EXHIBIT 13
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PAGE 18
FINANCIAL REVIEW AND MANAGEMENT DISCUSSION
- ----------------------------------------------------------
On December 2, 1996, CNF Transportation Inc. (formerly
Consolidated Freightways, Inc.)(the Company) completed the
tax-free distribution (the Spin-off) to shareholders of all
the outstanding shares of Consolidated Freightways
Corporation (CFC), including its related Canadian
subsidiaries, which have historically been reported in the
CF MotorFreight segment. Accordingly, the accounts and
operations of CFC through the date of the Spin-off are
reported as discontinued operations in the accompanying
consolidated financial statements.
The Company's 1996 operating income from continuing
operations was $192.1 million, representing a 2.9% increase
over the same group of companies in 1995. The increase came
from higher operating income at Con-Way Transportation
Services (CTS) and the Other segment, which consists
primarily of Menlo Logistics. The record-setting operating
income for 1996 was achieved despite additional costs caused
by severe weather conditions at the start of the year and
increased fuel prices. Operating income in 1995 was 1.7%
below 1994 primarily as a result of competitive rate
discounting and expansion costs at CTS.
The Company's revenues from continuing operations in
1996, also a record at $3.66 billion, increased 11.3% over
1995 reflecting increased revenues at all three of the
Company's segments. CTS and Emery overcame a difficult
start for the year caused in part by the severe winter
weather conditions. Menlo Logistics also contributed
revenue growth of more than 25% over 1995. Total Company
revenues in 1995 increased 17.5% over 1994 as CTS, Emery and
Other experienced strong revenue growth from domestic and
international markets as well as new logistics contracts.
CON-WAY TRANSPORTATION SERVICES
CTS revenues for 1996 increased 12.1% over 1995 on a tonnage
increase of 7.8% with less-than-truckload (LTL) tonnage up
5.9%. Revenues for the first quarter of the year were
adversely affected by severe winter weather. Steady
improvements from both the LTL and truckload businesses, and
increased density in newer geographic regions, contributed
to a stronger second half in 1996. Revenues for 1995
increased 13.1% over 1994 with LTL and total tonnage
increases of 6.7% and 6.4%, respectively. The higher
revenue reflected CTS' continued expansion into new
geographic markets and growth in traditional markets of
overnight service and inter-regional business.
Operating income at CTS in 1996 increased 4.6% over
1995. While the first half of the year was affected by
costs of winter storms and higher fuel costs, results
improved steadily in the third and fourth quarters.
Although fuel costs remained high, these increased expenses
were offset by a fuel surcharge passed on to customers.
Concentrated efforts to re-price or replace low-margin
freight also improved operating profits. Operating income in
1995 declined 13.2% from 1994 due to start-up costs and
lower system utilization associated with expansion into new
geographic areas and markets as well as the absence of
benefits received in 1994 during a strike of unionized LTL
carriers.
EMERY WORLDWIDE
Emery's 1996 revenues increased 11.4% over 1995, brought
about by both domestic and international revenue growth.
Domestic tonnage increased 14.7% from the prior year and
international tonnage was up 10.0%. International revenues
in 1996 comprised approximately 40% of Emery's commercial
revenues. Revenues in 1995 increased 12.7% from 1994,
driven by 37.2% growth in international tonnage.
PAGE 19
Operating income was 4.1% lower in 1996 compared with
1995 due to higher fuel costs, a growing share of
international business with generally lower margins and
higher costs of developing information systems. Beginning
November, 1996, Emery began to recoup fuel cost increases
with a fuel index fee. Operating income in 1995 increased
5.3% from 1994, but the operating margin of 4.6% represented
a decline from 5.0% in 1994 due to an increasing share of
international business that yields a lower margin compared
to domestic.
OTHER OPERATIONS
The results of operations of the Other segment consist
primarily of Menlo Logistics and to a lesser extent Road
Systems and VantageParts. These operating results were
previously included as part of the CF MotorFreight segment
which was discontinued with the Spin-off.
Revenues in 1996 increased 8.2% compared to 1995 with
higher revenues coming from the logistics operations,which
were partially offset by lower trailer sales to the
discontinued operations. The 1995 revenues of $371.6
million increased 74.0% from 1994.
Operating income in 1996 of $12.7 million was a 51.4%
increase over 1995, with most of the increase coming from
the logistics operations. The 1995 operating income
increased $7.2 million over 1994, again coming primarily
from the logistics business.
OTHER INCOME (EXPENSE)
Other expense increased 33.4% from 1995 as a result of
interest expense on increased short-term borrowings and
losses from write-offs and sales of non-operating assets.
Other expense in 1995 was 35.8% higher than 1994 due
primarily to interest expense on new short-term borrowings
and a full year's interest on 10-year Notes issued in 1994.
INCOME TAXES
The increased effective tax rate of 45.5% in 1996, compared
to a tax rate of 43.6% in 1995, was attributable to a higher
proportion of foreign taxes and non-deductible items. The
1995 effective income tax rate exceeded the 1994 rate due to
a higher foreign tax rate applied to increased foreign
income.
NET INCOME
Income from continuing operations for 1996 decreased 7.0%
from 1995 as a result of the increase in other expense and
the higher effective tax rate. The 1995 income from
continuing operations was 10.0% below 1994 due primarily to
higher interest expense and lower operating income. Net
income available to common shareholders for 1996 was down
59.3% as it included both a comparatively higher loss of
$36.4 million, net of income tax benefits, from operations
of CFC through the Spin-off date, and $16.2 million of
costs, net of income tax benefits, associated with the Spin-
off. Preferred dividends in 1996 decreased 20.4% from 1995
due to the absence of dividends from the Series C preferred
stock that converted to common stock in March 1995. The
preferred dividends were lower in 1995 compared to 1994 due
to a full year of dividends from the Series C preferred
stock in 1994. Net income available to common shareholders
in 1995 was $46.6 million compared to $35.7 million in 1994.
The 1994 amount included a $5.5 million charge ($1.9 million
related to discontinued operations) for the write-off of
intrastate operating rights.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had $82.1 million of cash
and cash equivalents. Net cash flow from operations was
$205.8 million compared to $91.1 million in 1995 and was
primarily the result of income
PAGE 20
from continuing operations, depreciation and amortization
and a lesser increase in accounts receivable compared with
1995. In 1996, changes in working capital contributed an
additional $38.1 million.
Capital expenditures for continuing operations were
$200.8 million in 1996, an increase of $33.6 million over
1995. The 1995 capital expenditure level was $17.4 million
over that of 1994. Capital expenditures in 1996, which
consisted primarily of revenue and other equipment, were
financed by cash from operations supplemented by short-term
borrowings. The 1997 capital expenditure requirements are
expected to be financed with cash flows from operations.
