PAGE 24
Financial Review and Management Discussion
The Company's 1993 operating profit was $120.2 million, a 147.3%
increase from 1992. This significant improvement is the result of
increased shipment levels and cost containment at Emery and record
operating profits at the Con-Ways. Emery achieved its first
profitable year of operations since its acquisition in 1989. The
Company's 1992 operating income includes $17.3 million of non-
recurring charges to restructure CF MotorFreight and write off
substantially all of its Canadian operating rights. Excluding
these charges, operating income improved $54.3 million or 82.4%
over 1992. The 1992 operating income improved $73.2 million from
$1.7 million in 1991 excluding the $17.3 million of restructuring
charges and $9.0 million of incremental charges related to the
Company's 1992 adoption of Statement of Financial Accounting
Standards No. 106 "Employer's Accounting for Post Retirement
Benefits Other than Pensions" (SFAS 106).
Total Company revenues increased $136.2 million or 3.4% over 1992
as Emery regained revenues due to various successful marketing
programs while the Con-Ways continued to grow through expansion
into new markets. These increases more than offset CF
MotorFreight's revenue decline of 3.3% which is attributed to
continued rate discounting and tonnage loss associated with market
dilution and a management decision to shed less profitable
business.
Significant variations in segment revenue and operating income are
as follows:
CF MOTORFREIGHT
CF MotorFreight's (CFMF) 1993 revenues decreased 3.3% on a tonnage
decline of 3.1% with higher rated less-than-truckload (LTL) tonnage
declining 3.0%. The decline in revenues reflects continued price
erosion and CFMF's efforts to selectively shed some of its more
unprofitable business. The decline also reflects market dilution
from new competitors and changes in distribution patterns by
customers. In 1992 revenues increased 1.9% on a tonnage increase
of 0.7% in contrast to revenue and tonnage declines of 2.0% and
5.0%, respectively, in 1991.
In 1993, operating income was $31.7 million compared to $27.5
million in 1992, an increase of 15.4%. The 1992 operating income
includes $17.3 million to restructure CFMF operations and write off
substantially all of its Canadian operating authority. Excluding
these charges, CFMF's 1993 operating income decreased $13.1 million
or 29.2% from 1992.
Persistent rate discounting and the previously mentioned market
dilution have impaired CFMF's ability to retain margins comparable
to those in prior years, as margins decreased from 2.4% in 1991 to
2.0% (excluding restructuring charges) in 1992 and 1.5% in 1993.
As shipment volumes stabilize, CFMF will size its freight flow
infrastructure to expected business levels. Additionally, CFMF has
initiated several programs to streamline operations. These include
technology enhancements such as dock automation and programs to
reduce freight handling and allow flexible services which are more
responsive to customer needs. Such programs include utilization of
metropolitan area terminals to consolidate freight and a greater
use of sleeper teams for more direct freight movement. While
short-term margins are expected to remain unsatisfactory, the benefits
of these initiatives should improve margins in the long-term.
CFMF's ability to successfully negotiate greater flexibility in
work-rules and equitable wage increases with various labor unions
should also contribute to improving margins. In addition, CFMF must
maintain business levels with adequate yields. To this end, CFMF
announced a 3% discount rollback in January 1994.
Approximately 88% of CFMF's domestic employees are represented by
various labor unions, primarily the International Brotherhood of
Teamsters (IBT). CFMF and IBT are parties to a National Master
Freight Agreement scheduled to expire on March 31, 1994.
CON-WAY TRANSPORTATION SERVICES
The Con-Way group again produced record revenues for the year.
Revenues increased 13.0% on a tonnage increase of 26.3% from 1992
with the higher rated LTL tonnage increasing 13.9%. All of the
companies in the Con-Way group experienced revenue growth. In 1993
the Con-Ways expanded service in Florida and into Missouri. In
1992, Con-Way revenues increased 13.3% on a 10.0% increase in
tonnage from 1991.
PAGE 25
The continued revenue growth combined with successful cost
containment efforts produced record operating income for the Con-
Way group as operating income increased 33.7% over 1992. The 1993
operating margin was 8.8% compared to 7.4% in the prior year. The
improved operating margin in 1993 occurred despite increased costs
associated with expansion of service into new areas. Operating
income in 1992 increased 61.3% from 1991. The 1992 operating
margin of 7.4% compares with a 5.2% margin in 1991.
The Con-Ways are seeking to increase business through growth in
existing markets and expansion into new geographic markets
including New England. Recent joint service agreements between the
Con-Way carriers will enhance business levels. However, short-term
operating margins may be impacted by start-up costs while
establishing freight levels in these new markets.
EMERY WORLDWIDE
For Emery, 1993 marked the first year of operating profits and the
first year since its acquisition that revenues increased over the
prior year. Revenues in 1993 increased 10.0% from 1992 due
entirely to gains in its commercial business as revenues from the
U.S. Postal Service (USPS) contracts declined. Emery revenues in
1992 declined 11.8% from 1991 following the reconfiguration
management initiated in 1991 to emphasize parcels, packages and
freight shipments 5 lbs. and above, and reduced revenues from USPS
contracts.
Operating income for 1993 was a $49.2 million improvement from the
$32.7 million loss in 1992. These operating results represent a
steady improvement that commenced in 1992. All of the profit
improvement came from the commercial business as USPS contracts
provided 16.7% less income due to lower business levels than in
1992. The successful return to profitability is attributed to
stringent cost control measures coupled with an increase in
business levels resulting from the success of Emery's marketing
initiatives and renewed customer confidence. The 1993 operating
results also include $20.4 million of incentive compensation shared
by over 6000 employees. In 1992, Emery reduced its operating loss
$50.9 million, from $83.6 million in 1991, despite a $13.4 million
reduction in operating income from USPS contracts.
Emery's management plans to continue its strategy of developing new
and existing business while emphasizing cost containment measures,
an approach that returned the company to profitability after four
years of losses. Emery expects to continue to expand its
international and domestic business with marketing programs
tailored to the needs of major accounts.
In January 1994, Emery continued USPS operations under a new
contract that was awarded to them in 1993. The contract provides
revenues of approximately $880 million over a 10 year period and
$26.9 million per year as reimbursement for certain costs.
OTHER INCOME AND (EXPENSE)
Other expense, net, decreased 51.6% for the following reasons.
Interest expense declined 22.0% from 1992 as the Company reduced
borrowing costs with scheduled and early retirement of debt and
debt refinancing. In 1992 other income and expense included $10.5
million of non-recurring expenses to reduce the cost of unused
properties to their market value and the amortization of deferred
financing costs related to credit facilities that have since
lapsed. In 1992 investment income included a $5.0 million
investment loss related to certain pension related investments.
Offsetting the above items is a decline in investment income in
1993 as investments were liquidated to retire debt and purchase
assets.
NET INCOME (LOSS) TO COMMON SHAREHOLDERS
In 1993, net income applicable to common shareholders was $31.6
million. The 1992 net loss applicable to common shareholders of
$97.7 million includes a $7.4 million extraordinary charge for the
early retirement of debt and a $70.0 million one-time charge for
the adoption of SFAS 106 effective January 1, 1992. Also included
is the previously mentioned $17.3 million of CFMF charges, $10.5
million to write down property held for sale and certain
intangibles and related tax benefits. Excluding the above 1992
charges, the net loss applicable to common shareholders was $2.4
million.
PAGE 26
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1993, the Company had $139.0 million in cash and
cash equivalents with an additional $13.7 million in long-term
investments. Although the Company had positive cash flow from
operations, due primarily to income from operations and significant
depreciation and amortization, cash and investments decreased from
last year due to the retirement of debt and increased capital
expenditures. The 1993 capital expenditures include the purchase
of approximately $72.2 million of aircraft and related equipment in
connection with the USPS contract. Of the $72.2 million,
approximately $24.5 million is attributed to acquired maintenance
and is included in deferred charges and other assets on the
accompanying balance sheet. In 1993, all debt retirement, capital
expenditures and dividend requirements were satisfied with cash
from operations and sales of marketable securities. Cash flows
from operations are expected to provide for capital expenditures
and scheduled debt repayments in 1994.
