance Sheets at December 31: (Dollars in thousands) 2000 1999 Change in benefit obligation: Accumulated benefit obligation at beginning of year $84,774 $89,947 Service cost-benefits earned during the year 1,449 1,558 Interest cost on accumulated benefit obligation 6,669 6,289 Benefit payments (5,138) (4,343) Actuarial gain (3,124) (8,677) Accumulated benefit obligation at end of year 84,630 84,774 Unrecognized net actuarial gain 13,889 10,854 Unrecognized prior service benefit 279 334 Accrued benefit cost $98,798 $95,962 Assumptions as of December 31: Weighted-average discount rate 7.75% 8.00% At December 31, 2000, a 9.5% annual rate of increase in the per capita cost of covered medical benefits was assumed for 2001 and was assumed to decrease gradually to 5.5% for 2006 and remain at that level thereafter. A 5.5% annual rate of increase in the per capita cost of dental and vision benefits was assumed for 2001 and was assumed to remain at that level thereafter. Net periodic post retirement benefit cost includes the following: (Dollars in thousands) 2000 1999 1998 Service cost-benefits earned during the year $1,449 $1,558 $2,228 Interest cost on accumulated benefit obligation 6,669 6,289 6,046 Net amortization and deferral (144) (55) (55) Net periodic post retirement benefit cost $7,974 $7,792 $8,219 A one-percentage-point change in assumed health care cost trend rates would change the aggregate service and interest cost by $697,000 and the accumulated benefit obligation by approximately $6,230,000. Other Compensation Plans The Company and each of its subsidiaries have adopted various plans relating to the achievement of specific goals to provide incentive compensation for designated employees. Total compensation earned by salaried participants of those plans was $36,134,000, $47,068,000, and $33,809,000 in 2000, 1999, and 1998, respectively, and by hourly participants was $30,612,000, $24,053,000, and $36,500,000 in 2000, 1999, and 1998, respectively. NOTE TEN: THRIFT AND STOCK PLAN The Company sponsors the CNF Thrift and Stock Plan (TASP), a voluntary defined contribution plan with a leveraged ESOP feature, for non-contractual U.S. employees. In 1989, the TASP borrowed $150,000,000 to purchase 986,259 shares of the Company's Series B Cumulative Convertible Preferred Stock. This stock is only issuable to the TASP trustee. The TASP satisfies the Company's contribution requirement by matching up to 50% of the first 3% percent of a participant's basic compensation. Company contributions to the TASP were $13,282,000 in 2000, $13,735,000 in 1999, and $10,491,000 in 1998, in the form of common and preferred stock. The Series B Preferred Stock earns a dividend of $12.93 per share and is used to repay the TASP debt. Any shortfall is paid in cash by the Company. Dividends on these preferred shares are deductible for income tax purposes and, accordingly, are reflected net of their tax benefits in the Statements of Consolidated Income. Allocation of preferred stock to participants' accounts is based upon the ratio of the current year's principal and interest payments to the total TASP debt. Since the Company guarantees the debt, it is reflected in Long-term Debt and Guarantees in the Consolidated Balance Sheets. The TASP guarantees are reduced as principal is paid. Each share of preferred stock is convertible into common stock, upon an employee ceasing participation in the plan, at a rate generally equal to that number of shares of common stock that could be purchased for $152.10, but not less than the minimum conversion rate of 4.71 shares of common stock for each share of Series B preferred stock. Deferred compensation expense is recognized as the preferred shares are allocated to participants and is equivalent to the cost of the preferred shares allocated and the TASP interest expense for the year, reduced by the dividends paid to the TASP. During 2000, 1999, and 1998, $6,998,000, $7,236,000, and $6,983,000, respectively, of deferred compensation expense was recognized. PAGE 34 At December 31, 2000, the TASP owned 824,902 shares of Series B preferred stock, of which 299,255 shares have been allocated to employees. At December 31, 2000, the Company has reserved, authorized and unissued common stock adequate to satisfy the conversion feature of the Series B preferred stock. NOTE ELEVEN: STOCK-BASED COMPENSATION Stock Options Officers and non-employee directors have been granted options under the Company's stock option plans to purchase common stock of the Company at prices equal to the market value of the stock on the date of grant. Options granted prior to June 30, 1998 generally are exercisable one year from the date of grant. Stock option grants awarded subsequent to June 30, 1998 generally vest ratably over four years following the grant date. The options generally expire 10 years from the dates of grant. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Had compensation cost for the Company's stock-based compensation plans been determined in accordance with SFAS 123, "Accounting for Stock-Based Compensation," pro forma net income from continuing operations as reported net of preferred dividends would have been $133.2 million, $177.3 million and $130.8 million for the years 2000, 1999 and 1998, respectively. Diluted earnings per share would have been $2.38, $3.16 and $2.36 per share for the years 2000, 1999 and 1998, respectively. These pro forma effects of applying SFAS 123 are not indicative of future amounts. The weighted-average grant-date fair value of options granted in 2000, 1999 and 1998 was $14.26, $15.65, and $17.22 per share, respectively. The following assumptions were used with the Black-Scholes options pricing model to calculate the option values: risk free, weighted-average rate, 5.6%-6.9%; expected life, 5.8 years; dividend yield, 1.4%; and volatility, 60.0%. The following is a summary of stock option data: Wtd. Avg. Number of Exercise Options Price Outstanding at December 31, 1997 2,587,598 $20.12 Granted 711,350 38.29 Exercised (321,079) 17.07 Expired or canceled (46,850) 38.24 Outstanding at December 31, 1998 2,931,019 24.60 Granted 751,100 30.92 Exercised (446,128) 16.75 Expired or canceled (10,995) 30.78 Outstanding at December 31, 1999 3,224,996 27.13 Granted 1,749,950 26.24 Exercised (115,732) 15.48 Expired or canceled (131,267) 33.02 Outstanding at December 31, 2000 4,727,947 $26.90 Options exercisable as of December 31: 2000 2,013,257 $24.78 1999 2,020,646 23.66 1998 2,194,975 20.66 The following is a summary of the stock options outstanding and exercisable at December 31, 2000: Outstanding Options Exercisable Options Remaining Wtd. Avg. Wtd. Avg. Range of Number Life in Exercise Number Exercise Exercise Prices of Options Years Price of Options Price $11.08-$16.26 371,636 2.8 $14.26 371,636 $14.26 $18.05-$27.06 2,551,678 5.3 23.75 863,378 19.40 $29.63-$43.06 1,804,633 7.8 33.95 778,243 35.77 Restricted Stock Under terms of the Company's stock-based compensation plans, shares of the Company's common stock are awarded to executive officers and, to a lesser extent, directors. Restrictions on the shares generally expire one-third per year dependent on the achievement of certain market prices of the Company's common stock. Shares are valued at the market price of the Company's common stock at the date of award. The following table summarizes information about restricted stock awards for the years ended December 31: 2000 1999 1998 Wtd. Wtd. Wtd. Avg. Fair Avg. Fair Avg. Fair Shares Value Shares Value Shares Value Awarded 19,258 $34.50 63,112 $33.08 112,113 $38.51 Forfeited 15,332 23.87 - - 5,667 34.41 PAGE 35 The weighted-average fair value for shares awarded in 2000 excludes 15,276 shares awarded for settlement of pension liabilities due to certain directors. Total compensation expense recognized for restricted stock in 2000, 1999, and 1998 was $358,000, $4,622,000, and $2,781,000, respectively. At December 31, 2000, the Company had 2,658,550 common shares available for the grant of stock options, restricted stock, or other stock-based incentive compensation. NOTE TWELVE: FINANCIAL INSTRUMENTS The Company has several interest rate swap agreements. Interest rate swaps that effectively convert $128.3 million of variable-rate lease obligations to fixed-rate obligations expire through 2005. Interest rate differentials to be paid or received are recognized over the life of each agreement as adjustments to operating expense. Interest rate swaps that effectively convert the Company's 8 7/8% Notes due 2010 to floating-rate obligations expire in 2010. Interest rate differentials are recognized as adjustments to interest expense. The Company is exposed to credit loss on the interest rate swaps, but does not anticipate any loss due to the creditworthiness of its swap counterparties. The fair values of the interest rate swaps, as presented below, reflect the estimated amounts that the Company would receive if the contracts were terminated at the reported date. The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31: 2000 1999 Carrying Carrying (Dollars in thousands) Amount Fair Value Amount Fair Value Short-term borrowings $ - $ - $ 40,000 $ 40,000 Long-term debt 431,616 451,000 329,200 315,000 Off-balance sheet receivables: Interest rate swaps - 20,600 - 7,600 Fuel purchase contracts - - - 1,100 In December 1999, the Company recognized a $9.6 million net gain on the sale of Emery's holdings in the equity securities of Equant N.V., an international data network service provider. Approximately 34% of Emery's holdings in the securities were sold in December 1999 and the resulting gain was recognized in Miscellaneous, net in the Statements of Consolidated Income. The remaining shares held by Emery are carried at essentially no cost at December 31, 2000, and are subject to transferability restrictions. NOTE THIRTEEN: COMMITMENTS AND CONTINGENCIES In addition to letters of credit outstanding under its $350 million unsecured credit facility and other uncommitted lines of credit discussed in Note 4 "Debt and Guarantees," the Company at December 31, 2000, had $73.6 million in letters of credit outstanding