The Company increased borrowings under its $350 million
unsecured credit facility to $100 million at year-end 1996
with an additional $55 million borrowed against other open
lines of credit. The 1996 balance of $155 million compared
to total outstanding borrowings under all credit facilities
of $50 million in 1995. The net proceeds from these sources
were used for general corporate purposes and capital
expenditures. At December 31, 1996, after deducting
outstanding letters of credit, the Company had available
$133.1 million under the above credit facilities.
At December 31, 1996, $121.2 million of letters of
credit were issued under the Company's $350 million
unsecured credit facility. In addition, $45.7 million of
letters of credit were issued under several unsecured letter
of credit facilities.
The Company paid $29.9 million of common and preferred
dividends in 1996 compared with $31.3 million in 1995 and
$23.1 million of preferred dividends in 1994. The
variations in dividends are the result of the reinstatement
of quarterly common dividends of $.10 per common share and
conversion of Series C preferred stock both in the first
quarter of 1995. The Company also used $64.9 million of
cash to fund discontinued operations in 1996 compared with
$67.1 million in 1995 and $5.8 million in 1994.
At December 31, 1996, the Company's ratio of long-term
debt obligations (including guarantees) to total capital
(including long-term obligations) was 48.4% compared with
39.9% at year-end 1995. The ratio increase is attributable
to the reduction of equity caused by the Spin-off. The
current ratio was 1.0 to 1 at December 31, 1996 and 1.2 to 1
at December 31, 1995, excluding the net assets of
discontinued operations.
The Company filed a shelf registration statement with
the Securities and Exchange Commission in June 1995 that
covers $150 million of debt and equity securities for future
issuance with terms to be decided at the time of and if
issued.
ENVIRONMENTAL MATTERS
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, management expects the Company's share
of the cleanup costs to be minimal.
PAGE 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
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, 1996 and 1995, and the related
statements of consolidated income, cash flows and shareholders'
equity for each of the three years ended December 31, 1996. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based upon our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
CNF Transportation Inc. and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
San Francisco, California
January 24, 1997
PAGE 22
CNF TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands)
1996 1995
ASSETS
Current Assets
Cash and cash equivalents $ 82,094 $ 59,787
Trade accounts receivable, net of allowance (Note 1) 542,381 510,029
Other accounts receivable 49,278 49,387
Operating supplies, at lower of average cost of market 32,916 26,578
Prepaid expenses 31,249 34,182
Deferred income taxes (Note 6) 77,977 58,395
Net current assets of discontinued operations (Note 2) - 33,628
Total Current Assets 815,895 771,986
Property, Plant and Equipment, at Cost
Land 104,314 74,182
Buildings and improvements 265,655 175,840
Revenue equipment 586,720 497,977
Other equipment and leasehold improvements 302,679 232,270
1,259,368 980,269
Accumulated depreciation and amortization (506,719) (405,595)
752,649 574,674
Other Assets
Restricted funds 12,685 11,189
Deposits and other assets 95,144 80,198
Unamortized aircraft maintenance, net (Note 1) 119,927 114,636
Costs in excess of net assets of businesses acquired,
net of accumulated amortization (Note 1) 285,566 306,795
Net non-current assets of discontinued operations (Note 2) - 225,480
513,322 738,298
Total Assets $ 2,081,866 $ 2,084,958
<FN>
The accompanying notes are an integral part of these statements.
PAGE 23
CNF TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
Current Liabilities
Accounts payable $ 210,902 $ 176,619
Accrued liabilities (Note 3) 349,497 284,359
Accrued claims costs 87,340 68,688
Current maturities of long-term debt and capital leases
(Notes 4 and 5) 3,185 2,412
Short-term borrowings (Note 4) 155,000 50,000
Federal and other income taxes (Note 6) 9,162 11,589
Total Current Liabilities 815,086 593,667
Long-Term Liabilities
Long-term debt and guarantees (Note 4) 366,305 369,445
Long-term obligations under capital leases (Note 5) 110,896 110,965
Accrued claims costs 57,912 63,372
Employee benefits (Note 8) 115,470 131,035
Other liabilities and deferred credits 75,479 83,807
Deferred income taxes (Note 6) 32,439 10,307
Total Liabilities 1,573,587 1,362,598
Shareholders' Equity (Note 7)
Preferred stock, no par value; authorized 5,000,000 shares:
Series B, 8.5% cumulative, convertible, $.01 stated
value; designated 1,100,000 shares; issued 875,191
and 954,412 shares, respectively 9 10
Additional paid-in capital, preferred stock 133,108 145,156
Deferred compensation (Note 9) (108,655) (114,896)
Total Preferred Shareholders' Equity 24,462 30,270
Common stock, $.625 par value; authorized 100,000,000
shares; issued 51,595,827 and 51,451,490 shares,
respectively 32,247 32,157
Additional paid-in capital, common stock 242,879 239,696
Cumulative translation adjustment 3,279 (2,028)
Retained earnings 378,744 608,399
Cost of repurchased common stock
(7,029,917 and 7,549,174 shares, respectively) (173,332) (186,134)
Total Common Shareholders' Equity 483,817 692,090
Total Shareholders' Equity 508,279 722,360
Total Liabilities and Shareholders' Equity $2,081,866 $2,084,958
<FN>
The accompanying notes are an integral part of these statements.
PAGE 24
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEARS ENDED DECEMBER 31
(Dollars in thousands except per share data)
1996 1995 1994
REVENUES $ 3,662,183 $ 3,290,077 $ 2,799,935
COSTS AND EXPENSES
Operating expenses 2,918,682 2,641,756 2,169,369
Selling and administrative expenses 463,930 391,682 377,032
Depreciation 87,423 69,952 63,557
3,470,035 3,103,390 2,609,958
OPERATING INCOME 192,148 186,687 189,977
OTHER INCOME (EXPENSE)
Investment income 52 85 1,708
Interest expense (39,766) (33,407) (27,065)
Miscellaneous, net (5,302) (423) 509
(45,016) (33,745) (24,848)
Income from continuing operations before income
taxes and extraordinary charge 147,132 152,942 165,129
Income taxes (Note 6) 66,951 66,723 69,304
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY CHARGE 80,181 86,219 95,825
Losses from discontinued operations, net of income
tax benefits (Note 2) (36,386) (28,854) (37,442)
Loss from discontinuance, net of
income tax benefits (Note 2) (16,247) - -
(52,633) (28,854) (37,442)
Extraordinary charge from write-off of intrastate
operating rights, net of income tax
benefits of $2,827 - - (3,610)
Net income 27,548 57,365 54,773
Preferred stock dividends 8,592 10,799 19,063
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 18,956 $ 46,566 $ 35,710
Primary average shares (Note 1) 45,062,576 44,362,485 44,116,044
Fully diluted average shares (Note 1) 49,833,947 48,723,790 48,441,388
PRIMARY EARNINGS PER SHARE (Note 1)
Income from continuing operations before
extraordinary charge $ 1.59 $ 1.75 $ 1.98
Losses from discontinued operations (0.81) (0.65) (0.85)
Loss from discontinuance (0.36) - -
Extraordinary charge - - (0.08)
Net income $ 0.42 $ 1.10 $ 1.05
FULLY DILUTED EARNINGS PER SHARE (Note 1)
Income from continuing operations before
extraordinary charge $ 1.47 $ 1.63 $ 1.81
Losses from discontinued operations (0.73) (0.59) (0.77)
Loss from discontinuance (0.32) - -
Extraordinary charge - - (0.07)
Net income $ 0.42 $ 1.04 $ 0.97
<FN>
The accompanying notes are an integral part of these statements.