In 1993, Emery entered into a $75 million receivable sale
facility with several banks. At December 31, 1993, $72 million of
letters of credit were issued and secured with eligible Emery
receivables. These needs, along with those of the trucking
subsidiaries, were previously being satisfied by a $250 million
receivable sale facility.
In July 1993, the Company entered into a $250 million unsecured
credit facility to provide standby availability for the Company's
letter of credit and working capital needs. The facility replaces
the previous $250 million receivable sale facility entered into
in December 1990. A second agreement provides for letter of credit
needs of up to $110 million. Letters of credit of $121 million at
December 31, 1993, previously financed under the receivable
sale facility, are refinanced under these new facilities. The
combined cash borrowings and letters of credit outstanding under
these two facilities may not exceed $250 million.
The Company retired $13.2 million of debt, net, in the year ended
December 1993, consisting primarily of industrial revenue bonds.
The bonds were retired at or near par.
In September 1993, the City of Dayton, Ohio issued $16 million
Series E and $16 million Series F, City of Dayton, Ohio, Special
Facilities Revenue Refunding Bonds. These bonds replaced $32
million of 1988 Series B City of Dayton, Ohio, Special Facilities
Revenue Bonds. This refinancing is expected to result in annual
cash savings in borrowing costs of approximately $3 million.
In addition, the Company reduced its long-term obligations by $45
million pursuant to a third party assuming the lease obligation
related to a previously owned facility. The relief of this
obligation also resulted in the removal from the Company's balance
sheet of a related $45 million note receivable.
At December 31, 1993, the Company's ratio of long-term obligations
(including guarantees) to total capital (including long-term
obligations) was 39.6% compared with 46.6% at year end 1992. The
improvement is primarily attributable to net income and the
retirement of debt in 1993. The current ratio at December 31, 1993
and 1992, was 1.1 to 1 and 1.2 to 1, respectively. The Company can
successfully maintain this current ratio because of a high turnover
of accounts receivable.
OTHER
The Company's operations necessitate the storage of fuel in
underground tanks as well as the disposal of substances regulated
by various federal and state laws. The Company adheres to a
stringent site by site tank testing and maintenance program
performed by a qualified independent party to protect the
environment and comply with regulations. Where the need for
environmental clean-up is necessary the Company takes appropriate
action.
The Company has been designated a Potentially Responsible Party
(PRP) by the U.S. Environmental Protection Agency with respect to
the disposal of hazardous substances at various sites. However,
based upon cost studies performed by independent parties, the
Company expects its share of the clean-up costs to be minimal.
PAGE 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Consolidated Freightways, Inc.:
We have audited the accompanying consolidated balance sheets
of Consolidated Freightways, Inc. (a Delaware Corporation) and
subsidiaries as of December 31, 1993 and 1992, and the related
statements of consolidated operations, cash flows and shareholders'
equity for each of the three years in the period ended December 31,
1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Consolidated Freightways, Inc. and subsidiaries as of December 31,
1993 and 1992, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
1993 in conformity with generally accepted accounting principles.
As discussed in Notes 5 and 7 to the consolidated financial
statements, effective January 1, 1992 the Company changed its
method of accounting for income taxes to reflect the adoption of
the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", and its method of accounting for
post retirement benefits to reflect the adoption of the Statement
of Financial Accounting Standards No. 106, "Employers' Accounting
for Post Retirement Benefits Other than Pensions",
/s/Arthur Andersen & Co.
San Francisco, California
January 28, 1994
PAGE 28
CONSOLIDATED FREIGHTWAYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands)
1993 1992
ASSETS
Current Assets
Cash and temporary cash investments $139,044 $152,064
Trade accounts receivable, net of
allowances (Note 1) 508,669 314,807
Other accounts and notes receivable 35,714 33,820
Notes receivable from sale of trade accounts -- 166,399
Operating supplies, at lower of
average cost or market 34,940 33,426
Prepaid expenses 69,009 64,193
Deferred income taxes (Note 5) 108,458 97,884
Total Current Assets 895,834 862,593
Property, Plant and Equipment, at cost
Land 152,402 145,547
Buildings and improvements 488,292 468,269
Revenue equipment 935,482 900,653
Other equipment and leasehold improvements 347,601 336,463
1,923,777 1,850,932
Accumulated depreciation and amortization (1,013,333) (964,098)
910,444 886,834
Other Assets
Operating rights, net of accumulated amortization 9,129 9,479
Cost in excess of net assets of businesses
acquired net of accumulated amortization 354,076 363,710
Long-term receivables 6,600 51,600
Marketable securities, at lower of cost or market 13,727 47,865
Restricted funds 13,954 17,909
Deferred charges and other assets 102,889 53,077
500,375 543,640
Total Assets $2,306,653 $2,293,067
The accompanying notes are an integral part of these statements.
PAGE 29
CONSOLIDATED FREIGHTWAYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 1993 1992
Current Liabilities
Accounts payable and accrued liabilities (Note 2) $634,107 $587,246
Accrued claims costs 138,242 119,798
Current maturities of long-term debt and
capital leases (Notes 3 and 4) 39,246 571
Federal and other income taxes (Note 5) 6,158 2,669
Total Current Liabilities 817,753 710,284
Long-Term Liabilities
Long-term debt and guarantees (Note 3) 297,215 393,677
Long-term obligations under capital leases (Note 4) 111,194 111,643
Deferred income taxes (Note 5) 22,085 47,081
Accrued claims costs 173,999 199,843
Other liabilities and deferred credits (Note 7) 261,032 251,378
Total Liabilities 1,683,278 1,713,906
Shareholders' Equity (Note 6)
Preferred stock, no par value; authorized
5,000,000 shares:
Series A, designated 600,000 shares;
none issued -- --
Series B, 8.5% cumulative, convertible,
$.01 stated value; designated 1,100,000
shares issued 968,655 and
974,152 shares, respectively 10 10
Series C, 8.738% cumulative, convertible,
$.01 stated value; designated and issued
690,000 shares 7 7
Additional paid-in capital, preferred stock 265,182 266,019
Deferred TASP compensation (Note 8) (129,276) (133,354)
Total Preferred Shareholders' Equity 135,923 132,682
Common stock, $.625 par value; authorized
100,000,000 shares; issued 43,340,801 and
43,016,319 shares, respectively 27,090 26,887
Additional paid-in capital, common stock 104,666 99,847
Cumulative translation adjustment 1,229 2,927
Retained earnings 542,811 511,207
Cost of repurchased common stock
(7,638,809 and 7,687,539 shares, respectively) (188,344) (189,546)
Deferred EMSOP compensation (Note 7) -- (4,843)
Total Common Shareholders' Equity 487,452 446,479
Total Shareholders' Equity 623,375 579,161
Total Liabilities and Shareholders' Equity $2,306,653 $2,293,067
The accompanying notes are an integral part of these statements.