under other unsecured letter of credit facilities. In connection with the December 2, 1996 spin-off of Consolidated Freightways Corporation (CFC), the Company's former long-haul LTL segment, the Company agreed to indemnify certain states, insurance companies and sureties against the failure of CFC to pay 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 December 31, 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 those examinations, 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 $149 million as of December 31, 2000. The amount due under the Notice was reduced in the third quarter of 2000 by a portion of the Company's $93.4 million payment to the IRS, which is described below. PAGE 36 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 and the recently issued Treasury Ruling 2001-4. 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. At December 31, 1999, the Company had recognized approximately $53 million in Deferred Charges and Other Assets in the Consolidated Balance Sheets for amounts receivable from CFC and a corresponding payable for amounts due the IRS but reimbursable by CFC under the tax sharing agreement. 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 the last half of 2000, the Company received real property with an estimated value of $21.2 million in settlement of CFC's commitment to transfer land and buildings. Prior to its transfer, the real property collateralized CFC's obligation to the Company. As discussed above, the IRS is seeking to recover $149 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 matters relating to CFC for years prior to the spin-off, and as mentioned above, aircraft maintenance costs. In June 2000, the Company settled the tax issue relating to the manner in which Emery Worldwide calculated and paid aviation excise taxes. 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 aviation 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. NOTE FOURTEEN: SEGMENT REPORTING The operations of the Company are comprised of four business segments: Con-Way Transportation Services, Emery Worldwide, Menlo Logistics, and Other. Con-Way provides regional one- and two-day LTL freight trucking and full-service truckload freight delivery throughout the U.S., Canada and Mexico, expedited and guaranteed ground transportation, and integrated supply chain services. Emery provides expedited and deferred domestic and international air cargo services, ocean delivery, and customs brokerage. Domestically, Emery relies primarily on its dedicated aircraft and ground fleet to provide its services. Internationally, Emery acts principally as a freight forwarder. Menlo is a full-service contract logistics company that specializes in developing and managing complex distribution networks. The Other segment consists primarily of Road Systems, a trailer manufacturer, and Vector SCM, a joint venture formed with General Motors in December 2000. Vector SCM will serve as a logistics service provider to General Motors. VantageParts, the Company's former wholesale distributor of truck parts and supplies, was also included in the Other segment prior to the sale of its assets in May 1999. Intersegment revenue and related operating income have been eliminated to reconcile consolidated revenue and operating income. Management evaluates segment performance primarily based on revenue and operating income; therefore, other items included in pretax income, consisting primarily of interest income or expense, are not reported in segment results. PAGE 37 Operating income is net of all corporate expenses, which are allocated based on measurable services provided each segment or for general corporate expenses allocated on a revenue and capital basis. Identifiable corporate assets consist primarily of deferred charges and other assets, property and equipment and deferred taxes. Certain corporate assets that are used to provide shared data processing and other administrative services are not allocated to individual segments. For geographic reporting, freight transportation revenues are allocated to international locations (except for Canada) when one or both of the shipment origination or destination locations are outside of the United States. Canada, which operates as an integrated part of the North America freight operations, is allocated 50 percent of the revenue when either the origination or destination location is in Canada and the other location is in the United States or an international location. Revenues for contract services are allocated to the country in which the services are performed. Long-lived assets outside of the United States were immaterial for all periods presented. (Dollars in thousands) 2000 1999 1998 Revenues United States $4,127,040 $3,810,177 $3,459,918 Canada 149,862 132,190 112,721 North America 4,276,902 3,942,367 3,572,639 International 1,295,475 1,094,934 958,047 Total $5,572,377 $5,037,301 $4,530,686 CNF TRANSPORTATION INC. AND SUBSIDIARIES OPERATING SEGMENTS YEAR ENDED DECEMBER 31, 2000 (Dollars in thousands)