PAGE 25
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31
(Dollars in thousands)
1996 1995 1994
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR $ 59,787 $ 72,595 $ 128,280
Cash Flows from Operating Activities
Net income 27,548 57,365 54,773
Adjustments to reconcile income to net
cash provided by operating activities:
Discontinued operations 52,633 28,854 37,442
Depreciation and amortization 95,746 79,625 72,322
Increase (decrease) in deferred income taxes (6,705) 14,288 16,346
Losses (gains) from property disposals, net (1,577) (145) 1,896
Changes in assets and liabilities:
Receivables (30,006) (114,855) (141,920)
Accounts payable 27,661 9,942 46,234
Accrued liabilities 36,074 1,057 28,136
Accrued claims costs 11,616 9,625 (11,214)
Income taxes 18,040 7,454 12,002
Accrued incentive compensation 9,366 (30,413) 27,074
Employee benefits (14,565) 32,793 20,330
Other (20,004) (4,467) (18,251)
Net Cash Provided by Operating Activities 205,827 91,123 145,170
Cash Flows from Investing Activities
Capital expenditures (200,835) (167,253) (149,808)
Proceeds from sales of property 7,689 5,361 5,383
Net Cash Used by Investing Activities (193,146) (161,892) (144,425)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt - 98,890 -
Repayment of long-term debt and capital lease
obligations (2,436) (2,537) (39,486)
Net short-term borrowings 105,000 50,000 -
Proceeds from issuance of common stock 1,887 10,460 11,949
Redemption of preferred stock purchase rights - (435) -
Payments of common dividends (17,604) (16,688) -
Payments of preferred dividends (12,288) (14,626) (23,102)
Net Cash Provided (Used) by Financing Activities 74,559 125,064 (50,639)
Net Cash Provided (Used) by Continuing Operations 87,240 54,295 (49,894)
Net Cash Used by Discontinued Operations (64,933) (67,103) (5,791)
Increase (Decrease) in Cash and Cash Equivalents 22,307 (12,808) (55,685)
CASH AND CASH EQUIVALENTS, END OF YEAR $ 82,094 $ 59,787 $ 72,595
Supplemental Disclosure
Cash paid for income taxes $ 32,749 $ 27,400 $ 56,679
Cash paid for interest
(net of amounts capitalized) $ 36,047 $ 22,916 $ 29,354
<FN>
The accompanying notes are an integral part of these statements.
PAGE 26
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(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, 1993 968,655 $ 10 690,000 $ 7 43,340,801 $ 27,090
Exercise of stock options including tax
benefits of $2,400 - - - - 614,709 382
Recognition of deferred compensation - - - - - -
Repurchased common stock issued for
conversion of preferred stock (5,907) - - - - -
Net income - - - - - -
Common dividends declared ($.10 per share) - - - - - -
Series B, Preferred dividends ($12.93
per share) net of tax benefits of $4,039 - - - - - -
Series C, Preferred dividends
($15.40 per share) - - - - - -
Translation adjustment - - - - - -
BALANCE, DECEMBER 31, 1994 962,748 10 690,000 7 43,955,510 27,472
Exercise of stock options including tax
benefits of $1,122 - - - - 583,143 364
Conversion of Series C Preferred stock
to Common stock - - (690,000) (7) 6,900,000 4,313
Issuance of restricted stock - - - - 12,837 8
Recognition of deferred compensation - - - - - -
Redemption of preferred stock purchase
rights (Note 7) - - - - - -
Repurchased common stock issued for
conversion of preferred stock (8,336) - - - - -
Net income - - - - - -
Common dividends declared ($.30 per share) - - - - - -
Series B, Preferred dividends ($12.93
per share) net of tax benefits of $3,827 - - - - - -
Series C, Preferred dividends
($3.20 per share) - - - - - -
Translation adjustment - - - - - -
BALANCE, DECEMBER 31, 1995 954,412 10 - - 51,451,490 32,157
Exercise of stock options, including tax
benefits of $1,565 - - - - 138,027 86
Issuance of restricted stock - - - - 6,310 4
Recognition of deferred compensation - - - - - -
Repurchased common stock issued for
conversion of preferred stock (79,221) (1) - - - -
Net income - - - - - -
Common dividends declared ($.40 per share) - - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,696 - - - - - -
Distribution of investment in CFC (Note 2) - - - - - -
Translation adjustment - - - - - -
BALANCE, DECEMBER 31, 1996 875,191 $9 - - 51,595,827 $ 32,247
<FN>
The accompanying notes are an integral part of these statements.
PAGE 27
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in thousands)
Cost of
Additional Cumulative Repurchased
Paid-in Translation Retained Common Deferred
Capital Adjustment Earnings Stock Compensation Total
BALANCE, DECEMBER 31, 1993 $ 369,848 $ 1,229 $ 542,811 $ (188,344) $ (129,276) $ 623,375
Exercise of stock options including tax
benefits of $2,400 11,567 - - - - 11,949
Recognition of deferred compensation - - - - 8,630 8,630
Repurchased common stock issued for
conversion of preferred stock (922) - - 922 - -
Net income - - 54,773 - - 54,773
Common dividends declared ($.10 per share) - - (3,636) - - (3,636)
Series B, Preferred dividends ($12.93
per share) net of tax benefits of $4,039 - - (8,436) - - (8,436)
Series C, Preferred dividends
($15.40 per share) - - (10,627) - - (10,627)
Translation adjustment - (2,399) - - - (2,399)
BALANCE, DECEMBER 31, 1994 380,493 (1,170) 574,885 (187,422) (120,646) 673,629
Exercise of stock options including tax
benefits of $1,122 10,096 - - - - 10,460
Conversion of Series C Preferred stock
to Common stock (4,306) - - - - -
Issuance of restricted stock 292 - - - (300) -
Recognition of deferred compensation - - - - 6,050 6,050
Redemption of preferred stock purchase
rights (Note 7) (435) - - - - (435)
Repurchased common stock issued for
conversion of preferred stock (1,288) - - 1,288 - -
Net income - - 57,365 - - 57,365
Common dividends declared ($.30 per share) - - (13,052) - - (13,052)
Series B, Preferred dividends ($12.93
per share) net of tax benefits of $3,827 - - (8,592) - - (8,592)
Series C, Preferred dividends
($3.20 per share) - - (2,207) - - (2,207)
Translation adjustment - (858) - - - (858)
BALANCE, DECEMBER 31, 1995 384,852 (2,028) 608,399 (186,134) (114,896) 722,360
Exercise of stock options including tax
benefits of $1,565 3,778 - - - - 3,864
Issuance of restricted stock 158 - - - (162) -
Recognition of deferred compensation - - - - 6,403 6,403
Repurchased common stock issued for
conversion of preferred stock (12,801) - - 12,802 - -
Net income - - 27,548 - - 27,548
Common dividends declared ($.40 per share) - - (17,604) - - (17,604)
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,693 - - (8,592) - - (8,592)
Distribution of investment in CFC (Note 2) - 4,571 (231,007) - - (226,436)
Translation adjustment - 736 - - - 736
BALANCE, DECEMBER 31, 1996 $ 375,987 $ 3,279 $ 378,744 $ (173,332) $ (108,655) $ 508,279
PAGE 28
CNF TRANSPORTATION 1996 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: PRINCIPAL ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation: The
consolidated financial statements include the accounts of CNF
Transportation, Inc. (the Company) and its wholly owned subsidiaries. On
December 2, 1996, the Company (formerly Consolidated Freightways, Inc.)