PAGE 30
CONSOLIDATED FREIGHTWAYS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
Years Ended December 31,
(Dollars in thousands except per share data)
1993 1992 1991
REVENUES $4,191,811 $4,055,589 $4,082,257
COSTS AND EXPENSES
Operating expenses 3,407,996 3,306,732 3,310,184
Selling and administrative expenses 528,022 561,581 624,213
Depreciation 135,636 138,695 146,124
4,071,654 4,007,008 4,080,521
OPERATING INCOME 120,157 48,581 1,736
OTHER INCOME (EXPENSE)
Investment income 5,586 5,041 10,558
Interest expense (30,333) (38,893) (46,703)
Miscellaneous, net (3,969) (25,462) (8,928)
(28,716) (59,314) (45,073)
Income (loss) before income taxes (benefits),
extraordinary charge and cumulative effect
of accounting change 91,441 (10,733) (43,337)
Income taxes (benefits) (Note 5) 40,867 (7,077) (2,916)
Net income (loss) before extraordinary charge
and cumulative effect of accounting change 50,574 (3,656) (40,421)
Extraordinary charge from early retirement
of debt, net of related income tax benefits
of $4,561 -- 7,428 --
Cumulative effect of change in method
of accounting for post retirement benefits,
net of related income tax benefits
of $42,899 (Note 7) -- 69,991 --
Net income (loss) 50,574 (81,075) (40,421)
Preferred stock dividends 18,967 16,653 12,691
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 31,607 $ (97,728) $ (53,112)
Primary average shares outstanding
(Note 1) 36,187,682 35,195,743 35,033,738
PRIMARY EARNINGS (LOSS) PER SHARE
Net income (loss) before extraordinary
charge and cumulative effect of
accounting change $ 0.87 $ (0.58) $ (1.52)
Extraordinary charge -- (0.21) --
Cumulative effect of accounting change -- (1.99) --
Net income (loss) $ 0.87 $ (2.78) $ (1.52)
FULLY DILUTED EARNINGS (LOSS) PER
SHARE (Note 1) $ 0.77 $ (2.78) $ (1.52)
The accompanying notes are an intergral part of these statements.
PAGE 31
CONSOLIDATED FREIGHTWAYS, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31
(In thousands)
1993 1992 1991
Cash and Temporary Cash Investments, Beginning
of Period $152,064 $284,645 $217,680
Cash Flows from Operating Activities
Income (loss) before extraordinary charge
and cumulative effect of accounting change 50,574 (3,656) (40,421)
Adjustments to reconcile income (loss) to net
cash provided by operating activities:
Depreciation and amortization 146,297 166,917 168,527
Decrease in deferred income taxes (20,298) (28,661) (8,004)
Losses (gains) from property disposals, net (607) 6,688 (2,370)
Changes in assets and liabilities:
Receivables (194,320) (16,139) 110,403
Notes receivable from sale of trade accounts 166,399 15 (32,441)
Accrued claims costs (7,400) 20,359 24,956
Accounts payable 17,225 (2,254) (40,601)
Income taxes (9,871) (7,313) 8,082
Accrued liabilities, deferred charges
and other 24,809 (4,177) 4,225
Net Cash Provided by Operating Activities 172,808 131,779 192,356
Cash Flows from Investing Activities
Capital expenditures (201,210) (148,706) (98,073)
Purchases of marketable securities (54,749) (47,865) --
Sales of marketable securities 88,887 -- --
Proceeds from sale of property 12,270 4,097 10,563
Net Cash Used by Investing Activities (154,802) (192,474) (87,510)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 32,000 -- --
Repayment of long-term debt and capital lease
obligations (45,236) (164,008) (25,514)
Premium on early retirement of debt -- (7,586) --
Proceeds from issuance of preferred stock -- 117,867 --
Proceeds from issuance of common stock 5,387 2,808 324
Payments of preferred dividends (23,177) (20,967) (12,691)
Net Cash Used by Financing Activities (31,026) (71,886) (37,881)
Increase (Decrease) in Cash and Temporary
Cash Investments (13,020) (132,581) 66,965
Cash and Temporary Cash Investments,
End of Period $139,044 $152,064 $284,645
Supplemental Disclosure
Cash paid for income taxes $71,036 $19,053 $ --
Cash paid for interest (net of amounts
capitalized) $30,438 $39,035 $45,199
The accompanying notes are an integral part of these statements.
PAGE 32
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
CONSOLIDATED FREIGHTWAYS, INC. AND SUBSIDIARIES
(Dollars in thousands)
Preferred Stock Series B Preferred Stock Series C Common Stock
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
Balance, December 31, 1990 984,958 $10 -- -- 42,797,544 $26,750
Exercise of stock options -- -- -- -- 24,000 15
Recognition of deferred compensation -- -- -- -- -- --
Repurchased common stock issued for
conversion of preferred stock (6,272) -- -- -- -- --
Net loss -- -- -- -- -- --
Preferred dividends ($12.93 per share) -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
Balance, December 31, 1991 978,686 10 -- -- 42,821,544 26,765
Issuance of preferred stock -- -- 690,000 7 -- --
Exercise of stock options -- -- -- -- 194,775 122
Recognition of deferred compensation -- -- -- -- -- --
Repurchased common stock issued for
conversion of preferred stock (4,534) -- -- -- -- --
Net loss -- -- -- -- -- --
Series B, Preferred dividends ($12.93 per share)
net of tax benefits -- -- -- -- -- --
Series C, Preferred dividends ($15.40 per share) -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
Balance, December 31, 1992 974,152 10 690,000 7 43,016,319 26,887
Exercise of stock options -- -- -- -- 324,482 203
Recognition of deferred compensation -- -- -- -- -- --
Repurchased common stock issued for
conversion of preferred stock (5,497) -- -- -- -- --
Net income -- -- -- -- -- --
Series B, Preferred dividends ($12.93 per share)
net of tax benefits -- -- -- -- -- --
Series C, Preferred dividends ($15.40 per share) -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
Balance, December 31, 1993 968,655 $10 690,000 $7 43,340,801 $27,090
<FN>
The accompanying notes are an intergral part of these statements.
PAGE 33
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (continued)
Cost of
Additional Cumulative Repurchased Deferred TASP
Paid-in Translation Retained Common and EMSOP
Capital Adjustment Earnings Stock Compensation Total
Balance, December 31, 1990 $247,716 $7,410 $662,047 ($192,251) ($169,703) $581,979
Exercise of stock options 309 -- -- -- -- 324
Recognition of deferred compensation -- -- -- -- 12,909 12,909
Repurchased common stock issued for
conversion of preferred stock (1,608) -- -- 1,608 -- --
Net loss -- -- (40,421) -- -- (40,421)
Preferred dividends ($12.93 per share) -- -- (12,691) -- -- (12,691)
Translation adjustment -- 4,983 -- -- -- 4,983
Balance, December 31, 1991 246,417 12,393 608,935 (190,643) (156,794) 547,083
Issuance of preferred stock 117,860 -- -- -- -- 117,867
Exercise of stock options 2,686 -- -- -- -- 2,808
Recognition of deferred compensation -- -- -- -- 18,597 18,597
Repurchased common stock issued for
conversion of preferred stock (1,097) -- -- 1,097 -- --
Net loss -- -- (81,075) -- -- (81,075)
Series B, Preferred dividends ($12.93 per share)
net of tax benefits -- -- (8,303) -- -- (8,303)
Series C, Preferred dividends ($15.40 per share) -- -- (8,350) -- -- (8,350)
Translation adjustment -- (9,466) -- -- -- (9,466)
Balance, December 31, 1992 365,866 2,927 511,207 (189,546) (138,197) 579,161
Exercise of stock options 5,184 -- -- -- -- 5,387
Recognition of deferred compensation -- -- -- -- 8,921 8,921
Repurchased common stock issued for
conversion of preferred stock (1,202) -- -- 1,202 -- --
Net income -- -- 50,574 -- -- 50,574
Series B, Preferred dividends ($12.93 per share)
net of tax benefits -- -- (8,343) -- -- (8,343)
Series C, Preferred dividends ($15.40 per share) -- -- (10,627) -- -- (10,627)
Translation adjustment -- (1,698) -- -- -- (1,698)
Balance, December 31, 1993 $369,848 $1,229 $542,811 ($188,344) ($129,276) $623,375
<FN>
The accompanying notes are an intergral part of these statements.
PAGE 34
CONSOLIDATED FREIGHTWAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principal Accounting Policies
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Consolidated Freightways, Inc. (the
Company), its wholly-owned subsidiaries, and those of special purpose
financing corporations.