Adjustments, Discontinued Operations, Con-Way Eliminations and Transportation Emery Menlo Consolidated the Parent Services Worldwide Logistics Other Revenues $5,572,377 $ (56,664) $2,045,580 $2,628,816 $903,964 $ 50,681 Inter-company eliminations - 56,664 (684) (20,674) (13,164) (22,142) Net revenues 5,572,377 - 2,044,896 2,608,142 890,800 28,539 Operating income 289,966 - 227,312(a) 28,365(b) 33,303 986 Depreciation and amortization 190,651 9,544 93,115 80,620 6,939 433 Capital expenditures 235,221 31,992 122,592 68,087 12,291 259 Identifiable assets 3,244,941 520,689 1,011,734 1,516,394 170,326 25,798 Year Ended December 31, 1999 Revenues $5,037,301 $ (56,880) $1,879,053 $2,420,220 $727,593 $ 67,315 Inter-company eliminations - 56,880 (837) (11,804) (11,585) (32,654) Net revenues 5,037,301 - 1,878,216 2,408,416 716,008 34,661 Operating income 354,238 - 228,820 75,514 22,255 27,649(c) Depreciation and amortization 164,876 10,242 85,418 61,781 6,842 593 Capital expenditures 324,604 6,359 211,971 100,219 5,642 413 Identifiable assets 3,059,334 479,671 968,507 1,439,957 141,184 30,015 Year Ended December 31, 1998 Revenues $4,530,686 $ (77,826) $1,684,879 $2,232,815 $598,750 $ 92,068 Inter-company eliminations - 77,826 (888) (29,341) (11,915) (35,682) Net revenues 4,530,686 - 1,683,991 2,203,474 586,835 56,386 Operating income 293,919 - 206,945 64,299 19,459 3,216 Depreciation and amortization 145,840 6,601 77,269 55,025 6,138 807 Capital expenditures 217,725 6,052 102,290 101,935 7,115 333 Identifiable assets 2,659,105 397,184 825,615 1,278,228 125,728 32,350 (a) Includes a $5.5 million loss, $3.2 million after tax, from the sale of certain assets of Con-Way Truckload Services. (b) Includes an $11.9 million loss, $6.9 million after tax, from the termination of certain aircraft leases. (c) Includes a $16.5 million net gain, $9.3 million after tax, from a lawsuit settlement, and a $10.1 million net gain, $5.7 million after tax, from the sale of a truck parts operation.
PAGE 38 NOTE FIFTEEN: QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars in thousands except per share data)
March 31 June 30 September 30 December 31 2000-QUARTER ENDED Revenues $1,321,894 $1,401,146 $1,409,613 $1,439,724 Operating income 71,469 87,131 54,940(c)(d) 76,426 Income from continuing operations before income taxes 66,456(b) 79,589 46,832 68,319 Income taxes 28,244 33,825 19,435 28,376 Net income from continuing operations(a) 36,178 43,692 25,350 37,835 Discontinued operations, net of tax - - (13,508) - Cumulative effect of accounting change, net of tax (2,744) - - - Net income available to common shareholders 33,434 43,692 11,842 37,835 Per share: Basic earnings Continuing operations 0.75 0.90 0.52 0.78 Discontinued operations, net of tax - - (0.28) - Cumulative effect of accounting change, net of tax (0.06) - - - Net income available to common shareholders 0.69 0.90 0.24 0.78 Diluted earnings Continuing operations 0.67 0.80 0.47 0.70 Discontinued operations, net of tax - - (0.24) - Cumulative effect of accounting change, net of tax (0.05) - - - Net income available to common shareholders 0.62 0.80 0.23 0.70 Market price range $26.19-$34.75 $22.73-$34.38 $20.25-$29.50 $21.94-$33.81 Common dividends 0.10 0.10 0.10 0.10
March 31 June 30 September 30 December 31 1999-QUARTER ENDED Revenues $1,137,137 $1,243,438 $1,290,182 $1,366,544 Operating income 79,127(e) 93,940(f) 85,768 95,403 Income from continuing operations before income taxes 71,393 84,949 78,202 97,716(g) Income taxes 31,212 37,016 34,018 42,506 Net income from continuing operations(a) 38,154 45,872 42,147 53,117 Discontinued operations, net of tax 2,115 851 - - Net income available to common shareholders 40,269 46,723 42,147 53,117 Per share: Basic earnings Continuing operations 0.80 0.95 0.87 1.10 Discontinued operations, net of tax 0.04 0.02 - - Net income available to common shareholders 0.84 0.97 0.87 1.10 Diluted earnings Continuing operations 0.71 0.84 0.77 0.97 Discontinued operations, net of tax 0.03 0.02 - - Net income available to common shareholders 0.74 0.86 0.77 0.97 Market price range $34.15-$44.55 $32.56-$45.52 $34.64-$45.19 $28.28-$38.38 Common dividends 0.10 0.10 0.10 0.10 (a) Reduced by preferred stock dividends. (b) Includes a $2.6 million net gain, $1.5 million after tax, ($0.03 per basic and diluted share) from the sale of securities. (c) Includes a $5.5 million loss, $3.2 million after tax, ($0.07 per basic share and $0.06 per diluted share) from the sale of certain assets of Con-Way Truckload Services. (d) Includes an $11.9 million loss, $6.9 million after tax, ($0.14 per basic share and $0.12 per diluted share) from the termination of certain aircraft leases. (e) Includes a $16.5 million net gain, $9.3 million after tax, ($0.19 per basic share and $0.17 per diluted share) from a lawsuit settlement. (f) Includes a $10.1 million net gain, $5.7 million after tax, ($0.12 per basic share and $0.10 per diluted share) from the sale of a truck parts operation. (g) Includes a $9.6 million net gain, $5.4 million after tax, ($0.11 per basic share and $0.10 per diluted share) from the sale of securities.