completed the spin-off of Consolidated Freightways Corporation (CFC) as
described in Note 2. CFC has been reflected as discontinued operations in
the consolidated financial statements and, unless otherwise stated, is
excluded from the accompanying notes.
The continuing operations of the Company encompass three business
segments: Con-Way Transportation Services (CTS), a regional trucking and
full-service truckload company; Emery Worldwide (Emery), an international
air freight company; and Other, which is composed of Menlo Logistics
(Menlo), a full-service contract logistics company; Road Systems, a trailer
manufacturer; and VantageParts, a wholesale distributor of truck parts and
supplies. CTS provides regional one- and two-day LTL freight trucking,
full-service truckload freight delivery utilizing highway over-the-road and
intermodal rail stack train resources for transcontinental, inter-regional
and regional transportation, local and interstate container drayage
throughout the U.S. and international services for Canada and Mexico. Emery
provides expedited and deferred domestic and international air cargo
services through a freight system designed for the movement of parcels and
packages of all sizes and weights, and also provides ocean delivery and
customs brokerage. Menlo, the primary business in the Other segment,
provides full-service contract logistics using advanced management systems
to cost-effectively integrate and simplify complex logistics operations,
including transportation, storage and distribution, shipment tracking and
invoicing.
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.
This revenue recognition method does not result in a material difference
from in-transit or completed service methods of recognition.
Cash and Cash Equivalents: The Company considers highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Trade Accounts Receivable, Net: Trade accounts receivable are net of
allowances of $18,712,000 and $16,870,000 at December 31, 1996 and 1995,
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.
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 $169,035,000 and
$174,233,000 at December 31, 1996 and 1995, 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 $49,108,000 and $59,597,000 at December 31, 1996 and 1995,
respectively, to accrue for this obligation and any estimated unusable
maintenance at the date of lease return or other disposal. The net amount,
which represents the difference between maintenance performed currently and
that required or
PAGE 29
remaining at the expiration of the lease or other disposal, is
classified as Unamortized Aircraft Maintenance, net, in the
Consolidated Balance Sheets.
Costs in Excess of Net Assets of Businesses Acquired: The costs in
excess of net assets of businesses acquired (goodwill) are capitalized and
amortized on a straight-line basis up to a 40-year period. Impairment is
periodically reviewed based on a comparison of estimated, undiscounted cash
flows from the underlying segment to the related investment. In the event
goodwill is not considered recoverable, an amount equal to the excess of
carrying amount of goodwill less the estimated discounted cashflows from
the segment will be charged against goodwill with a corresponding expense
to the income statement. Based on this review, management does not believe
goodwill is impaired. Accumulated amortization at December 31, 1996 and
1995 was $76,961,000 and $68,413,000, respectively.
Income Taxes: The Company follows the liability method of accounting
for income taxes.
Accrued Claims Costs: The Company provides for the uninsured costs of
medical, casualty, liability, vehicular, cargo and workers' compensation
claims. Such costs are estimated each year based on historical claims and
unfiled claims relating to operations conducted through December 31. The
actual costs may vary from estimates based on trends of losses for filed
claims and claims estimated to be incurred but not filed. The long-term
portion of accrued claims costs relates 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 Thrift and Stock Plan (TASP) shares. The 1995 and 1994
primary and fully diluted computations include the addback of dividends of
$2,207,000 and $10,627,000, respectively, for the conversion of Series C
preferred stock. The 1996, 1995 and 1994 fully diluted computations
include addbacks to earnings of $1,769,000, $1,849,000 and $478,000,
respectively, representing the addback of the Series B preferred stock
dividend net of replacement funding.
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.
Reclassification: Certain amounts in prior year's financial statements
have been reclassified to conform to the current year presentation.
NOTE 2: BUSINESS DIVESTITURES
On December 2, 1996, the Company completed a tax-free distribution
(the Spin-off) to the Company's shareholders of all the outstanding shares
of CFC. CFC consists of the Company's former long-haul, LTL segment, CF
MotorFreight, which is composed of CF MotorFreight, a domestic LTL motor
carrier, and its Canadian operations. The Company's shareholders received
one share of CFC common stock for every two shares of The Company's common
stock owned on November 15, 1996.
The accompanying consolidated financial statements have been restated
to report the discontinued operations of CFC separately from continuing
operations of The Company. The December 31, 1996 Consolidated Balance Sheet
reflects a non-cash reduction to Retained Earnings of $231,007,000 and a
($4,571,000) adjustment to Cumulative Translation Adjustment to recognize
the book value of net assets distributed. The Statements of Consolidated
Income include
PAGE 30
the following operating results for the discontinued
operations presented as a single classification, net of tax:
(Dollars in thousands) 1996 1995 1994
Revenues $1,982,544 $2,106,529 $1,936,412
Operating loss (48,942) (42,786) (47,743)
Other income (expense), net 706 717 (5,466)
Loss before income tax benefits (48,236) (42,069) (53,209)
Income tax benefits (11,850) (13,215) (17,679)
Losses from discontinued operations$ (36,386) $ (28,854) $ (37,442)*
* Includes $1,912,000 ($0.04 per share) extraordinary charge, net of
income tax benefits, for write-off of intrastate operating rights.
The Company incurred costs in connection with the Spin-off, including
legal and advisory fees, costs of relocating administrative, data
processing and other operating locations, severance, and other transaction
costs. These costs are reported net of $7.0 million of income tax benefits
in the Statements of Consolidated Income as Loss from Discontinuance in
1996.