Recognition of Revenues: Transportation freight charges are recognized
as revenue when freight is received for shipment. The estimated costs of
performing the total transportation service are then accrued.
Cash and Temporary Cash Investments: Included within cash and temporary
cash investments are all items considered to be cash equivalents. The
Company considers highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Trade Accounts Receivable, Net: Trade accounts receivable are net of
allowances of $29,780,000 and $26,198,000 at December 31, 1993 and 1992,
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, 10 years for most other equipment and 6 or 7 years for revenue
equipment. Leasehold improvements are amortized over the shorter of the
terms of the respective leases or the useful lives of the assets.
Expenditures for equipment maintenance and repairs, except for aircraft,
are charged to operating expenses as incurred; betterments are capitalized.
Gains (losses) on sales of equipment are recorded in operating expenses.
The costs to perform required maintenance inspections of engines and
aircraft frames for leased and owned aircraft are capitalized and amortized
to expense over the shorter of the period until the next scheduled
maintenance or the remaining term of the lease agreement. Accordingly, the
Company has recorded unamortized maintenance of $120,204,000 and $118,184,000
at December 31, 1993 and 1992, respectively. Under the Company's various
aircraft lease agreements, the Company is expected to return the aircraft
with a stipulated number of hours remaining on the aircraft and engines until
the next scheduled maintenance. The Company has recorded $55,468,000 and
$101,351,000, at December 31, 1993 and 1992, respectively, to accrue for this
obligation and any anticipated unusable maintenance expected at the date of
lease return or other disposal. The net amount, which represents the
difference between maintenance performed currently and that required or
remaining at the expiration of the lease or other disposal, is included in
deferred charges and other assets.
Operating Rights and Costs in Excess of Net Assets of Businesses Acquired:
The costs of operating rights and excess of purchase price over net assets
acquired are capitalized and amortized on a straight-line basis up to a 40-
year period.
Income Taxes: The Company follows the liability method of accounting
for income taxes whereby deferred income taxes are recognized for the tax
consequences of "temporary differences" to the extent they are not reduced by
net operating loss carryforwards, by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of certain assets and liabilities.
The cumulative undistributed earnings of the Company's foreign
subsidiaries ($60,881,000 at December 31, 1993), 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 $6 million.
PAGE 35
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
long-term portion of accrued claims costs relate primarily to workers'
compensation claims which are payable over several years.
Earnings Per Share: Primary earnings per common share are based upon
the weighted average number of common shares outstanding during each period
after consideration of the dilutive effect of stock options. Fully diluted
earnings per share are similarly computed, but include the dilutive effect of
the Company's TASP shares. The number of shares used for the computation of
fully diluted earnings per share for 1993 is 40,857,876 shares. Fully
diluted loss per share computations for 1992 and 1991 exclude stock options
and TASP shares as their inclusion would be anti-dilutive.
2. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
As of December 31,
1993 1992
(Dollars in thousands)
Accounts payable $206,499 $187,800
Other accrued liabilities 172,702 154,172
Accrued holiday and vacation pay 80,661 78,394
Accrued pension costs 50,728 48,651
Estimated revenue adjustments 26,651 27,329
Wages and salaries 38,409 39,883
Accrued taxes other than income taxes 41,785 34,240
Accrued interest 16,672 16,777
Total accounts payable and
accrued liabilities $634,107 $587,246
3. Long-Term Debt and Guarantees
As of December 31, long-term debt and guarantees consisted of the following:
(Dollars in thousands) 1993 1992
8.75% to 8.88% Medium-Term Notes due
1994 to 1995 ($100 million authorized;
interest payable semi-annually) $40,225 $40,225
9-1/8% Notes Due 1999 (interest payable
semi-annually) 117,705 117,705
7.0% to 12.0% Industrial Revenue
Bonds due through 2014 19,900 34,350
Other debt 1,691 106
TASP Notes guaranteed due through 2009 150,000 150,000
Reimbursable obligations related to
previously owned facilities due
2004 and 2014 6,600 51,600
336,121 393,986
Less current maturities of long-term debt (38,906) (309)
Total long-term debt and guarantees $297,215 $393,677
In 1989, the Company issued $55 million of medium-term notes with
variable terms determined at issuance and $150 million of 9 1/8% notes due
1999. These notes contain certain covenants limiting the incurrence of
additional liens.
Of the $150 million Thrift and Stock Plan (TASP) Notes, $117 million
are subject to earlier repurchase by the Company at the option of the
holders, with a yield protection penalty, in the event the Company's long-
term senior unsecured indebtedness should be rated by both Moody's and S&P as
below investment grade. S&P rates the Company's long-term senior unsecured
indebtedness at a rating below investment grade. Moody's rating of such
indebtedness is investment grade.
PAGE 36
In November 1992, the terms of $33 million of the TASP Notes were
modified to exclude the holders' early repurchase option. In exchange, the
interest rates on the notes were enhanced by .5% and additional financial
covenants.
In 1993, the Company entered into an agreement with several banks to
establish a $75 million receivable sale facility. The agreement involves
the sale of eligible Emery receivables to a special purpose corporation,
Emery Receivables Corporation (ERC), for use as collateral for cash or non-
transferrable promissory notes and related letters of credit. The letters of
credit may be issued only on behalf of Emery Air Freight Corporation and for
a term of one year with an option to renew. The letters of credit bear a fee
of 1.5% per annum. At December 31, 1993, there were $72.2 million of letters
of credit issued and collateralized by receivables under this facility.
Under the terms of the agreement, ERC's assets will be available to satisfy
its obligations prior to any distribution to its stockholders. The agreement
contains various covenants, the most restrictive of which requires the
participating companies to maintain specified amounts of tangible net worth.
In July 1993, the Company entered into an agreement with several banks
to establish a $250 million unsecured credit facility to provide for the
Company's letter of credit and working capital needs. The agreement contains
various restrictive covenants which limit the incurrence of additional
indebtedness, require the Company to maintain minimum amounts of tangible net
worth and fixed charge coverage and restrict capital expenditures of
specified subsidiaries. At December 31, 1993, there were $73.1 million of
letters of credit issued under this agreement. This facility replaces a $250
million receivable sale facility which was terminated in 1993. At December
31, 1992, there were $166,399,000 of purchaser's notes due, for receivables
sold, and a comparible amount of letters of credit issued under this
receivable sale facility.
The Company also entered into a related agreement with a bank in July
1993 to establish a $110 million letter of credit facility to provide for the
Company's standby letter of credit needs. At December 31, 1993, there were
$48.0 million of letters of credit issued under this agreement. The
agreement contains covenants substantially the same as those described in the
related $250 million agreement above. The total amounts outstanding under
the unsecured facilities may not exceed $250 million at any one time.
Based on interest rates currently available to the Company for debt with
similar terms and maturities, the fair value of long-term debt is
approximately 5% above the carrying amount at December 31, 1993.
The aggregate annual maturities and sinking fund requirements of long-
term debt for each of the next five years ending December 31 are: 1994,
$38,906,000; 1995, $3,707,000; 1996, $2,403,000; 1997, $3,100,000, and, 1998
$4,200,000.
The Company's consolidated interest expense as presented on the
statements of consolidated operations is net of interest capitalized of
$1,224,000, $543,000 and $1,703,000 for each of the three years in the period
ended December 31, 1993.
The 1992 statement of consolidated operations reflects $7.4 million of
expense for the early retirement of indebtedness under Secured Note Purchase
Agreement. All other debt retirement was at or near par.
PAGE 37
4. Leases
The Company and its subsidiaries are obligated under various non-
cancelable leases which expire at various dates through 2011.