PAGE 39 REPORTS MANAGEMENT REPORT ON REPONSIBILITY FOR FINANCIAL REPORTING The management of CNF Transportation Inc. has prepared the accompanying financial statements and is responsible for their integrity. The statements were prepared in accordance with generally accepted accounting principles, after giving consideration to materiality, and are based on management's best estimates and judgments. The other financial information in the annual report is consistent with the financial statements. Management has established and maintains a system of internal control. Limitations exist in any control structure based on the recognition that the cost of such system should not exceed the benefits derived. Management believes its control system provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. The system of internal control is documented by written policies and procedures that are communicated to employees. The Company's internal audit staff independently assesses the adequacy and the effectiveness of the internal controls which are also tested by the Company's independent public accountants. The Board of Directors, through its audit committee consisting of five independent directors, is responsible for engaging the independent accountants and assuring that management fulfills its responsibilities in the preparation of the financial statements. The Company's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Both the internal auditors and Arthur Andersen LLP have access to the audit committee without the presence of management to discuss internal accounting controls, auditing and financial reporting matters. Gregory L. Quesnel President, Chief Executive and Chief Financial Officer Kevin S. Coel Controller REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of CNF Transportation Inc. We have audited the accompanying consolidated balance sheets of CNF Transportation Inc. (a Delaware Corporation) and subsidiaries as of December 31, 2000 and 1999, and the related statements of consolidated income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CNF Transportation Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the Consolidated Financial Statements, effective January 1, 2001, the Company changed its method of accounting for recognition of its in-transit freight transportation revenue. Arthur Andersen LLP San Francisco, California January 26, 2001 PAGE 40 FIVE YEAR FINANCIAL SUMMARY (Dollars in thousands except per share data)
2000 1999 1998 1997 1996 SUMMARY OF OPERATIONS Revenues $5,572,377 $5,037,301 $4,530,686 $4,215,165 $3,662,183 Con-Way Transportation Services 2,044,896 1,878,216 1,683,991 1,473,188 1,292,082 Emery Worldwide 2,608,142 2,408,416 2,203,474 2,249,594 1,968,058 Menlo Logistics 890,800 716,008 586,835 455,892 359,377 Other 28,539 34,661 56,386 36,491 42,666 Operating income (loss) 289,966 354,238 293,919 277,865 192,148 Con-Way Transportation Services 227,312(c) 228,820 206,945 147,155 101,049 Emery Worldwide 28,365(d) 75,514 64,299 113,963 78,415 Menlo Logistics 33,303 22,255 19,459 17,178 10,918 Other 986 27,649(f) 3,216 (431) 1,766 Depreciation and amortization 190,651 164,876 145,840 123,391 95,746 Interest expense 29,972 25,972 32,627 39,553 39,766 Income from continuing operations before income taxes 261,196(e) 332,260(g) 253,812 234,812 147,132 Income taxes 109,880 144,752 112,756 106,839 66,951 Income from continuing operations(a) 143,055 179,290 132,887 120,087 71,589 Discontinued operations, net of tax(b) - 2,966 (2,078) (7,929) (36,386) Loss from discontinuance, net of tax(b) (13,508) - - - (16,247) Cumulative effect of accounting change, net of tax (2,744) - - - - Net Income available to common shareholders 126,803 182,256 130,809 112,158 18,956 PER SHARE Net income from continuing operations, basic 2.95 3.72 2.79 2.59 1.63 Discontinued operations, net of tax(b) - 0.06 (0.05) (0.17) (0.83) Loss from discontinuance, net of tax(b) (0.28) - - - (0.37) Cumulative effect of accounting change, net of tax (0.06) - - - - Net income available