The following supplemental summarized balance sheet data represents
the accounts of CFC as spun off on December 2, 1996 and as reported, net,
in the December 31, 1995 balance sheet:
(Dollars in thousands) December 2, 1996 December 31, 1995
Current Assets
Trade accounts receivable, net $300,444 $252,105
Other 157,113 147,080
457,557 399,185
Property, plant and equipment, net 419,931 501,311
Other 11,668 9,764
Total assets of discontinued
operations $889,156 $910,260
Current Liabilities
Accounts payable and
accrued liabilities $284,102 $282,253
Other 88,626 83,304
372,728 365,557
Long-term debt 15,100 15,100
Other long-term liabilities 274,892 270,495
Total liabilities of
discontinued operations $662,720 $651,152
NOTE 3: ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31:
1996 1995
(Dollars in thousands)
Other accrued liabilities $130,365 $100,897
Accrued holiday and vacation pay 44,922 35,839
Purchased transportation 43,328 38,713
Accrued taxes other than income taxes 33,826 29,154
Wages and salaries 24,841 22,905
Estimated revenue adjustments 23,912 21,634
Accrued interest 27,224 23,504
Accrued incentive compensation 21,079 11,713
Total accrued liabilities $349,497 $284,359
NOTE 4: DEBT AND GUARANTEES
As of December 31, long-term debt and guarantees consisted of the
following:
(Dollars in thousands) 1996 1995
9 1/8% Notes Due 1999 (interest payable
semi-annually) $117,705 $117,705
7.35% Notes due 2005
(interest payable semi-annually) 100,000 100,000
6.14% Industrial Revenue
Bonds due 2014 4,800 4,800
Other debt 20 290
TASP Notes guaranteed, 8.42% to 9.04%,
due through 2009 146,900 149,000
369,425 371,795
Less current maturities (3,120) (2,350)
Total long-term debt and guarantees $366,305 $369,445
The 9 1/8% notes due in 1999 and the 7.35% notes due in 2005 contain
certain covenants limiting the incurrence of additional liens.
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 1999, bear interest at a rate (5.97% at
December 31, 1996) based upon select indices plus a margin dependent on the
Company's credit rating. The agreement contains various restrictive
covenants which limit the incurrence
PAGE 31
of additional indebtedness and require the Company to maintain minimum
amounts of net worth and fixed charge coverage. As of December 31, 1996,
the Company had $100.0 million of short-term borrowings and $121.2 million
of letters of credit outstanding under this agreement. In addition, the
Company had $55.0 million of short-term borrowings under other unsecured,
open lines of credit.
Of the $146.9 million TASP Notes, $115.1 million 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 remaining $31.8 million of the notes
contain financial covenants including a common dividend restriction equal
to $10.0 million plus one-half of the Company's earnings since inception of
the agreement.
The aggregate annual maturities and sinking fund requirements of long-
term debt for each of the next five years ending December 31 are: 1997,
$3,120,000; 1998, $4,200,000; 1999, $122,905,000; 2000, $6,400,000; and
2001, $7,500,000.
In June 1995, the Company filed a shelf registration statement with
the Securities and Exchange Commission covering $150 million of debt and
equity securities for future issuance with terms to be decided at the time
of issuance.
The Company's consolidated interest expense as presented on the
Statements of Consolidated Income is net of interest capitalized of
$2,092,000 in 1996, $731,000 in 1995 and $793,000 in 1994.
NOTE 5: LEASES
The Company and its subsidiaries are obligated under various non-
cancelable leases which expire at various dates through 2014.
The principal capital lease covers a sorting facility in Dayton, Ohio
(the Facility) for a 30-year lease term. The Facility is financed by City
of Dayton, Ohio revenue bonds. Of the total bonds, $46 million bear an
effective rate of 8%, while the remaining $62 million bear rates of
interest between 6.05% and 6.20%. The bonds, due through 2009, have
various call provisions and are secured by the underlying assets of the
lease, a $7 million debt service fund, certain other Emery assets and
irrevocable letters of credit. Included in property, plant and equipment is
$40,847,000 of equipment and leasehold improvements, net, related to 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,
1996, are as follows:
Capital Operating
(Dollars in thousands) Leases Leases
Year ending December 31
1997 $ 9,981 $146,113
1998 9,981 113,863
1999 11,261 66,919
2000 11,261 32,824
2001 11,261 16,061
Thereafter 171,849 18,962
Total minimum lease payments 225,594 $394,742
Less amount representing interest (114,633)
Present value of minimum lease
payments 110,961
Less current maturities of obligations
under capital leases (65)
Long-term obligations under capital
leases $110,896
Certain operating leases contain financial covenants equal to or less
restrictive than covenants on debt.
Rental expense for operating leases is comprised of the following:
1996 1995 1994
(Dollars in thousands)
Minimum rentals $178,781 $174,951 $146,055
Less:
Sublease rentals (2,355) (4,505) (1,170)
Amortization of deferred
gains (4,487) (1,785) (1,785)
$171,939 $168,661 $143,100
PAGE 32
NOTE 6: INCOME TAXES
The components of pretax income and income taxes are as follows:
1996 1995 1994
(Dollars in thousands)
Pretax income
U.S. corporations $137,918 $146,042 $161,723
Foreign corporations 9,214 6,900 3,406
Total pretax income $147,132 $152,942 $165,129
Income taxes (benefits)
Current
U.S. federal $ 51,947 $ 36,277 $ 43,355
State and local 6,430 7,979 5,223
Foreign 11,212 8,179 1,178
69,589 52,435 49,756
Deferred
U.S. federal (2,903) 12,147 16,068
State and local 265 2,141 3,480
(2,638) 14,288 19,548
Total income taxes $ 66,951 $ 66,723 $ 69,304
During 1996 and 1995, the Company utilized $29 million and $11 million,
respectively, of net operating loss carryforwards from an acquired
subsidiary to reduce the income tax liability of that subsidiary. The
related tax benefits of approximately $11 million and $5 million,
respectively, were used to reduce costs in excess of net assets of
businesses acquired. The Company has no remaining net operating loss
carryforwards from acquired subsidiaries.
The components of deferred tax assets and liabilities at December 31,
relate to the following:
(Dollars in thousands)
Deferred tax assets 1996 1995
Reserves for accrued claims costs $28,001 $ 26,885
Reserves for post retirement health benefits 35,743 34,782
Other reserves not currently deductible 47,496 33,694
Reserves for employee benefits 42,308 35,482
Alternative minimum tax
credit carryovers 18,065 8,860
171,613 139,703
Deferred tax liabilities
Depreciation 120,440 88,714
Unearned revenue 2,939 1,816
Other 2,696 1,085
126,075 91,615
Net deferred tax asset $ 45,538 $ 48,088
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.
The Company is currently under examination by the Internal Revenue
Service (IRS) for tax years 1984 through 1990. It is the opinion of
management that any adjustments related to the examination for these years
would not have a material impact on the Company's financial position or
results of operations. In addition, as part of the Spin-off, the Company
and CFC entered into a Tax Sharing Agreement which provides a mechanism for
the allocation of any additional tax liability and related interest that
arise due to adjustments from the IRS for years prior to the Spin-off.