The principal capital lease covers a sorting facility in Dayton, Ohio
(Facility) for a 30-year lease term. Included in other equipment and
leasehold improvements are $83,741,000 as of December 31, 1993 and 1992,
related to this facility. The accumulated depreciation at December 31, 1993
and 1992 was $30,351,000 and $24,677,000, respectively. The Facility was
financed by City of Dayton, Ohio revenue bonds Series A, B, C and D (Bonds).
In September 1993, Emery redeemed the Series B Bonds and subsequently issued
Series E and F Bonds in the same amount, also maturing in 2009. The Series
C, D, E and F Bonds bear variable rates of interest, approximately 3% at
December 31, 1993. The Series A Bonds are due through 2009 with an effective
interest rate of 8%. Rental payments under this lease are equivalent to debt
service on the Bonds. The Bonds have various call provisions at Emery's
option. Series A Bonds are secured by a debt service reserve fund of $7
million which is classified as restricted funds in the consolidated balance
sheets, a first lien on the leasehold interests of Emery in the Facility and
the leased real property pursuant to a mortgage, and a pledge agreement of
the stock of a wholly-owned subsidiary of Emery, which is the lessee or
sublessee of certain aircraft. The Series C, D, E and F Bonds are secured by
irrevocable letters of credit. The Series E and F bonds are also secured by
a junior lien on the Facility.
Future minimum lease payments under all leases with initial or remaining
non-cancelable lease terms in excess of one year, at December 31, 1993, are
as follows:
Capital Operating
(Dollars in thousands) Leases Leases
Year ending December 31
1994 $7,927 $137,915
1995 7,723 115,869
1996 7,723 88,187
1997 7,723 64,897
1998 7,723 43,394
Thereafter 193,880 92,485
Total minimum lease payments 232,699 $542,747
Less amount representing interest (121,165)
Present value of minimum lease
payments 111,534
Less current maturities of obligations
under capital leases (340)
Long-term obligations under capital
leases $111,194
Rental expense for operating leases is comprised of the following:
1993 1992 1991
(Dollars in thousands)
Minimum rentals $185,425 $176,832 $186,909
Less:
Amortization of deferred
gains (1,785) (1,785) (1,785)
Sublease rentals (10,886) (7,727) (10,969)
$172,754 $167,320 $174,155
PAGE 38
5. Income Taxes
The components of pretax income (loss) and income taxes (benefits) are
as follows:
1993 1992 1991
(Dollars in thousands)
Pretax income (loss)
U.S. corporations $84,700 $(10,736) $(48,856)
Foreign corporations 6,741 3 5,519
Total pretax income (loss) $91,441 $(10,733) $(43,337)
Income taxes (benefits)
Current
U.S. federal $ 63,956 $12,681 $ 3,474
State and local 7,089 6,457 4,873
Foreign 5,475 6,090 4,046
76,520 25,228 12,393
Deferred
U.S. federal (31,616) (14,648) (9,580)
Tax credit benefits -- (7,600) --
State and local (3,642) (3,705) 2,130
Foreign (395) (6,352) 232
Utilization of net
operating loss carryover -- -- (8,091)
(35,653) (32,305) (15,309)
Total income taxes
(benefits) $ 40,867 $ (7,077) $ (2,916)
The Company elected to prospectively adopt Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109),
effective January 1, 1992. The adoption had an immaterial effect on the 1991
net loss applicable to common shareholders. However, the 1991 income tax
benefit would be lower by approximately $4.7 million with a corresponding
reduction to the preferred dividends. This offset represents the tax benefit
related to the TASP preferred dividends which SFAS 109 requires to be
reported as a reduction of the preferred dividend.
Under SFAS 109, deferred tax assets and liabilities are adjusted for the
effect changes in tax laws or rates. The increase in U.S. federal tax rate
to 35% effective January 1, 1993 resulted in an increase in the deferred tax
asset of $1.6 million and a corresponding reduction in 1993 deferred tax
expense.
The Company has net operating loss carryforwards from acquired
subsidiaries of approximately $103 million, which expire between 2002 and
2003. The net operating loss carryforwards are restricted to offsetting
future years' U.S. federal income tax liabilities of the subsidiary which
generated the losses. If realized, this benefit will be used to reduce cost
in excess of net assets of businesses acquired.
The components of deferred tax assets and liabilities on the balance
sheets at December 31, relate to the following:
(Dollars in thousands)
Deferred tax assets 1993 1992
Reserves for accrued claims costs $82,663 $67,863
Reserves for post retirement health benefits 50,235 42,899
Other reserves not currently deductible 38,741 25,577
Reserves for employee benefits 35,311 22,954
Foreign tax and alternative minimum tax
credit carryovers 1,011 15,910
Other -- 3,059
207,961 178,262
Deferred tax liabilities
Depreciation 87,971 95,709
Tax benefits from leasing transactions 20,013 20,642
Unearned revenue 9,171 7,129
Other 4,433 3,979
121,588 127,459
Net deferred tax asset $86,373 $50,803
Deferred tax assets and liabilities in the balance sheet are classified
in accordance with SFAS 109, which generally requires the classification be
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.
PAGE 39
Income tax benefits vary from the amounts calculated by applying the
U.S. statutory income tax rate to the pretax income (loss) as set forth in
the following reconciliation:
1993 1992 1991
U.S. statutory tax rate 35.0% (34.0)% (34.0)%
State income taxes (net of
federal income tax benefit) 2.5 5.1 12.9
Foreign taxes in excess of
U.S. statutory rate 3.0 (2.4) 5.5
Dividends paid to TASP (.7) (4.0) (9.9)
Non-deductible operating
expenses 1.9 9.3 5.0
Amortization of cost in excess
of net assets of businesses
acquired 3.7 31.2 7.6
Tax rate change impact on
deferred expense (1.7) -- --
Foreign tax credit benefits, net (1.0) (70.8) --
Other, net 2.0 (.3) 6.2
Effective income tax rate 44.7% (65.9)% (6.7)%
6. Shareholders' Equity
In 1986, the Board of Directors designated a series of 600,000 shares as
Series A Participating Preferred Stock from the Company's 5,000,000 shares of
preferred stock, no par value, which had previously been authorized but
unissued. The Board also declared a dividend of one preferred stock purchase
right for each outstanding share of the Company's common stock. Under
certain conditions, each right may be exercised to purchase one one-hundredth
share of the Company's Series A Participating Preferred Stock at an exercise
price of $140 per right. The rights may be exercisable only after a party
acquires beneficial ownership of 20% or more of the Company's common stock or
announces an offer for 30% or more of the Company's common stock. The
rights, which do not have voting rights, expire November 7, 1996 and may be
redeemed at the Company's option for $.01 per right at any time prior to
their expiration or the acquisition of 20% or more of the Company's common
stock. In the event that the Company is acquired in a merger or other
business combination transaction, each right that has not previously been
exercised will entitle its holder, upon exercise thereof at the exercise
price, that number of shares of common stock of the surviving company which
at the time of such transaction would have a market value of two times the
exercise price of the right. The Company intends to redeem these rights on
November 7, 1995.
In 1989, as part of an amendment to the TASP, the Board of Directors
authorized the expenditure of up to $150,000,000 to repurchase up to
7,500,000 shares of the Company's common stock. Under such authorization,
the Company repurchased 4,859,029 shares of its outstanding common stock in
open market transactions for an aggregate purchase price, including
commissions, of approximately $150 million.
In 1989, as part of an amendment to the TASP, the Board of Directors
designated a series of 1,100,000 preferred shares as Series B Cumulative
Convertible Preferred Stock, $.01 stated value. The Series B preferred stock
is convertible into common stock at the option of the holder at the rate of
four 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 as a single class on all
matters upon which the common stock is entitled to vote 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 (as described above) on the record date of
such vote. Holders of the Series B preferred stock are also entitled to vote
separately as a class on certain other matters. The TASP trustee is required
to vote the allocated shares based upon instructions from the participants;
unallocated shares are voted in proportion to the voting instructions
received from the participants with allocated shares. The Series B preferred
stock is senior to the Company's Series A and C preferred stock with respect
to dividends and liquidation. The Series B preferred stock is also subject
to automatic conversion into common stock in the manner described in Note 8.