to common shareholders 2.61 3.78 2.74 2.42 0.43 Net income from continuing operations, diluted 2.65 3.29 2.49 2.33 1.48 Discontinued operations, net of tax(b) - 0.06 (0.04) (0.15) (0.73) Loss from discontinuance, net of tax(b) (0.24) - - - (0.33) Cumulative effect of accounting change, net of tax (0.05) - - - - Net income available to common shareholders 2.36 3.35 2.45 2.18 0.42 Dividends declared and paid on common stock 0.40 0.40 0.40 0.40 0.40 Common shareholders' equity 20.90 19.15 15.48 13.26 10.86 STATISTICS Total assets $3,244,941 $3,059,334 $2,659,105 $2,421,496 $2,081,866 Long-term obligations 534,649 433,446 467,635 473,488 477,201 Capital expenditures 235,221 324,604 217,725 183,164 200,835 Effective income tax rate 42.1% 43.6% 44.4% 45.5% 45.5% Basic average shares 48,490,662 48,189,618 47,659,745 46,236,688 44,041,159 Market price range $20.25-$34.75 $28.28-$45.52$21.63-$49.94 $20.25-$50.88 $17.25-$29.38 Number of shareholders 8,802 9,520 9,870 15,560 16,090 Number of regular full-time employees 28,700 28,300 26,500 26,300 25,100 (a) Reduced by preferred stock dividends. (b) Includes the results of Priority Mail operations, except for 1996, which reflects the results of CFC, the Company's former long-haul LTL segment. (c) Includes a $5.5 million loss, $3.2 million after tax, ($0.07 per basic share and $0.06 per diluted share) from the sale of certain assets of Con-Way Truckload Services. (d) Includes an $11.9 million loss, $6.9 million after tax, ($0.14 per basic share and $0.12 per diluted share) from the termination of certain aircraft leases. (e) Includes a $2.6 million net gain, $1.5 million after tax, ($0.03 per basic and diluted share) from the sale of securities. (f) Includes a $16.5 million net gain, $9.3 million after tax, ($0.19 per basic share and $0.17 per diluted share) from a lawsuit settlement, and a $10.1 million net gain, $5.7 million after tax, ($0.12 per basic share and $0.10 per diluted share) from the sale of a truck parts operation. (g) Includes a $9.6 million net gain, $5.4 million after tax, ($0.11 per basic share and $0.10 per diluted share) from the sale of securities.
EX-18 6 0006.txt EXHIBIT 18 CNF Transportation Inc. March 26, 2001 Re: Form 10-K Report for the year ended December 31, 2000. Gentlemen/Ladies: This letter is written to meet the requirements of Regulation S-K calling for a letter from a registrant's independent accountants whenever there has been a change in accounting principle or practice. As of January 1, 2000, the Company changed from the method of accounting for recognition of freight transportation revenue when freight is received with accrual of estimated cost to complete to the method of accounting for recognition of freight transportation revenue based on the allocation of revenue between reporting periods based on relative transit times in each reporting period with expenses recognized as incurred. According to the management of the Company, this change was made as a result of recent pronouncements, including SEC Staff Accounting Bulletin No. 101. We are of the opinion that the Company's change in method of accounting for freight transportation revenue is to a more preferable method as indicated in the Emerging Issues Task Force Issue No. 91-9, "Revenue and Expense Recognition for Freight Services in Process." Very truly yours, /s/Arthur Andersen LLP - ----------------------------- ARTHUR ANDERSEN LLP EX-21 7 0007.txt EXHIBIT 21 Exhibit 21 CNF TRANSPORTATION INC. SIGNIFICANT SUBSIDIARIES OF THE COMPANY December 31, 2000 The Company and its significant subsidiaries were: State or Percent of Province or Stock Owned Country of Parent and Significant Subsidiaries by Company Incorporation CNF Transportation Inc. Delaware Significant Subsidiaries of CNF Transportation Inc. Con-Way Transportation Services, Inc. 100 Delaware Emery Air Freight Corporation 100 Delaware Emery Worldwide Airlines, Inc. 100 Nevada Menlo Logistics, Inc. 100 California Road Systems, Inc. 100 California -----END PRIVACY-ENHANCED MESSAGE-----