PAGE 33
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:
1996 1995 1994
U.S. statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of
federal income tax benefit) 4.4 5.0 4.4
Foreign taxes in excess of
U.S. statutory rate 5.4 3.8 --
Dividends paid to TASP (0.5) (0.6) (0.5)
Non-deductible operating
expenses 1.8 1.5 1.2
Amortization of costs in excess
of net assets of businesses
acquired 2.2 2.1 2.1
Foreign tax credits, net (3.6) (2.5) (0.5)
Other, net 0.8 (0.7) 0.3
Effective income tax rate 45.5% 43.6% 42.0%
The cumulative undistributed earnings of the Company's foreign
subsidiaries (approximately $14.5 million at December 31, 1996), 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 $1.3 million.
NOTE 7: 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. In November 1995, the Company
redeemed related preferred stock purchase rights.
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 Consolidated Freightways Thrift and
Stock Plan (TASP). The Series B preferred stock is convertible into common
stock, as described in Note 9, 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. 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.
In March 1995, the Company's 6,900,000 depository shares, each
representing one-tenth of a share of Series C Conversion Preferred Stock,
were converted to 6,900,000 shares of the Company's common stock.
NOTE 8: EMPLOYEE BENEFIT 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 86% 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.
Significant changes to the Plan from the prior year consist mainly of
the transfers of assets and obligations in connection with the Spin-off.
Of the total plan balances, $220.9 million of projected benefit obligation
and $212.3 million of plan assets were transferred to a pension plan of
CFC. The interest costs and expected returns in pension costs reflect the
lower amounts.
PAGE 34
The following sets forth the pension liabilities included in Employee
Benefits in the Consolidated Balance Sheets at December 31:
1996 1995
(Dollars in thousands)
Accumulated benefit obligation, including
vested benefits of $169,714 in 1996 and
$158,813 in 1995 $(187,041) $(176,559)
Effect of projected future compensation
levels (65,049) (64,045)
Projected benefit obligation (252,090) (240,604)
Plan assets at market value 271,669 215,418
Plan assets over (under)
projected benefit obligation 19,579 (25,186)
Unrecognized prior service costs 10,183 8,910
Unrecognized net gain (36,473) (1,909)
Unrecognized net asset at transition (7,905) (6,103)
Plan liability $ (14,616) $ (24,288)
Weighted average discount rate 7.75% 7.25%
Expected long-term rate of return on assets 9.5% 9.5%
Rate of increase in future compensation levels 5.0% 5.0%
Net pension cost includes the following:
1996 1995 1994
(Dollars in thousands)
Cost of benefits earned during
the year $ 22,544 $ 15,651 $ 15,359
Interest cost on projected
benefit obligation 18,214 15,702 19,029
Actual gain arising from
plan assets (36,002) (46,575) (2,726)
Net amortization and deferral 15,449 29,223 (17,472)
Net pension cost $ 20,205 $ 14,001 $ 14,190
The Company's Plan includes programs to provide 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. Obligations in these supplemental
programs up to the Spin-off date for participants now employed by CFC have
been retained by the Company. At December 31, 1996 and 1995, the total
pension liability was $12,480,000 and $12,824,000, respectively, and the
total pension cost was $2,274,000 in 1996, $1,837,000 in 1995 and
$1,880,000 in 1994.
The Company has a retiree health plan that provides benefits to all
non-contractual employees at least 55 years of age with 10 years or more of
service. The retiree health plan limits benefits for participants who were
not eligible to retire before January 1, 1993 to a defined dollar amount
based on age and years of service and does not provide employer-subsidized
retiree health care benefits for employees hired on or after January 1,
1993.
The following sets forth the total post retirement benefit liability
included in Employee Benefits in the Consolidated Balance Sheets at
December 31:
(Dollars in thousands) 1996 1995
Accumulated post retirement benefit obligation
Retirees and other inactives $ 38,789 $ 40,645
Participants currently eligible to retire 13,581 15,853
Other active participants 19,334 18,910
71,704 75,408
Unrecognized prior service costs 499 1,814
Unrecognized valuation gain 12,313 5,905
Accrued post retirement benefit cost $ 84,516 $83,127
Weighted average discount rate 7.75% 7.25%
Average health care cost trend rate
First year 9.0% 10.0%
Declining to (year 1999) 6.0% 6.0%
Net periodic post retirement benefit cost includes the following
components:
1996 1995 1994
(Dollars in thousands)
Cost of benefits earned during
the year $2,422 $1,960 $ 2,699
Interest cost on accumulated post
retirement obligation 5,256 5,301 4,794
Net amortization and deferral (131) (719) (410)
Net periodic post retirement benefit cost $7,547 $6,542 $7,083
PAGE 35
The increase in the accumulated post retirement benefit obligation and
the aggregate service and interest cost, given a 1 percent increase in the
health care cost trend rate assumption, would be approximately 12% and 15%,
respectively.
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 $23,210,000, $17,300,000 and
$52,200,000 in 1996, 1995 and 1994, respectively, and by hourly
participants was $12,200,000, $9,100,000 and $29,500,000 in 1996, 1995 and
1994, respectively.
NOTE 9: THRIFT AND STOCK PLAN
The Company sponsors the Consolidated Freightways Thrift and Stock
Plan (TASP), a voluntary defined contribution plan with a leveraged ESOP
feature, for non-contractual U.S. employees. The TASP satisfies the
Company's contribution requirement by matching up to 50% of the first three
percent of a participant's basic compensation. 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. Company contributions were $8,589,000 in 1996, $7,227,000 in
1995 and $5,366,000 in 1994, primarily in the form of 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 debt is
guaranteed by the Company, 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 1996, 1995 and 1994,
$6,250,000, $5,918,000 and $5,780,000, respectively, of deferred
compensation expense was recognized.
At December 31, 1996, the TASP owned 875,191 shares of Series B
preferred stock, of which 163,596 shares have been allocated to employees.
In connection with the Spin-off, 67,222 allocated shares held by CFC
participants were converted to the Company's common stock in December 1996.
At December 31, 1996, the Company has reserved, authorized and unissued
common stock adequate to satisfy the conversion feature of the Series B
preferred stock.
NOTE 10. STOCK OPTION PLANS
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.
Outstanding options become fully exercisable one year after date of grant;
any unexercised options expire after 10 years.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Adoption of SFAS 123 is optional, and the
Company does not intend to change its accounting for stock-based
compensation. Had the Company adopted this statement in 1995, pro forma
net income from continuing operations as reported net of preferred
dividends would have been $68.6 million or $1.52 per share and $74.0
million or $1.72 per share for the years 1996 and 1995, respectively.
These pro forma effects of
PAGE 36
applying SFAS 123 are not indicative of future amounts. The weighted
average fair value of options granted in 1996 and 1995 were $8.54
and $8.37 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, 6.7%; option term, 10.0
years; dividend yield, 1.7%; and volatility, 35.0%.