PAGE 40
In 1992, the Company issued 6,900,000 depository shares each
representing one-tenth of a share of Series C Conversion Preferred Stock, no
par value. The depository shares were sold at a price of $17.625. The net
capital proceeds of $117.9 million were used to retire debt. The depository
shares provide for cumulative quarterly dividends at a per share rate of
$1.54 per annum. Each depository share will automatically convert into one
share of common stock, plus unpaid dividends in the form of cash or
additional common stock, on March 15, 1995. The Company has the option to
call any or all of the depository shares prior to March 15, 1995 in exchange
for shares of common stock having a market value at issuance equal to $30.17
and declining, by January 15, 1995, to $25.55 plus cash or common stock equal
to unpaid dividends. In the event of a merger or consolidation, the holders
will receive amounts substantially the same as the amounts determined under
the terms outlined above for a Company-initiated call. Holders of the shares
will have no voting rights, except as otherwise provided under designated
circumstances. In the event of a liquidation or winding up of the Company,
an amount equal to the initial offering price plus all accrued and unpaid
dividends will be provided to holders of the Series C Preferred Stock after
payment of all amounts due to the holders of the Series B Preferred Stock.
The Series C Preferred Stock is senior to the Company's Series A Preferred
and Common Stock with respect to dividends and liquidation.
7. Employee Benefit Plans
The Company has a non-contributory defined benefit pension plan (the
Pension Plan) covering non-contractual employees in the United States.
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 Pension Plan are based on
a career average final five-year pay formula.
The Company's annual pension provision is based on an independent
actuarial computation. Based on that computation, a pension provision of
$14,165,000 in 1993, $18,045,000 in 1992 and $21,466,000 in 1991 was
required. Approximately 85% of the Pension 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.
Following is additional information relating to the Pension Plan at
December 31:
1993 1992
(Dollars in thousands)
Pension Plan assets at market
value $326,915 $279,516
Less actuarial present value of
projected benefit obligation
Vested benefits (250,564) (212,917)
Non-vested benefits (27,299) (23,200)
Accumulated benefit obligation (277,863) (236,117)
Effect of projected future
compensation levels (88,922) (83,321)
Projected benefit obligation (366,785) (319,438)
Pension Plan assets under projected
benefit obligation (39,870) (39,922)
Unrecognized prior service costs 29,897 32,290
Unrecognized net gain (7,174) (8,999)
Unrecognized net asset at
transition, being amortized
over 18 years (22,329) (24,562)
Pension Plan liability $(39,476) $(41,193)
Weighted average discount rate 7.5% 8.0%
Expected long-term rate of return
on assets 9.5% 10.0%
Rate of increase in future
compensation levels 5.5% 6.0%
PAGE 41
Net pension cost includes the following:
1993 1992 1991
(Dollars in thousands)
Cost of benefits earned during
the year $15,789 $ 18,236 $ 17,266
Interest cost on projected
benefit obligation 26,378 24,857 23,725
Actual gain arising from
plan assets (41,891) (12,976) (44,910)
Amortization of unrecognized net
asset at transition (2,233) (2,233) (2,233)
Amortization of unrecognized
net (gain) loss (111) -- 308
Deferred investment gain (loss) 13,658 (12,397) 24,752
Amortization of unrecognized prior
service cost 2,575 2,558 2,558
Net pension cost $14,165 $ 18,045 $ 21,466
The Company's Pension Plan includes programs to provide additional
benefits for compensation excluded from the basic Pension Plan. The annual
provision for these programs is based on independent actuarial computations
using assumptions consistent with the Pension Plan. In 1993 and 1992, the
total pension liability was $10,202,000 and $10,681,000, respectively, and
the total pension cost was $1,633,000 in 1993, $1,767,000 in 1992 and
$1,584,000 in 1991.
Approximately 55% of the Company's employees are covered by union-
sponsored, collectively bargained, multi-employer pension plans. The Company
contributed and charged to expense $98,090,000 in 1993, $97,048,000 in 1992
and $91,693,000 in 1991 for such plans. Those contributions were made in
accordance with negotiated labor contracts and generally were based on time
worked.
In the fourth quarter of 1992, the Company elected to prospectively
adopt, effective January 1, 1992, the Financial Accounting Standards Board
Statement No. 106, "Employer's Accounting for Post Retirement Benefits Other
Than Pensions" (SFAS 106). This statement requires the accrual of the total
cost of post retirement benefits during the period up to the date employees
are eligible to retire. Previously, those costs were recorded at the time
the benefits were provided. Adoption of SFAS 106 had no impact on the
Company's cash flows and the Company continues to fund benefits as claims are
paid. The Company made benefit payments totaling $3,709,000 in 1993,
$4,170,000 in 1992 and $2,588,000 in 1991.
The Company's retiree health plan provides benefits to all non-
contractual employees at least 55 years of age with 10 years or more of
service. In 1992, the plan was amended to modify benefits for all future
participants unless they were eligible to retire at January 1, 1993. The
most significant amendments limit the benefits for participants to a defined
dollar amount based on age and years of service and eliminate employer-
subsidized retiree health care benefits for employees hired on or after
January 1, 1993.
At adoption of SFAS 106 in 1992, the Company elected to take $112.9
million as a one-time charge in the statement of consolidated operations net
of related income tax benefits. The following information sets forth the
total post retirement benefit amounts accrued in Other Liabilities and
Deferred Credits in the Company's consolidated balance sheets at December 31.
(Dollars in thousands)
1993 1992
Accumulated post retirement benefit obligation
Retirees and other inactives $62,161 $64,094
Participants currently eligible to retire 29,699 32,870
Other active participants 26,085 21,626
117,945 118,590
Unrecognized valuation gain 15,349 --
Accrued post retirement benefit cost $133,294 $118,590
Weighted average discount rate 7.5% 8.0%
Average health care cost trend rate
First year 12.5% 13.5%
Declining to (year 2000) 6.5% 6.5%
PAGE 42
Net periodic post retirement benefit costs include the following
components:
(Dollars in thousands) 1993 1992
Cost of benefits earned during the year $2,877 $3,340
Interest cost on accumulated post retirement
obligation 8,683 9,746
Amortization of unrecognized net gain (411) --
Net periodic post retirement benefit cost $11,149 $13,086
The increase in the accumulated post retirement benefit obligation and
the net periodic post retirement benefit cost, given a 1 percent increase in
the health care cost trend rate assumption, would be 9.6% and 10.8%,
respectively.
In 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, "Employer's Accounting for Post-
employment Benefits" (SFAS 112). This statement requires the accrual of
costs for benefits provided to former or inactive employees after
termination, but before retirement. The Company's existing accounting
practice is substantially the same as this new statement. As such, the
adoption of this statement in 1994 will not have a material impact on the
Company's financial statements.
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 incentive compensation earned
by the participants of those plans is as follows:
(Dollars in thousands) 1993 1992 1991
Incentive compensation $54,600 $22,509 $ 9,365
Participants 17,200 8,900 5,400
All shares under the CF Common Stock Fund (EMSOP) have been allocated to
plan participants at December 31, 1993.
8. Thrift and Stock Plan
On January 1, 1988, the Company adopted a 401(k) Plan for non-
contractual U.S. employees to which it makes contributions to be used to
purchase the Company's common stock. The Company's contribution vests
immediately with the employee and totaled $7,248,000 in 1993, $6,852,000 in
1992 and $6,675,000 in 1991. The Company's contributions were substantially
all in the form of preferred stock as described below.
On May 18, 1989, the Company issued 986,259 shares of Series B
Cumulative Convertible Preferred Stock to the Consolidated Freightways Thrift
and Stock Plan (TASP) for an aggregate purchase price of $150,010,000. The
Series B preferred stock is issuable only to the TASP trustee. Upon
termination of an employee's participation in the TASP, the Series B
preferred stock is automatically converted into common stock 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 four
shares of common stock for each share of Series B preferred stock.
The preferred stock is allocated among participants by the Company
matching participants' contributions at a rate of 50% of the first three
percent of the participants' basic compensation. The total preferred shares
allocated annually are based upon the principal and interest method. If the
allocated preferred shares do not meet the Company's matching requirement, an
additional cash contribution is made to the TASP. Deferred compensation
expense is recognized as the preferred shares are allocated to participants;
the amount recognized is equivalent to the interest on the TASP debt plus
shares allocated to participants less preferred dividends paid to the TASP.
During 1993, 1992 and 1991, $5,598,000, $5,359,000, and $6,506,000,
respectively, of deferred compensation expense was recognized. The TASP
guarantees are reduced as principal is paid.
At December 31, 1993, the TASP owned 968,655 shares of Series B
preferred stock, of which 137,631 shares have been allocated to employees.
At December 31, 1993,
PAGE 43
the Company has reserved, authorized and unissued
common stock adequate to satisfy the conversion feature of the Series B
preferred stock.
9. Stock Option Plans
Officers and key employees have been granted options under the Company's
stock option plans to purchase common stock of the Company at prices not less
than the fair market value of the stock on the date of grant. Outstanding
options become fully exercisable one year after date of grant; any
unexercised options expire after 10 years.
A stock option plan under which options may be granted to purchase up to
3,000,000 shares of common stock of the Company became effective January 1,
1988. In 1992, the plan was amended to include authority to grant an
additional 3,000,000 options.
Following is a summary of stock option unit data:
1993 1992 1991
Outstanding at January 1 3,552,068 3,516,634 3,186,847
Granted 650,000 300,000 580,000
Exercised (324,482) (194,775) (24,000)
Expired, canceled or
surrendered (63,987) (69,791) (226,213)
Outstanding at December 31 3,813,599 3,552,068 3,516,634
Options which became exercisable
during the year 300,000 580,000 2,211,725
Options exercisable at
December 31 3,163,599 3,252,068 2,936,634
Shares reserved at December 31
For future option grants 2,119,200 2,725,975 87,150
For issuance (including future,
option grants, if any) 5,932,799 6,278,043 3,603,784
Exercise prices related to options outstanding at December 31, 1993
ranged from $10.75 to $32.75 per share and aggregated $65,420,341. Exercise
prices related to options exercised during 1993 ranged from $12.19 to $19.94,
during 1992 were $12.19 to $16.40 and during 1991 were $13.50.
10. Contingencies
The Company and its subsidiaries are defendants in various lawsuits
incidental to their businesses. It is the opinion of management that the
ultimate outcome of these actions will not have a material impact on the
Company's financial position or results of operations.
11. Industry Group Analysis and Foreign Operations
The operations of the Company and its subsidiaries, which are conducted
primarily in the United States and Canada, encompass principally three
business segments: Long-Haul Trucking (CF MotorFreight), Regional Trucking
and Intermodal (Con-Way Transportation Services), and Air Freight (Emery
Worldwide). The activities of these groups are fully described elsewhere in
this Annual Report. Revenues and expenses are allocated between U.S. and
international depending on whether the shipments are between locations within
the United States or between locations where one or both are outside of the
United States.
Following is an analysis by geographic and industry group. Operating
income is net of general corporate expenses, a portion of which has been
allocated to subsidiaries on a revenue and capital basis. Intersegment
revenues are not material. The identifiable assets of the parent consist
principally of cash, temporary cash investments and receivables.
GEOGRAPHIC GROUP INFORMATION
(Dollars in thousands)
Consolidated U.S. International
Year Ended December 31, 1993
Revenues $4,191,811 $3,665,654 $526,157
Operating income 120,157 113,179 6,978
Identifiable assets 2,306,653 2,221,772 84,881
Year Ended December 31, 1992
Revenues $4,055,589 $3,542,521 $513,068
Operating income (loss) 48,581 56,437 (7,856)
Identifiable assets 2,293,067 2,198,386 94,681
Year Ended December 31, 1991
Revenues $4,082,257 $3,561,417 $520,840
Operating income (loss) 1,736 (1,797) 3,533
Identifiable assets 2,285,466 2,140,027 145,439
PAGE 44
Consolidated Freightways, Inc. and Subsidiaries
INDUSTRY GROUP INFORMATION
(Dollars in thousands) Industry Group
----------------------------------------
Con-Way
CF Motor Transportation Emery
Consolidated Corporate Freight Services Worldwide
Year Ended December 31, 1993
Revenues $4,191,811 $2,112,237 $818,301 $1,261,273
Operating expenses 3,407,996 1,770,148 615,585 1,022,263
Selling and administrative expenses 528,022 226,405 101,144 200,473
Depreciation 135,636 83,972 29,718 21,946
Operating income 120,157 $31,712 $71,854 $16,591
Other income (expense) (28,716)
Income before income taxes $91,441
Capital expenditures $201,210 $2,789 $52,470 $63,823 $82,128
Identifiable assets $2,306,653 $195,583 $864,748 $338,567 $907,755
Year Ended December 31, 1992
Revenues $4,055,589 $2,184,190 $724,195 $1,147,204
Operating expenses 3,306,732 1,803,854 532,476 970,402
Selling and administrative expenses 561,581 269,849 105,001 186,731
Depreciation 138,695 83,002 32,971 22,722
Operating income (loss) 48,581 $27,485 $53,747 ($32,651)
Other income (expense) (59,314)
Loss before income tax benefits ($10,733)
Capital expenditures $148,706 $1,267 $91,026 $36,317 $20,096
Identifiable assets $2,293,067 $392,120 $803,300 $228,565 $869,082
Year Ended December 31, 1991
Revenues $4,082,257 $2,142,603 $639,443 $1,300,211
Operating expenses 3,310,184 1,713,201 458,320 1,138,663
Selling and administrative expenses 624,213 292,099 114,778 217,336
Depreciation 146,124 85,312 33,027 27,785
Operating income (loss) 1,736 $51,991 $33,318 ($83,573)
Other income (expense) (45,073)
Loss before income tax benefits ($43,337)
Capital Expenditures $98,073 $15,222 $60,977 $10,598 $11,276
Identifiable assets $2,285,466 $243,033 $935,471 $233,695 $873,267
PAGE 45
CONSOLIDATED FREIGHTWAYS, INC. AND SUBSIDIARIES
12 Quarterly Financial Data (Unaudited)
(Dollars in thousands except per share data)
1993 - Quarter Ended March 31 June 30 September 30 December 31
Revenues $992,981 $1,020,224 $1,067,003 $1,111,603
Operating income 21,350 25,315 38,448 35,044
Income before income taxes 15,481 16,937 31,678 27,345
Income taxes 7,213 8,545 14,599 10,510
Net income applicable to common
shareholders 3,519 3,645 12,382 12,061
Net income per share:
Primary 0.10 0.10 0.35 0.33
Fully diluted 0.09 0.09 0.31 0.29
Market price $16.25-$20.38 $14.75-$18.75 $13.63-$16.88 $15.50-$24.00
1992 - Quarter Ended March 31* June 30* September 30* December 31
Revenues $990,627 $1,002,767 $1,037,843 $1,024,352
Operating income 11,093 16,206 17,819 3,463
Income (loss) before income
tax (benefits) (1,652) 5,288 8,334 (22,703)
Income taxes (benefits) (833) (4,510) 6,771 (8,505)
Extraordinary charge -- 7,428 -- --
Cumulative effect of
accounting change 69,991 -- -- --
Net loss applicable to common
shareholders (73,340) (2,495) (3,269) (18,624)**
Net income (loss) per share
Net income (loss) before extraordinary
charge and cumulative effect of
accounting change (0.10) 0.14 (0.09) (0.53)
Extraordinary charge -- (0.21) -- --
Cumulative effect of
accounting change (1.99) -- -- --
Net loss (2.09) (0.07) (0.09) (0.53)
Market price $14.38-$19.63 $12.63-$19.00 $12.50-$14.75 $13.00-$19.13
<FN>
* Restated for the prospective adoption, effective January 1, 1992, of SFAS No. 109 and SFAS No. 106 in the second and
and fourth quarters, respectively. The effects on the losses per common share from what was previously
reported were $(2.00), $(.03) and $(.04) for the first, second and third quarters, respectively.