Following is a summary of stock option data:
Number Wgtd Avg
of Exercise
Options Price
Outstanding at December 31, 1993 3,813,599 $17.15
Granted 736,800 22.60
Exercised (614,709) 15.56
Expired or canceled (157,262) 27.78
Outstanding at December 31, 1994 3,778,428 18.02
Granted 647,500 23.61
Exercised (583,143) 16.01
Expired or canceled (84,590) 26.48
Outstanding at December 31, 1995 3,758,195 19.11
Granted 537,500 21.53
Exercised (138,027) 14.30
Expired or canceled (24,319) 27.10
Adjustment for Spin-off 773,139 -
Outstanding at December 31, 1996 4,906,488 $16.46
The following is a summary of the stock options outstanding at
December 31, 1996:
Range of Number of Wgtd Avg Wgtd Avg
Exercise Options Remaining Exercise
Prices Outstanding Life (Years) Price
$9.08-$13.35 2,026,159 5.3 $11.59
$15.99-$19.63 2,219,609 8.0 $19.01
$21.01-$27.66 660,720 5.5 $23.70
Of the options outstanding at December 31, 1996, the following were
the number of options exercisable and the respective weighted average
exercise price for each range indicated: $9.08-$13.35, 2,026,159 options at
$11.59; $15.99-$19.63, 1,694,408 options at $18.97, and $21.01-$27.66,
645,473 options at $23.82.
As a result of the Spin-off, participants in the stock option plan who
are employees of CFC have until March 3, 1997, to exercise approximately
566,000 options with an aggregate value of $9,574,000.
NOTE 11: FINANCIAL INSTRUMENTS
The Company has entered into interest rate swap agreements that expire in
1999. These agreements effectively convert $44 million of variable rate
lease obligations to fixed rate obligations. Interest rate differentials
to be paid or received are recognized over the life of each agreement as
adjustments to operating expense. The Company is exposed to credit loss on
the interest rate swaps in the event of non-performance by counter parties,
but the Company does not anticipate non-performance by any of these counter
parties. The fair values of the interest rate swaps, as presented below,
reflect the estimated amounts that the Company would receive or pay to
terminate the contracts at the reported date.
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The following table presents
the carrying amounts and estimated fair values of the Company's financial
instruments at December 31:
(Dollars in thousands) 1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Payables for
interest swaps $ -- $ 1,351 $ -- $ 2,845
Short-term borrowings 155,000 155,000 50,000 50,000
Long-term debt 369,425 400,000 371,795 408,000
Capital leases $110,961 $119,000 $111,027 $122,000
PAGE 37
NOTE 12: CONTINGENCIES AND OTHER COMMITMENTS
In connection with the Spin-off, the Company agreed to indemnify
certain states, insurance companies and sureties against the failure of CFC
to pay certain worker's compensation 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, CFC has provided the Company with
approximately $30 million of letters of credit and $50 of real property
collateral.
The Company has entered into a Transition Services Agreement to
provide CFC with certain information systems, data processing and other
administrative services and will administer CFC's retirement and benefits
plans. The agreement has a three year term although CFC may terminate any
or all services with six months notice. The Company may terminate all
services other than the telecommunications and data processing services at
any time after the first anniversary of the agreement, with six months
notice. Services performed by the Company under the agreement shall be
paid by CFC on an arm's-length negotiated basis.
The Internal Revenue Service has notified a subsidiary of the Company
of proposed adjustments in aviation transportation excise tax caused by a
difference in methods used to calculate the tax. The Company intends to
vigorously defend against the proposed adjustments. Although the Company
is unable to predict the ultimate outcome, it is the opinion of management
that this action will not have a material impact on the Company's financial
position or results of operations.
The Company has received notices from the Environmental Protection
Agency and others that it has been identified as a potentially responsible
party (PRP) under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) or other Federal and state environmental statutes at
several hazardous waste sites. Under CERCLA, PRPs are jointly and
severally liable for all site remediation and expenses. After
investigating the Company's involvement at such sites, the Company has
either agreed to de minimis settlements or, based upon cost studies
performed by independent third parties, believes its obligations with
respect to such sites would not have a material adverse effect on the
Company's financial position or results of operations.
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.
NOTE 13: INDUSTRY GROUP ANALYSIS AND FOREIGN OPERATIONS
The following analyses are by geographic and industry group. Revenues
and expenses are allocated between the United States and international,
depending on whether the shipments are between locations within the United
States or between locations where one or both are outside the United
States. Operating income is net of general corporate expenses, a portion
of which have been allocated to subsidiaries on a revenue and capital
basis. Intersegment revenues and earnings thereon have been eliminated.
The identifiable assets of the parent consist principally of cash, cash
equivalents and deposits.
GEOGRAPHIC GROUP INFORMATION
(Dollars in thousands)
Consolidated U.S. International
Year Ended December 31, 1996
Revenues $3,662,183 $ 2,898,091 $ 764,092
Operating income 192,148 151,575 40,573
Identifiable assets 2,081,866 2,032,085 49,781
Year Ended December 31, 1995
Revenues $3,290,077 $ 2,601,193 $ 688,884
Operating income 186,687 151,379 35,308
Identifiable assets* 1,825,850 1,787,960 37,890
Year Ended December 31, 1994
Revenues $2,799,935 $ 2,288,308 $ 511,627
Operating income 189,977 163,540 26,437
Identifiable assets* 1,621,110 1,584,660 36,450
* Excludes net assets of discontinued operations.
PAGE 38
INDUSTRY GROUP INFORMATION
(Dollars in thousands)
Industry Group
Adjustments, Con-Way
Eliminations and Transportation Emery
Consolidated the Parent Services Worldwide Other
Year Ended December 31, 1996
Revenues $3,662,183 $1,292,082 $1,968,058 $402,043
Operating expenses 2,918,682 973,341 1,586,855 358,486
Selling and administrative expenses 463,930 165,291 270,834 27,805
Depreciation 87,423 52,401 31,954 3,068
Operating income 192,148 $ 101,049 $ 78,415 $ 12,684
Other expense (45,016)
Income before income taxes $ 147,132
Capital expenditures $ 200,835 $ 434 $ 146,377 $ 46,939 $ 7,085
Identifiable assets $2,081,866 $ 172,969 $ 687,821 $1,137,631 $ 83,445
Year Ended December 31, 1995
Revenues $3,290,077 $1,152,164 $1,766,301 $371,612
Operating expenses 2,641,756 876,505 1,422,872 342,379
Selling and administrative expenses 391,682 138,329 234,223 19,130
Depreciation 69,952 40,757 27,472 1,723
Operating income 186,687 $ 96,573 $ 81,734 $ 8,380
Other expense (33,745)
Income before income taxes $ 152,942
Capital expenditures $ 167,253 $ (4,242) $ 136,546 $ 32,197 $ 2,752
Identifiable assets* $1,825,850 $ 106,080 $ 562,449 $1,082,507 $ 74,814
Year Ended December 31, 1994
Revenues $2,799,935 $1,018,544 $1,567,854 $213,537
Operating expenses 2,169,369 748,086 1,252,263 169,020
Selling and administrative expenses 377,032 124,719 211,841 40,472
Depreciation 63,557 34,519 26,134 2,904
Operating income 189,977 $ 111,220 $ 77,616 $ 1,141
Other expense (24,848)
Income before income taxes $ 165,129
Capital expenditures $ 149,808 $ (1,514) $ 97,392 $ 48,648 $ 5,282
Identifiable assets* $1,621,110 $ 138,702 $ 424,234 $1,008,012 $ 50,162
<FN>
* Excludes net assets of discontinued operations.