**Includes special charges of $27.8 million for the restructuring of CF MotorFreight, write off of Canadian operating
authorities , write down of properties and certain other intangibles and related tax benefits.
PAGE 46
Ten Year Financial Summary
Consolidated Freightways, Inc. and Subsidiaries
Years Ended December 31
(Dollars in thousands except per share data)
SUMMARY OF OPERATIONS: 1993 1992 1991 1990 1989(d)
Revenues $4,191,811 $4,055,589 $4,082,257 $4,208,527 $3,760,193
CF MotorFreight 2,112,237 2,184,190 2,142,603 2,185,271 1,996,681
Con-Way Transportation Services 818,301 724,195 639,443 638,098 558,517
Emery Worldwide 1,261,273 1,147,204 1,300,211 1,385,158 1,204,995
Operating income (loss) 120,157 48,581 1,736 6,044 50,855
CF MotorFreight 31,712 27,485 (a) 51,991 108,462 107,895
Con-Way Transportation Services 71,854 53,747 33,318 25,547 (c) 40,365
Emery Worldwide 16,591 (32,651) (83,573) (127,965) (97,405)
Depreciation and amortization 146,297 166,917 168,527 170,757 159,282
Investment income 5,586 5,041 10,558 2,531 5,418
Interest expense 30,333 38,893 46,703 40,178 38,471
Income (loss) before income taxes 91,441 (10,733) (43,337) (32,678) 24,297
Income taxes (benefits) 40,867 (7,077) (2,916) (4,697) 15,685
Net income (loss) applicable to common
shareholders 31,607 (97,728)(b) (53,112) (40,727) 12,048(e)
Cash from operations 172,808 131,779 192,356 194,821 81,031
PER SHARE
Net income (loss) applicable to common
shareholders .87 (2.78)(b) (1.52) (1.16) .33(e)
Dividends on common stock -- -- -- .530 1.040
Common shareholders' equity 13.47 12.69 15.33 16.50 17.13
FINANCIAL POSTION
Cash and temporary cash investments 139,044 152,064 284,645 217,680 111,081
Property, plant and equipment, net 910,444 886,834 896,922 953,504 1,016,325
Total assets 2,306,653 2,293,067 2,285,466 2,412,003 2,391,826
Capital expenditures 201,210 148,706 98,073 141,784 255,793
Long-term debt and capital leases 408,409 505,320 646,655 673,611 652,169
Shareholders' equity 623,375 579,161 547,083 581,979 630,122
RATIOS AND STATISTICS
Current ratio 1.1 to 1 1.2 to 1 1.2 to 1 1.2 to 1 1.2 to 1
Income (loss) as % of revenues .75% (2.4)% (1.3)% (1.0)% .3%
Effective income tax rate 44.7% (65.9%) (6.7%) (14.4)% 64.6%
Long-term debt and capital leases as % of
total capitalization 40% 47% 54% 54% 51%
Return on average invested capital 5% -- (3)% (2)% 2%
Return on average shareholders' equity 8% (1)% (7)% (7)% 2%
Common dividends as % of net income (loss) -- -- -- 46% 315%
Average shares outstanding 36,187,682 35,195,743 35,033,738 34,988,778 36,791,182
Market price range $24.00-$13.63 $19.63-$12.50 $21.50-$9.50 $26.88-$10.75 $37.75-$25.25
Number of common shareholders 15,785 15,260 14,300 14,500 13,427
Number of employees 39,100 37,900 37,700 41,300 40,800
<FN>
(a) Includes special charges of $17.3 million related to the restructuring of CFMotorFreight
and write off of Canadian operating authority.
(b) Includes $70 million ($1.99 per share) cumulative effect of change in method of accounting for post retirement
benefits and $7.4 million ($.21 per share) extraordinary charge from early retirement of debt.
Also included are special charges of $17.3 million, $10.5 million of charges for the write down of properties held for
sale and certain other intangibles and related tax benefits.
(c) Includes one-time subsidiary closure costs of $11.3 million.
(d) Includes the results of operations of Emery Air Freight Corporation since its acquisition in April.
(e) Includes $11.3 million ($.31 per share) cumulative effect of change in method of accounting for income taxes.
PAGE 47
Ten Year Financial Summary (continued)
SUMMARY OF OPERATIONS 1988 1987 1986 1985 1984
Revenues $2,689,075 $2,296,911 $2,124,467 $1,882,142 $1,704,909
CF MotorFreight 1,836,141 1,621,148 1,524,336 1,382,637 1,330,856
Con-Way Transportation Services 463,918 370,940 318,841 233,930 149,300
Emery Worldwide 389,016 304,823 281,290 265,575 224,753
Operating income (loss) 162,727 101,248 135,045 112,235 118,202
CF MotorFreight 119,116 92,456 128,927 109,005 106,359
Con-Way Transportation Services 33,373 6,404 11,359 (731) (5,667)
Emery Worldwide 10,238 2,388 (5,241) 3,961 17,510
Depreciation and amortization 116,204 102,165 94,262 85,953 71,037
Investment income 13,950 25,182 16,942 22,468 20,991
Interest expense 6,324 6,016 7,298 6,159 7,379
Income (loss) before income taxes 173,330 119,311 147,639 127,408 128,735
Income taxes (benefits) 60,177 44,741 58,530 48,117 54,270
Net income (loss) applicable to common
shareholders 113,153 74,570 89,109 79,291 74,465
Cash from operations 243,595 206,841 224,242 176,356 153,082
PER SHARE
Net income (loss) applicable to common
shareholders 3.00 1.93 2.31 2.06 1.88
Dividends on common stock .960 .880 .798 .717 .650
Common shareholders' equity 20.32 18.16 17.22 15.69 14.42
FINANCIAL POSTION
Cash and temporary cash investments 134,783 161,590 153,334 119,614 141,594
Property, plant and equipment, net 760,349 622,181 573,092 537,659 465,639
Total assets 1,536,099 1,377,329 1,288,063 1,134,430 1,060,574
Capital expenditures 258,368 155,127 136,278 164,862 122,977
Long-term debt and capital leases 47,677 50,935 58,700 62,539 62,645
Shareholders' equity 766,248 687,857 665,048 603,794 552,836
RATIOS AND STATISTICS
Current ratio 1.3 to 1 1.4 to 1 1.5 to 1 1.6 to 1 1.5 to 1
Income (loss) as % of revenues 4.2% 3.2% 4.2% 4.2% 4.4%
Effective income tax rate 34.7% 37.5% 39.6% 37.8% 42.2%
Long-term debt and capital leases
as % of total capitalization 6% 7% 8% 9% 10%
Return on average invested capital 12% 9% 11% 10% 11%
Return on average shareholders' equity 16% 11% 14% 14% 14%
Common dividends as % of
net income (loss) 32% 46% 35% 35% 35%
Average shares outstanding 37,712,402 38,579,572 38,586,375 38,428,242 39,680,006
Market price range $34.75-$25.25 $41.25-$22.75 $36.50-$23.67 $27.50-$18.67 $19.58-$13.42
Number of common shareholders 12,789 12,202 11,622 10,901 10,089
Number of employees 29,400 26,300 24,600 21,700 20,600