PAGE 39
CNF TRANSPORTATION INC. AND SUBSIDIARIES
NOTE 14: Quarterly Financial Data (Unaudited)
(Dollars in thousands except per share data)
1996 - QUARTER ENDED March 31 June 30 September 30 December 31
Revenues $ 847,873 $ 894,336 $ 935,790 $ 984,184
Operating income 35,214 52,657 54,416 49,861
Income from continuing operations
before income taxes 25,683 41,323 42,065 38,061
Income taxes 12,020 17,605 18,766 18,560
Net income from continuing operations 13,663 23,718 23,299 19,501
Loss from discontinued operations
net of tax benefits* (13,383) (10,062) (3,445) (25,743)**
Net income (loss) applicable to common
shareholders (1,854) 11,473 17,713 (8,376)
Per share:
Primary income (loss):
Continuing operations 0.26 0.48 0.47 0.38
Discontinued operations* (0.29) (0.22) (0.07) (0.57)**
Net income (loss) (0.03) 0.26 0.40 (0.19)
Fully diluted income (loss):
Continuing operations 0.24 0.45 0.44 0.35
Discontinued operations* (0.27) (0.21) (0.07) (0.51)**
Net income (loss) (0.03) 0.24 0.37 (0.16)
Market price range $29.38-$21.00 $26.25-$21.13 $24.50-$17.25 $26.00-$21.50
Common dividends paid 0.10 0.10 0.10 0.10
1995 - QUARTER ENDED
March 31 June 30 September 30 December 31
Revenues $771,691 $808,983 $830,979 $878,424
Operating income 45,515 47,453 45,151 48,568
Income from continuing operations
before income taxes 38,877 40,210 35,793 38,062
Income taxes 16,865 17,628 15,595 16,635
Net income from continuing operations 22,012 22,582 20,198 21,427
Income (loss) from discontinued
operations net of taxes (benefits)* 2,154 (355) (4,683) (25,970)
Net income (loss) applicable to common
shareholders 19,842 20,086 13,360 (6,722)
Per share:
Primary income (loss):
Continuing operations 0.45 0.46 0.40 0.43
Discontinued operations* 0.05 (0.01) (0.10) (0.58)
Net income (loss) 0.50 0.45 0.30 (0.15)
Fully diluted income (loss):
Continuing operations 0.42 0.43 0.38 0.40
Discontinued operations* 0.04 (0.01) (0.10) (0.53)
Net income (loss) 0.46 0.42 0.28 (0.13)
Market price range $27.00-$20.25 $27.00-$20.63 $26.75-$21.75 $27.88-$22.75
Common dividends paid 0.10 0.10 0.10 0.10
<FN>
* Reflects the results of CFC as described in Note 2 to the consolidated financial statements.
** Includes $16.2 million for loss on discontinuance, net of tax benefits ($0.36 per share
primary and $0.32 per share fully diluted).
PAGE 40
CNF Transportation Inc.
Five Year Financial Summary
(Dollars in thousands except per share data) 1996 1995 1994 1993 1992
SUMMARY OF OPERATIONS
Revenues $3,662,183 $3,290,077 $2,799,935 $2,163,631 $1,921,379
Con-Way Transportation Services 1,292,082 1,152,164 1,018,544 818,301 724,195
Emery Worldwide 1,968,058 1,766,301 1,567,854 1,261,273 1,147,204
Other 402,043 371,612 213,537 84,057 49,980
Operating income (loss) 192,148 186,687 189,977 90,754 24,916
Con-Way Transportation Services 101,049 96,573 111,220 71,854 53,747
Emery Worldwide 78,415 81,734 77,616 16,591 (32,651)
Other 12,684 8,380 1,141 2,309 3,820
Investment income 52 85 1,708 5,127 3,726
Interest expense 39,766 33,407 27,065 29,890 33,023
Income (loss) from continuing operations
before income taxes (benefits) 147,132 152,942 165,129 66,202 (26,783)
Income taxes (benefits) 66,951 66,723 69,304 28,736 (6,058)
Income (loss) from continuing operations (a) 71,589 75,420 76,762 18,499 (79,911)(e)
Discontinued operations: (b)
Income (loss) from discontinued operations, net of
income taxes (benefits) (36,386) (28,854) (37,442)(d) 13,108 (17,817)(e)
Loss from discontinuance,
net of income tax benefits (16,247) - - - -
Income (loss) from discontinued operations (52,633) (28,854) (37,442) 13,108 (17,817)
Net Income (loss) applicable to common shareholders 18,956 46,566 35,710 (d) 31,607 (97,728)(e)
PER SHARE
Income (loss) from continuing operations 1.59 1.75 1.90 (d) 0.51 (2.27)(e)
Discontinued operations: (b)
Income (loss) from discontinued operations, net of
income taxes (benefits) (0.81) (0.65) (0.85)(d) 0.36 (0.51)(e)
Loss from discontinuance,
net of tax benefits (0.36) - - - -
Net income (loss) applicable to common shareholders 0.42 1.10 1.05 (d) 0.87 (2.78)(e)
Dividends paid on common stock 0.40 0.40 - - -
Common shareholders' equity 10.86 15.76 14.58 13.65 12.64
STATISTICS
Capital expenditures $200,835 $167,253 $149,808 $151,815 $58,399
Effective income tax rate 45.5% 43.6% 42.0% 43.4% (22.6)%
Primary average shares 45,062,576 44,362,485(c) 44,116,044 36,187,682 35,195,743
Market price range $29.38-$17.25 $27.88-$20.25 $29.25-$18.00 $24.00-$13.63 $19.63-$12.50
Number of shareholders 16,090 15,980 16,015 15,785 15,260
Number of employees 25,100 21,400 18,500 17,000 14,700
<FN>
(a) Includes preferred stock dividends.
(b) Reflects the results of CFC as described in Note 2 to the consolidated financial statements.
(c) Reflects the conversion of Series C Preferred stock to Common stock.
(d) Continuing operations include $3.6 million extraordinary charge ($.08 per share primary and $.07 per share
fully diluted), and discontinued operations $1.9 million ($.04 per share), net of related tax benefits, for the
write-off of intrastate operating rights.
(e) Continuing operations include $39.8 million ($1.13 per share) cumulative effect of change in method of accounting
for post retirement benefits and $2.8 million ($.08 per share) extraordinary charge from early retirement of debt.
Discontinued operations include $30.2 million ($.86 per share) cumulative effect for the accounting change and
$4.5 million ($.13 per share) extraordinary charge from early retirement of debt.